There are two ways to look at the future: The first assumes a linear progression from past achievements and is relevant to forecasting short periods of time, where the future is a derivative of the past. The other method assumes that in the period of a decade, the law of accelerated returns applies exponentially and compounds acceleration assuming a high level of change in the period forecasted. The following is a short-term forecast and therefore does NOT assume we will see a period of accelerated returns because of the short sample of time.
Many people in the financial industry are trying to prepare for or predict what the financial services sector will look like in 2020. Will artificial intelligence replace operations? Will performing financial functions occur in an instantaneous manner from the palm of our hands? Will there be enough disruption so that large banks will no longer exist? Maybe. The following principles are not only my forecast for the future, but also the areas in which I am investing efforts in:
I have built several platforms: Some were installed and some were web-based, but none were completely open. Several very successful companies (such as my last employer) were completely obsessive about keeping the system closed. In most cases, it actually worked very well. However, the current trend is to open, and for good reason.
Recently, Google, which had franticly protected its search algorithms, opened its AI algorithms for everyone to see and interact with. I am a big believer of this shift, as I see the open system materializing in two aspects: First, build your platform with as much proven open sourced financial services-oriented software.
One example could be the databases a company uses, such as Hadoop, PostgreSQL and MongoDB. Second, build in an open API. This open API provides future flexibility as well as the ability to have other non-influenced voices providing continuous feedback to suggest new ways in approaching a problem. An open API also allows third-party vendors to build additional features and enhancements without getting stuck in the company’s resource constrained pipeline and prioritizations.
An open system fits perfectly into the overarching need for transparency in the financial markets system, and more transparency will lead to better product and cost control. The main problem with an open system is information leakage. How to have a fully open system to increase transparency and at the same time make sure the amount of information leakage is minimal will be the fine art that would need to be mastered by tomorrow’s big players.
Web & Mobile
Web is king! There have been many iterations of web-based front-end technologies, from Microsoft’s Silverlight to Adobe’s Flash, yet they have all faded into the history halls of technologies. However, Web and HTML 5 are here to stay.
The advent of financial markets-specific containers such as Openfin, which creates an ease of integration amongst platforms and institutions by making an application native to any screen, allows the transformation to mobile to be extremely easy. The more institutions standardize the usage of these elopement infrastructures, the easier application deployment and integration will be.
Open sourced efforts in this space are impressive, but only if they lead to further standardization of front-end development. As for mobile, it is easy to say a platform will be mobile, but harder to execute transitioning to mobile if all features of an application have to be made mobile. Having the luxury to build a mobile strategy from scratch is rare.
Looking at certain areas in the world, such as Africa and China, the desktop model has been completely bypassed. Hence, the importance of offering the consumer full capabilities using a mobile platform. For the average financial services executive on the street, mobile means more frequent and immediate transparency. The ability to know about an issue in real time and solve that issue on a mobile platform is key for our 2020 users.
I consider myself to be somewhat of a cloud pioneer, as my first company provided cloud-based trade routing and execution in 1998. When I was at SuperDerivatives, we were one of the first companies to offer cloud-based risk and analytics systems to the financial industry. Explaining these services was hard and the ability to sell them was even harder.
I remember having conversations in Switzerland, where, until recently, cloud implementation of financial platforms was very difficult given the required data governance issues around privacy of personal information. Public clouds, private clouds, cloud as a DR, and cloud communications are here to stay and will increase exponentially as the adoption of cloud-based computing booms. I believe all companies, regardless of size, should build with a cloud-based infrastructure in mind. We are seriously considering a Server-less environment.
Banks ask a lot of questions relating to security, and the ability to store their sensitive information in the cloud. I personally find these concerns laughable, as most of the high-visibility hacks in the past 10 years have affected networks but not one of the cloud providers. It is much easier to protect small amounts of connection points than it is to large amounts of entry points coming into a system. Financial institutions need to find ways to mitigate security fears with the path to future computing, which is all in the cloud.
Cloud computing also serves as an opportunity to consolidate platforms and connectivity. However, it is the role of vendors to provide further efficiencies using cloud computing rather than financial institutions believing that if they simply move everything to the cloud, their processes would be cheaper and easier to maintain.
Going full cloud is like disconnecting from cable; it does not make sense for every player. Some cloud service pricing is flexible in that they charge by the number of minutes used on the platform. I find this to be very encouraging and innovative, as making an upfront commitment no longer necessary. Banks should focus on managing balance sheets, trading, and risk management while using whatever tools they have at their disposal to provide mobility and competition in their space.
A recent poll showed that 60% of participants believe that further digitization and clearing of the OTC world is certain. The recent numbers published by the largest clearing houses support this migration mainly due to crippling regulatory burdens of keeping larger amounts of capital for OTC trades.
There are many factors working against full migration of OTC products to standardized clearable products. Some include the basic fact that there is not ONE model to price these products. Therefore, disagreements on the amount of required collateral prevents the full migration into clearing. SIMM was an attempt to do so for a certain set of interest rate products, but it does not support the Vol products, which represent the largest amount of non-cleared products.
Another obstacle is that banks do not want to create too much transparency in these products, as they provide the bank with huge margins on trading this opaque market. Some financial institutions have created direct links to clearing houses and other advancements in the cleared processing of trades. New regulation around cleared trades requires an immediate processing activity on these products, and some regulations require full reporting within 10 minutes.
However, what is obviously being missed is that even in the cleared space, 50% or more of the transactions are still voice trades made over the phone. If we do not fully automate that part of the cleared trade process, we will not achieve the full compliance needed to create the efficiencies predicted by many.
Therefore, automation of the voice trade is key to the advancement of trade processing. We expect technologies in this space to rapidly advance. However, 98% accuracy and automation is NOT enough in this use case. We must be right all the time when it comes to sensitive information. I do think that by 2020, this area will be addressed and we will reach full automation of the trading process both from an OTC digitization standpoint as well as from the voice trade perspective.
Cognitive & Distributed
If you are a vendor or start-up and want to be funded, you will need to explain how your platform will use either AI, cognitive components such as chat bots, or behavioral-based insurance underwriting (such as my friends at Lemonade), and of course you must explain how you will use Blockchain in your future vision.
The short-term prediction is that AI, cognitive platforms, and Blockchain will all be a major part of every solution going forward. But if you ask me if they will have any major impact before 2020, I would be hesitant to answer yes. With the explosion of big data, AI technologies are key to understanding and improving the use of this big data.
AI is advancing at the fastest pace, and will integrate into our daily lives by 2020 in almost every aspect. For example, we see the use of AI in our platform as a means to achieve two major goals: data quality, and trade breaks reconciliation and remediation. I recently read an article written by a former colleague about the catalyst for further data usage. All of the catalysts for increased data usage are clear, but the biggest problem is the quality of the data itself. If the quality of the data coming in is poor, then you will only have piles of garbage going out.
This example shows that the holy grail in terms of our platform’s goals is to improve data quality, improve data matching of non-structured data, and help our AI algos correct data impurities on their own. My investors asked me about blockchain. Well, I am proud to sit in the former office of Digital Asset, the main pioneer in Blockchain technology in the financial services space. We have seen an explosion in the interest around blockchain and the way it could simplify the complexities of the market infrastructure.
Blockchain would drastically reduce costs while improving the ability of financial institutions to synchronize data and transactions. I am a big believer in adopting this technology, and believe the way to prepare for is it by installing a private node distributed ledger and then preparing to expose it to other players if and when they are ready. Herein lies the main problem with the implementation of blockchain – it will only work if all the participants implement the technology. To reach this network effect, one factor that is very important is the ability to define the right use case for the technology.
From what I am seeing in the market, and I am sure my friend Blythe would agree, institutions are not very selective in the choice of use case when implementing AI or blockchain. This dilutes the importance of the technology and sometimes leads to large investments of solutions being disbanded mid-way. I am not certain that the network can adopt the technology in full strength by the year 2020. If we are selective in our use cases, and are choosing the right partner for the POC, we should have full verification of the success of such technologies by 2020, which will set clear KPIs toward the implementation of these technologies.
If we could all agree on one area that controls the narrative of the financial institution business model and its future viability, it would be the immense amount of new regulations controlling investment capital in the market for the past decade.
Complying with the regulations, dealt with around the world, became a dear cost for being a global entity. If you were local and thought you could escape the reach of the regulators, you were wrong. Furthermore, the regulatory attitude toward financial market participant was do or die, leaving no choice or time to think about future strategies.
Most regulators were interested in collecting large fees for non-compliance issues rather than working to reduce systematic risk. New technology was patched on like band-aids put on an open wound. The latest Presidential elections brought back a perception that these burdens will be lifted from the financial institutions … but not so fast.
Although some efforts are on the way for deregulation in the U.S, many new regulations and even tighter frameworks were approved in the EU. My 2020 prediction is that we will continue to suffer higher level of regulations globally, which will distract us from the strategic views of our institutions. It is interesting to see how other, less developed geographical sectors will react to adding regulatory burdens for global players.
One example was the recent request of the Bank of Israel to report all Shekel-denominated transactions to its repository. After much effort on the financial institution side, the bank decided to disband the requirement. Asian regulators are in a more “wait and see” approach, but by 2020 they will catch up. Asian regulators tend to wait for the best methods and then copy these methods, but if they plan on complying with EU regulations, this will add massive efforts in technology coming into the new decade.
Managing global compliance with these regulations and adjusting the financial institutions systems to be flexible enough to deal with the newest breed of regulation is not the best way to approach this issue strategically. Utilities could provide a meaningful stepping stone for further compliance to the ever-changing regulatory environment. I only see compliance increasing in complexity rather than being simplified by 2020.
The paradigm of the separation of Buy-Side functions and Sell-Side functions is rapidly changing. Functions such as market making or direct clearing were not considered a real threat to the sell-side model until recently. This trend will continue to grow and therefore we believe that by 2020, at least one or two large Buy-Side firms will decide to enter both the market making business (e.g., Citadel Securities) and direct clear (we hear BlackRock is considering this move).
What this means from a technology platform perspective is that the full automation of workflows that were once deemed to be impossible to automate are now possible. Buy-side firms have no interest in becoming banks, as they are always at the forefront of creativity in financial instruments and, most important, they have the power of the user. When building our platform, we are constantly reaching out to innovative Buy-Side firms to get their input on product development. If there is one major risk to the banks’ future business model, it is the evolution of the Buy-Side model.
Conversely, Buy-Side firms have benefited from the fact that Sell-Side firms pay for most of the costs involving clearing, processing, and even trading securities. Furthermore, Buy-Side firms are used to the banks performing functions on their behalf, such as reporting. These functions will not be handled by the banks past 2020 and therefore the flip side of Buy-Side dominance is the extra expense in technology and resources to comply with this new level of importance. The positive aspect is that Buy-Side firms, especially the nimbler hedge fund industry, tend to think about problems with no legacy bias, and are thus part of creating new and improved workflows to deal with the new financial responsibilities.
If we get to where we are planning to be before 2020, we will offer the simple function of mobility. Competition is good for the market and we believe that we are in an era when it will only increase, offering a diverse competitive landscape for fintech but raising other issues. Which horse do I want to be on? This issue is currently very apparent in many parts of the industry, where there are at least 6-10 choices of vendors for one problem. Blockchain, compression, and payment platforms are just some examples of this proliferation.
Our answer for 2020 is that you don’t need to make a choice. If we provide the ecosystem in which many participants can easily integrate their services, then financial institutions would be able to “try out” any service they would like with minimal technological effort. Frequency of usage and new functionality would be deployed in a seamless way to market participants.
Take the Amazon or iTunes models, for example. Apps come and go, succeed and fail, but the user never needs to spend more time or effort on them beyond a simple download or small fee. The other important factor to reaching diversity and choice is that you don’t want the framework that gets you the ability to choose to be just another toll taker on the way to a perfect environment. The commercial business model of both participants and vendors needs to change and I see this happening by 2020.
We have seen too many systems and technologies created by the financial industry that seem to have thought about the use case and the technology needed to achieve its goals, but at the same time neglected the user experience. When the user experience is poor, eventuality the user will look for another alternative.
Looking at the current technological offerings, some of the major platforms that support the market infrastructure are simply terrible to use, as an average function might take a long list of manual steps to complete. There is a shift in power that is moving to the users, and vendors should assign UX a much higher importance, as it does other features. Basically, behind the traders that make money sit great people who have had to deal with inferior and cumbersome user experiences.
Financial institutions rarely make that experience better unless they think it will directly affect their bottom-lines. However, by the year 2020, I believe that most institutions will address this issue; otherwise their competitors will do so and benefit with an increased market share because of it. Another important part of improvement to user experience is the clear definition and support for user rights. Users are looking for clear rights and a flexible method to add or take away from entitlements and user preferences. Letting the user define his own trade matching algorithms is one way we are addressing this issue for 2020.
For advancements in governance and freedom to work in an efficient way, the industry, including its users, needs to be comfortable with how processes get governed and what the clear set of rules to work by are. Setting clear, accessible internal and external governance is key to the success of the changes proposed for the future. Knowing what the rules are and a way to mitigate risk in case of a firestorm ultimately is crucial to the success of change implementation.
We are sure that if you read this and you are either a participant in the financial markets or an institution, you might find some areas aligned with your 2020 plans. We at truePTS would like to have an open discussion on this subject to learn more and perhaps adjust our thinking. So, is your vision of 2020 clear?