Technology has always been important to investment banks, but in 2014 it became their all-important consideration, along with finding and keeping good technologists. Banks launched incubators and multi-million dollar funds to tap into emerging fintech talent outside their reach, and the churn of chief information officers demonstrated the importance of having good leadership at the top of IT.
Technology has become omnipresent in the banking industry. It doesn't just affect the people working on the systems, but touches everyone across the bank. Do you work in the front office? Technology can either make your life easier, or can take your role. Do you work in the back office? The same applies, although the likelihood of technology stealing your job is increased. So, how will 2015 pan out? What kinds of technology innovation will emerge this year and which skill-sets are likely to be in demand, or out of favour? We spoke to capital markets technology experts who gave their considered views.
Over the past 12 months, investment banks have joined the crush to recruit data scientists. However, Paul Rowaday, a senior analyst at capital markets consultancy TABB Group, says they have largely been focused on projects related to governance, risk and compliance. This is set to change next year.
“Next year, it will move from defensive to offensive use of data scientists – you’ll see them in the front office,” he says. “I’m not talking about data scientists replacing quants, but while quants are focused on high turnover trading strategies, data scientists will be working on how to utilise large datasets for a much better understanding of slow turnover markets.”
In 2014, investment banks took the unusual approach of either investing in, or providing the funds for expansion of, fintech start-ups. “This is strange, because they’re essentially admitting that they don’t have a culture of innovation and need to buy in expertise,” says Adam Honore, CEO of capital markets consultancy MarketsTech. “Next year, they’re going to invest more in emerging tech firms.”
Banks are under pressure to bolster revenues, but in a tough environment they may be better served by automating and spinning-off back office processes that cost them a lot of money. By focusing on cost saving, banks will find it easier to hit their 10%+ return on equity targets. These ‘digital related’ cost savings could cut expenses by 50% according to a forward looking report by McKinsey on bank IT.
“When we look at large universal banks, they have 400 to 500 core activities or processes. Over two-thirds don’t touch the client at all. While not all that stuff can be digitized or automated overnight, a lot of those steps certainly can be, so we think there is a large opportunity to get more productive.”
Hacks at J.P. Morgan and Sony at the tail end of 2014 are two reasons why cyber-security professionals have seen their stock rise yet again. The pressure on banks to maintain security around their customers’ details and to be generally seen to have robust defences against hackers means cyber-security is likely to be the key skill in demand throughout 2015, suggest both Honore and Rowaday.
“The focus on security will help banks redeem their reputation with the government, regulators and the public,” says Rowaday.
For every front office employee, investment banks spend an average of $485.4k annually on technology. This is partly because banks like to develop their own proprietary systems for sales and trading, and it's partly because they maintain a silo mentality in which divisional tech teams work in isolation. If costs are to be cut, banks need to embrace third-party applications – particularly in areas where tech provides no competitive advantage. Third party systems could therefore gain more traction next year.
“Longer term large banks will simply not be able to afford to develop and maintain proprietary solutions for every part of their infrastructure and will have to take out some of that functionality through managed services,” says Rowaday.
Investment banks have been hiring-in Agile expertise over the past 12 months – J.P. Morgan, for instance, shook up its team in Asia to embrace the new working methodology – but Agile is still rare in banking. Why should Agile become more popular in 2015? Quite simply, cost-savings.
“We found that agile practices help control costs as well as delivery time,” said McKinsey. “Banks that apply agile methodologies to less than a quarter of their projects deliver 70% of projects on budget and 55% on time. In contrast, banks that use agile in more than half of their projects deliver 96% of projects on budget and 79% on time.”
Regulators clamping down on the fund management industry will prompt the sort of hiring around developing governance, risk and compliance reporting methods that has cost the investment banks so much over the past few years, believes Bob McDowall, an independent consultant for banking and financial markets.
“Asset managers still have to go through all the pain of risk reporting and governance that has hit investment banking,” he says.
Already there are small fintech companies like FundApps – a firm that manages regulatory information for fund managers – to help them out. McDowall believes that fund managers will indulge in a combination of recruiting technologists and buying in expertise from vendors.
Investment banks like UBS – which has been ordered by regulators to automate 95% of its FX trading – and Barclays are already making moves to minimise human intervention in FX trading. The huge fines levied against banks for allegedly manipulating currency markets will only accelerate this trend and FX and rates traders could suffer more.
Risk and regulation will continue to dominate technology investment in 2015, believe both Honore and Rowaday, but banks will be opportunistic, rather than defensive.
“Regulatory implementation is maturing in the U.S and Europe and firms are moving from a defensive use of modelling capabilities to respond to regulatory demands towards something that will start driving the business,” says Rowaday
Accenture's 2015 outlook predicts that banks will need to engage with new 'fintech ecosystems' in the next 12 months. 'Chief digital officers' will need to be appointed, says the consultancy firm. These digital officers will be responsible for strategy and for looking at what small, nimble players, are doing. They'll need to create 'social solutions' for institutional clients, for example. Will banks need hire legions of digital expertise? Not necessarily, but they'll need to know what's happening digitally in the outside world.
“Technology continues to deconstruct the walls that once surrounded capital markets and former powerhouses’ dominant access to information, price, and liquidity,” says Accenture. “New entrants enabled by innovative digital technologies will come from all sides; small fintech start-ups and non-traditional providers (Google, for example) will compete with either a head start or a clean slate in the digital space.”
Forget the oft-cited security concerns, the biggest “blocker” for banks moving their huge infrastructure to a cloud computing model is, typically, internal politics. Why would the decision makers in banks’ infrastructure teams sanction a move to a technology that would, ultimately, see them out of a job? Honore says this is why the gravitational shift to the cloud has been so slow.
“The biggest area of growth that’s still on a slow curve in banking is cloud – people who have the skills to manage cloud infrastructure migration will certainly be in demand next year,” he says. “Internal infrastructure employees continue to fight the cloud, however, because it’s their jobs to lose but they’re only delaying the inevitable. I wouldn’t want to be someone looking after banks’ datacentre assets right now.”