The pandemic of 2020 has profoundly impacted our global communities. The need for social distancing has impacted every aspect of our daily lives from the way we work, how our children attend school, and how we socialize with family, friends, and colleagues. Overall, the broader capital markets industry has responded admirably to this global health crisis. In addition to holding up to COVID related economic shocks, including record market drawdowns, volumes and volatility, capital markets operations carried on without major disruption – a testament to industry resilience. Such results were made possible through new regulations passed since 2008, improved business continuity planning, ongoing digital transformations, and more recent investments in remote working and collaborative infrastructures.
Beyond demonstrating operational resilience (OR), two additional outcomes surfaced in 2020 as a result of the pandemic. Remote work acted to accelerate innovation in the capital markets business as the need for strengthened supervisory and control capabilities accelerated to provide views of global trade, position, and risk data. It also acted to highlight weaknesses around certain manual processes not conducive to remote working conditions. Shoring up such vulnerabilities has become a priority with increased industry focus on improving operational resilience as highlighted in our recent resilience Insight.
Four technologies stand out as having the highest potential to transform the investment banking industry in 2021. These technologies include data and analytic capabilities, cloud computing, artificial intelligence (AI) / machine learning (ML), and robotics process automation (RPA). Although the industry has been progressing the adoption of these transformative capabilities over the past several years, the industry has not yet adopted at scale. The primary constraints limiting the pace of adoption include the ongoing support and maintenance of legacy IT infrastructures, pressure on bottom-line returns, and continuous regulatory changes resulting from the crisis of 2008. With the backdrop of a hectic 2020 behind us, and an uncertain future ahead, let’s further explore the digital trends reshaping the capital markets industry globally in 2021 and beyond.
Data and Analytics:
Data and Analytics capabilities include the controls and management practices applied to organizational data assets and the ability to leverage those assets to gain insights. Doing this successfully requires a comprehensive data strategy to evolve data management competencies to enable business capabilities and drive business value. Core competencies in data excellence include data architecture, performance management, data governance, analytical tooling, as well as a well-trained and data literate workforce.
Advancement in innovative data capabilities within the industry have frequently lagged due to complex legacy architectures and asset class related data and operational silos. Additionally, greater demands from clients and regulators require firms to process and store ever increasing quantities of data which demand scalable data architectures. Improving data architectures and delivery capabilities is critical for firms to achieve revenue generation targets while meeting regulatory compliance mandates. The ability to achieve faster time to market increases competitiveness in terms of fulfilling client requests with speed and accuracy and enables firms to respond to new revenue generating opportunities. Most industry leaders will agree that data & analytics delivers the highest potential and is the key enabler of a successful digital transformation strategy.
The complexity associated with righting legacy data architectures and data governance frameworks while supporting operations and regulatory demands is not simple. Driving change in this space requires firms to develop a comprehensive data strategy with a long view on evolving core data capabilities incrementally. Today, the industry reports making investments to improve data and analytics capabilities by investing in cloud-based data lakes and tooling to improve front-to-back operational processing and AI capabilities, enterprise data management, data quality & analytics tooling, enhancements to increase data granularity, and document digitization efforts. The industry has made good progress in this area with only 33% of AMFE study participants indicating scale adoption of data & analytics capabilities across their organization, significant runway remains.[1]
Cloud Computing:
Cloud computing is the delivery of computing services—including servers, storage, databases, networking, software, analytics, and intelligence—over the Internet (the cloud) to offer faster innovation, flexible resources, and economies of scale.
Cloud technology bolsters the ability to implement new technologies, drive speed to market, and process vast amounts of data quickly. These benefits are critical for capital markets competitiveness and are causally related to progressing data & analytics capabilities and ultimately AI/ML capabilities. As such cloud computing is seen as a foundational technology for the capital markets industry.
Other benefits include reduced fixed costs and increased scalability. Such benefits are magnified in public cloud implementations where IAAS and PaaS services provide greater agility, lower costs, and global scale compared with private cloud where equipment is owned by the sponsoring organization and hosted either in-house or outsourced datacenters.
Today the industry is beginning to transition targeted applications to the public cloud, but past industry investments in complex global systems and infrastructures continue to constrain the wholesale migration. Time and increased investment will be required to reengineer these platforms to meet regulatory and technical challenges; however, many capital markets participants are currently making deals with cloud service providers to leverage this technology.
In a survey of 250 buy and sell side firms, Global Trading reports that 62% of respondents believe the pandemic has created increased demand for cloud systems. This increased demand is even showing up in areas of past reluctance such as risk management and post trade processing. [2] Additionally, the AFME study reports in the 2020 survey, that 63% of industry respondents are currently implementing cloud capabilities, while another 37% plan to be in implementation phase by 2023. Firms reporting cloud adoption at scale were 20% while 58% of respondents are expecting scale adoption by 2023.
Artificial Intelligence (AI) and Machine Learning (ML):
The incentives for the capital markets industry to achieve scale adoption of artificial intelligence and machine learning technologies are enormous. Achieving operational excellence in the AI/ML domain may be the pinnacle of technological transformation within the industry for decades to come. Firms that master these capabilities will gain competitive advantage in terms of improved customer service, reduced risk, and higher profitability, and for those who can’t, they will most certainly fall behind
Such examples showcase how AI/ML implementations applied within a capital market setting present enormous opportunities to transform the business. The reality is that although investment banks have successfully applied AI/ML in isolated use cases, as an industry, we are far from reaching scale adoption. In the 2020 AFME study, 47% of firms report that they are working on AI/ML implementations, while only 7% have reported to have operationally imbedded AI/ML programs. [2] These finding suggest that while isolated implementations are progressing, achieving scale adoption remains elusive.
Implementing a production ready AI/ML application is a challenging undertaking that requires complex coordination between data scientists, domain experts, and IT resources. Vast quantities of data need to be sourced, analyzed, cleansed, and transformed in a production-ready consumable format for training decisioning models; real-time streaming data needs to be ingested into cloud-based data pipelines for algorithmic processing; and workflows need to be developed to action resulting insights. Coming full circle, the potential roadblocks to perform these activities at scale will come back to the foundational capabilities of data and analytics and cloud adoption. Gartner highlights that by 2023 AI engineering will progress to develop capabilities to support the scale operations of AI. A robust AI engineering strategy will facilitate the performance, scalability, interpretability, and reliability of AI models to ensure benefits realization of AI investments. [6]
Robotics Process Automation and Hyperautomation:
Traditionally, robotics process automation (RPA) has been a form of business process automation technology that creates and manages the deployment of software robots (Bots) which sit on top of existing systems to execute repetitive, and rules-based activities performed by humans. This contrasts with traditional workflow automation tools where lists of actions are automated through system back-ends using API’s and scripting languages. RPA emulates a person by executing manual, repetitive tasks in existing applications, and makes decisions based on a defined set of rules. RPA comes in two flavors, unattended and attended. Unattended bots run seamlessly in the background without human intervention, while attended RPA bots require human interaction.
Financial institutions were early adopters of RPA technologies, where the industry found that initial generations of such software produced projects that just did not meet expectations. Common experiences across the industry, included steep learning curves, slow development times, and projects that did not produce attractive returns. [7] Additionally, the functionality of early software had limitations making them unfit to solve complex use cases needed by the industry.
Today's RPA products have matured greatly. Tools such as UiPath and Automation Anywhere, two of the leading RPA vendors, products use "low code" technologies, with drag and drop interfaces that aid in rapidly developing and deploying bots to solve problems. Such products have lower learning curves enabling quick turnarounds. Additionally, these new tools provide both embedded and are open to external AI/ML technologies. This opens the door to abilities such as natural language processing, optical character recognition, and ML based decisioning and classifications capabilities. Such intelligent cogitative abilities were not found in their predecessors, and greatly expand the applicable use cases.
Where previously, the use of RPA was limited to tactical fixes of fragmented processes, the emerging view is that large scale end-to-end processes re-designs will strategically employ RPA coupled with AI and ML to deliver intelligent solutions across complex processes to drive operational efficiency and to improve service quality. Gartner recently termed this new iteration of RPA implementations hyper-automation and predicts that organizations will reduce operating costs by 30% by 2024. [6] It is uncertain if this magnitude of cost saving can be achieved in the capital markets industry, but opportunities abound to employ intelligent digital workers in many areas.
A few of the promising use cases identified by UiPath and Automation Anywhere within the capital markets business include such functions as [7,8]:
· Know your Customer (KYC) data gathering and verification
· Anti-Money Laundering
· Client Onboarding
· Confirmation Management
· Settlements
A Cultural Shift
Achieving scaled adoption of the next generation of transformative technologies within the capital markets business is a daunting task and an exciting opportunity at the same time. To accelerate change, leadership teams will need to increase focus on longer range strategic planning and continue to progress industry efforts towards agile transition. To ensure target changes are achieved, longer term strategic planning will require increased scrutiny of project proposals to ensure that business cases align with strategy and proper project reviews are performed to ensure that desired business outcomes are achieved. The industries shift towards agile practices over the last several years has done much towards fostering innovation and tighter customer centric development practices. This trend will accelerate as Strategy and Implementation collide as cultures shift towards long termism and a more Agile world. 2021 is on pace to be a landmark year as digital transformations that started in 2020 continue to unfold.
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Monticello Consulting Group is a management consulting firm supporting the financial services industry through deep knowledge and expertise in digital transformation, change management, and financial services advisory. Our understanding of the competitive forces reshaping business models in capital markets and digital banking are proven enablers that help our clients drive innovative change programs to be more competitive and gain market share in new and existing businesses.
References:
[1] AFME: Technology and Innovation in Europe's Capital Markets – 2020 https://www.afme.eu/Portals/0/AFME_TechnologyInnovation_FINAL.pdf?ver=2020-11-13-135131-297
[2] Global Trading Oct 2020: Remote Work Outlook for Buy Side and Sell Side
https://www.fixglobal.com/home/remote-work-outlook-for-buy-side-sell-side/
[3] Global Custodian: BNP Paribas Securities Services adopts AI for trade processing
https://www.globalcustodian.com/bnp-paribas-securities-services-adopts-ai-for-trade-processing/
[4] ING: Katana gives bond trades a cutting edge
https://www.ing.com/Newsroom/News/Katana-gives-bond-traders-a-cutting-edge.htm
[5] ING spins out its advanced analytics portfolio tool into Katana Labs:
[6] Gartner Identifies the Top Strategic Technology Trends for 2021
[7] UiPath: The Quickest Ways to Successfully Scale RPA in Banking and Capital Markets: https://www.uipath.com/blog/expanded-rpa-opportunities-banking-capital-markets
[8] Automation Anywhere: RPA for financial services Reduce costs. Strengthen compliance. Fuel digital transformation in financial services. https://www.automationanywhere.com/solutions/financial-services