Managed services 鈥� making the case for sharing
01 July 2020
Incoming regulations and other drivers of change in the securities finance market environment is putting pressure on banks to find new cost-saving measures, and better technology is part of the answer
Image: cristovao/shutterstock.com
A pivotal point has been reached for many financial institutions operating in global and local markets; the cost of doing business (operating legacy technology, meeting an overwhelming regulatory burden) in uncertain operating conditions, on occasions, teeters dangerously close to not being viable for mid to lower-tier banks and financial institutions. Factors including competition, the maturity of the business and saturation of providers continue to drive down margins.
Navigating the challenges to remain competitive
The ability to relocate operations and technology functions to lower-cost locations has lowered operating cost and bought COOs and CTOs more time to consider how the banks鈥� technology stack can be consolidated and modernised by the retirement of legacy technology and the onboarding of new technologies. This had provided a lowering of fixed costs but the cost base remains similar; there is very little opportunity to swap elements of fixed cost for variable costs. Moreover, this approach has not been without its day-to-day practical challenges.
More recently with the global COVID-19 pandemic, there was some variability in certain locations being able to support business continuity outside their business premises; different locations varied in their ability to support working from home. Indeed, the 鈥榳orld鈥檚 back office鈥� has struggled in some instances to piece together working-from-home solutions and other business continuity plans.
As seen in retail banking, the technology giants and new entrants have had the luxury of approaching technology from a ground-up perspective, not having the burden of operating and adapting the legacy technology to meet the changes in the business and meet the needs of customers.
Regulation generally, the delivery of transaction reporting specifically and the timing of compliance can rarely coincide with the adoption and implementation of new technology. We know from our own industry, operating securities finance businesses, has required firms to consume resources to make sub-optimal development choices because transaction reporting obligations have meant enhancing legacy technology when the optimal situation would be to migrate to new technology that incorporates reporting capability. If it was possible to precede technology investment with industry planning (for example adopting a common domain model) ahead of the regulatory deadlines (to have technology that is built with regulation in mind with participants having the opportunity to get in front of the changes rather than reacting to them) the outcome would be improved, easier to implement and the whole industry would collectively benefit.
When banks source new technology from fintechs they are faced with the challenges on onboarding it, integrating it into a complex network of upstream and downstream applications, ensuring that it can be supported as well as making provision in the event that provider can no longer deliver support. Technology firms also require their customers to upgrade to later versions which can result in a change overhead or be forced to support the application themselves.
In short, operating cost, regulatory burden, legacy technology and cost to change to new technology remain the overwhelming challenge when trying to become more efficient.
So what鈥檚 the alternative?
Many organisations have a complex architecture which hundreds of applications, that have been added in an organic way, through mergers and acquisitions and years of incrementally responding growth and development of its various business. Modernising and consolidating that in something more efficient is a risky, lengthy and expensive undertaking.
And yet is that the direction that an established global industry collectively wants to take? There are examples of global industries outside of banking where they took a path of retaining functions that were core to their businesses and accessing an eco-system of specialist providers for non-core functions and service. Examples are the automotive manufacturers who use a vast network of specialist component suppliers whilst retaining core functions (e.g. product development, assembly) and the airline industry in its own way has done the same.
By developing standardised services on multi-tenanted platforms to multiple airlines, these specialist providers were able to achieve utility-scale and the platform investment not possible for a single airline operator. In turn, this allowed the airlines to focus on differentiation of proposition. The result was that they were able to eliminate the fixed cost of providing those services/functions internally and competitively source those services on a usage basis. The outcome was improved cost/income ratios, better quality support services and enhanced customer experiences, resulting in improved returns on equity.
It appears that as an industry matures and has multiple providers over multiple geographies, a secondary set of providers support that industry with products and services that they, in turn, become expert and competitive in providing. By focusing on their particular niche across multiple clients, they are better placed to adapt to and prioritise change than an organisation that has multiple functions and supporting technologies to prioritise. The client buys the services and no longer has to be burdened with maintaining the technology platform it is delivered on and benefits from a dedicated set of expertise focused purely on that service.
So, how could that apply to banking?
For a multitude of reasons, regulation is driving the banking/capital markets industry in a direction whereby functions irrespective of the organisation have to be delivered and operated in a standardised way. The 色花堂Financing Transactions Regulation (SFTR) has forced the securities finance industry to standardise the treatment of the inter-life events such partial returns so that the unique transaction identifiers continue to match during the life of the trade.
The industry associations are actively working towards a common domain model which in turn will influence the next generation of technology. But what if complex non-core functions become services that could be purchased on a volume-linked basis (cost-flexing with revenue)? And the technology for those services was no longer a maintenance concern? It would unburden the purchaser of ever competing technology priorities and create bandwidth and budget to facilitate a strategy for technology for the core businesses. Moreover, those service providers are able to deliver those in their clients preferred geographical locations due to the cost-effectiveness of delivering the same service to multiple clients.
This approach not only brings economies of scale and assists in accelerating clients technology change programme for core functions but lowers the barriers entry to new participants and new geographies.
Delta Capita
Delta Capita currently provides managed services to support financial service clients鈥� know-your-customer and client lifecycle management functions. It also has a well established managed service in the structured retail products space. Now as part of the Prytek Group, it is now positioned to broaden its managed service offerings to further support banks and financial institutions.
It has made strategic senior executive hires to support its strategy. Specific to capital markets, Gary Bullock now heads up the post trade workstream (which includes the existing securities finance, prime services and collateral team). Gary McClure is leading the charge to develop and bring to market a range of managed services (operations and technology) in line with the Delta Capita principle of being able to deliver those services in the clients鈥� locations with teams that will have expertise and empathy for their clients.
Navigating the challenges to remain competitive
The ability to relocate operations and technology functions to lower-cost locations has lowered operating cost and bought COOs and CTOs more time to consider how the banks鈥� technology stack can be consolidated and modernised by the retirement of legacy technology and the onboarding of new technologies. This had provided a lowering of fixed costs but the cost base remains similar; there is very little opportunity to swap elements of fixed cost for variable costs. Moreover, this approach has not been without its day-to-day practical challenges.
More recently with the global COVID-19 pandemic, there was some variability in certain locations being able to support business continuity outside their business premises; different locations varied in their ability to support working from home. Indeed, the 鈥榳orld鈥檚 back office鈥� has struggled in some instances to piece together working-from-home solutions and other business continuity plans.
As seen in retail banking, the technology giants and new entrants have had the luxury of approaching technology from a ground-up perspective, not having the burden of operating and adapting the legacy technology to meet the changes in the business and meet the needs of customers.
Regulation generally, the delivery of transaction reporting specifically and the timing of compliance can rarely coincide with the adoption and implementation of new technology. We know from our own industry, operating securities finance businesses, has required firms to consume resources to make sub-optimal development choices because transaction reporting obligations have meant enhancing legacy technology when the optimal situation would be to migrate to new technology that incorporates reporting capability. If it was possible to precede technology investment with industry planning (for example adopting a common domain model) ahead of the regulatory deadlines (to have technology that is built with regulation in mind with participants having the opportunity to get in front of the changes rather than reacting to them) the outcome would be improved, easier to implement and the whole industry would collectively benefit.
When banks source new technology from fintechs they are faced with the challenges on onboarding it, integrating it into a complex network of upstream and downstream applications, ensuring that it can be supported as well as making provision in the event that provider can no longer deliver support. Technology firms also require their customers to upgrade to later versions which can result in a change overhead or be forced to support the application themselves.
In short, operating cost, regulatory burden, legacy technology and cost to change to new technology remain the overwhelming challenge when trying to become more efficient.
So what鈥檚 the alternative?
Many organisations have a complex architecture which hundreds of applications, that have been added in an organic way, through mergers and acquisitions and years of incrementally responding growth and development of its various business. Modernising and consolidating that in something more efficient is a risky, lengthy and expensive undertaking.
And yet is that the direction that an established global industry collectively wants to take? There are examples of global industries outside of banking where they took a path of retaining functions that were core to their businesses and accessing an eco-system of specialist providers for non-core functions and service. Examples are the automotive manufacturers who use a vast network of specialist component suppliers whilst retaining core functions (e.g. product development, assembly) and the airline industry in its own way has done the same.
By developing standardised services on multi-tenanted platforms to multiple airlines, these specialist providers were able to achieve utility-scale and the platform investment not possible for a single airline operator. In turn, this allowed the airlines to focus on differentiation of proposition. The result was that they were able to eliminate the fixed cost of providing those services/functions internally and competitively source those services on a usage basis. The outcome was improved cost/income ratios, better quality support services and enhanced customer experiences, resulting in improved returns on equity.
It appears that as an industry matures and has multiple providers over multiple geographies, a secondary set of providers support that industry with products and services that they, in turn, become expert and competitive in providing. By focusing on their particular niche across multiple clients, they are better placed to adapt to and prioritise change than an organisation that has multiple functions and supporting technologies to prioritise. The client buys the services and no longer has to be burdened with maintaining the technology platform it is delivered on and benefits from a dedicated set of expertise focused purely on that service.
So, how could that apply to banking?
For a multitude of reasons, regulation is driving the banking/capital markets industry in a direction whereby functions irrespective of the organisation have to be delivered and operated in a standardised way. The 色花堂Financing Transactions Regulation (SFTR) has forced the securities finance industry to standardise the treatment of the inter-life events such partial returns so that the unique transaction identifiers continue to match during the life of the trade.
The industry associations are actively working towards a common domain model which in turn will influence the next generation of technology. But what if complex non-core functions become services that could be purchased on a volume-linked basis (cost-flexing with revenue)? And the technology for those services was no longer a maintenance concern? It would unburden the purchaser of ever competing technology priorities and create bandwidth and budget to facilitate a strategy for technology for the core businesses. Moreover, those service providers are able to deliver those in their clients preferred geographical locations due to the cost-effectiveness of delivering the same service to multiple clients.
This approach not only brings economies of scale and assists in accelerating clients technology change programme for core functions but lowers the barriers entry to new participants and new geographies.
Delta Capita
Delta Capita currently provides managed services to support financial service clients鈥� know-your-customer and client lifecycle management functions. It also has a well established managed service in the structured retail products space. Now as part of the Prytek Group, it is now positioned to broaden its managed service offerings to further support banks and financial institutions.
It has made strategic senior executive hires to support its strategy. Specific to capital markets, Gary Bullock now heads up the post trade workstream (which includes the existing securities finance, prime services and collateral team). Gary McClure is leading the charge to develop and bring to market a range of managed services (operations and technology) in line with the Delta Capita principle of being able to deliver those services in the clients鈥� locations with teams that will have expertise and empathy for their clients.
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