The highest rewards will be reaped by those purveyors of technology in the world of institutional to institutional business who remain concentrated on their client. Advanced suppliers who make useful information readily available and easy to use; develop consistent, reliable solutions to meet client requirements; and keep the front-end (the bit nearest the customer) easy to understand and use – whatever the technological background of the person at the computer – are those that will end up on top.
This article will attempt to provide a ‘snap-shot’ of the strategy behind technology today in the world of institutional financial services. Starting with the Internet and its impact on the servicing model, we’ll move on to other technologies and how they are serving to create more efficiencies and mitigate risk in transaction-based environments.
The internet: Fast? Yes! But, is anyone listening? Does everyone understand? This single platform is not only transforming ways of doing business, it is transforming business itself. For routine transaction-oriented businesses such as brokering, the internet allows a physical distance to exist between the client and their service provider, while actually enabling the client to conduct their business more efficiently. Will this capability serve to ‘distance’ the client from the provider over time, or make them more loyal as the broker provides the technology to make it easy for the client to do business their way – in the manner that they have chosen? For new retail businesses, we are seeing that the internet can be the primary point of contact with the client, as has been achieved successfully by Amazon.com. However, for many institutional businesses, the Internet is more likely to be a complement, rather than a complete substitute, to the existing relationship management model, as relationships are multi-faceted and have interlinking multiple products and services.
In business to business enterprises, much of the value is in information. Immediate, meaningful, accessible and portable information is the key link between supplier and client. Once providers have reached this initial step of providing useful data in a friendly format via the internet, their next steps are essential to define their future success. The development of applications on the internet to conduct transactions and initiate trades may be desirable. Or, perhaps the real advantage is to smooth out the back-office communications, as well as the front-end, if both have significant impact for the client.
One of the largest technology initiatives in the financial services world today is termed ‘straight-through-processing’ (STP) – information flowing straight through multiple systems in different organisations around the world without intervention. Internet applications are creating their own version of STP, by developing client-initiated trading systems that eliminate the middleman. Trades are entered in pre-defined formats directly, trade communication is automated, and the process is streamlined. However, at an industry level, STP is fine-tuning the transaction processing business for institutional investments at a wholesale level.
The issues facing the industry were led most probably by the fear of rising costs: high fixed costs to maintain all the proprietary systems and high variable costs for staffing to cope with volume spikes. As things get more complex with more markets and new asset types, and trading volumes doubling every two to three years, there is the added risk of higher repair needs and multiple queries on a single transaction.
The result of this rising concern was the creation of a forum for all industry participants to collectively build a common solution – something which will be owned by the industry as a whole and provide equal access and exchange of information across borders – wherever they are. The Global Straight Through Processing Association (GSTPA) will create accelerated links between the investment manager, the broker dealer and the global custodian and so will help reduce the risk. The benefits will be a more cohesive and flexible infrastructure, which will set the scene for shorter settlement cycles, such as the drive towards T+1 in the USA. This new technology environment, buoyed by a corresponding and supporting mindset change throughout management, will also produce increased capacity across processing engines. This is not a company strategy or even a market initiative, but a true industry development, inside and out. However, the changes will be facilitated and turned into reality by separate organisations and key individuals who have the vision to see beyond the current world. They see out into the future of a truly electronic age, where securities instructions are only touched by humans once. At the moment, data is still typed manually into a electronic device – in the future perhaps it will be voice only, dictated remotely by mobile phone with the security checked by voice recognition.
But what of those who choose not to pay the literal price to participate in this game? They may choose to get the gain from outsourcing – purchasing the services from others who have made the investment, which is in itself a new business. In other words, if you choose outsourcing, you’re opting out of at least part of your current business, and choosing to re-focus your resources somewhere else.
The third significant industry initiative is ‘Continuous Linked Settlement’ (CLS) – intended to provide the equivalent of delivery versus payment (DVP) for foreign exchange transactions. It is designed to eliminate the risks associated with settlement, by netting and settling trades by currency.
The concept was created in 1995 by the Group of 20, and in 1997 a company CLS Services Ltd (CLSS) was formed to develop and build the system. CLS is a subscription service owned by more than 60 member banks. One of the key ideas is to create a single industry facility to reduce settlement risk and pre-settlement risk in the foreign currency markets. There will be a netting facility and separate provision for the continuous linked settlement service of payment-versus-payment settlement, for gross and netted transactions in eligible currencies. For the time being they are US dollars, Sterling, Canadian dollars, Euros, Swiss francs and Japanese yen.
CLS relies on an IBM computer platform, connecting back–office operations to all member shareholders. The clearing mechanism promotes SWIFT formats, and in fact, SWIFT has offered its technical support to the venture.
The key features of the new concept are that currency transactions will be performed simultaneously or not at all, so members only have to fund their net short positions and they can pay the required amount in instalments spread over a number of hours. CLS Bank will have a settlement account with the central bank for each currency in which it settles and members will pay through the local Real Time Gross Settlement payment systems and the CLS Bank will pay out settlement proceeds through these payment systems. This ensures payments are secure and final.
And there it is, technology that is not only “whizzy,” but highly effective and useful as well! But where does that leave us?
For all the wizardry in today’s technology, a successful outcome most likely requires even more care and attention than before. Many providers have lost their focus on their client. Some have even forgotten in what business there are - or so it seems from their mis-adventures on the web. But for those who are looking at it as a means to more meaningful client relationships, it can be a magical path.
These providers know that technology does not negate the need for the ‘high touch’ personalised service. As we have discussed, properly deployed technology will serve to enhance the client’s experience in some way: through better, faster information delivered wherever they are; through streamlined processing supporting their relationship; and through new ways to mitigate the risk in global investing.
Lucille Knapp is manager for European business development, Corporate and Institutional Services at Northern Trust in London