According to our new research on the future of sell-side banking, automation is one of the most important trends shaping our industry over the next five years.
The middle office is no exception. More than one-third (37 percent) of the 173 middle-office executives we surveyed say automation is one of the top three technology trends for the next five years.
Automation helps banks in two ways. Banks are under pressure to manage margins, and automation helps you do more with what you have.
But it also helps you capture more revenue by being more productive. For instance, if you’re making a loan to a corporate, the whole loan approval process could take weeks. If you could automate that, you free up the credit officer to focus on the value-add while significantly reducing the process time – giving you a real competitive advantage.
Or take the trading space. In the past, traders just needed to do a simple pre-deal credit check. Now they have to factor in the full costs of risk – KVA, CVA, DVA, FVA, margin costs, where to clear. The only way to get all of that information in front of the trader is to automate the process.
Meanwhile, the newest wave of regulations, such as the Fundamental Review of the Trading Book and Interest Rate Risk in the Banking Book, are more comprehensive than the rules that were released immediately after the credit crisis. Their impact goes beyond the core risk function in the middle office, forcing groups to work together across silos.
So how else is the middle office changing? A relatively new priority is to provide the front office with new functionality at a much more rapid pace. That’s both a technology challenge and a business model challenge. Hosting and cloud can help banks achieve these goals. And while only 39 percent of the middle-office executives believe their own roles will be outsourced, 53 percent agree that front-office functions will be outsourced. So clearly there is support for outsourcing within the middle office.
I believe there’s one final piece to understanding what the new middle office will look like. Because of the pace of technological change, people in functions outside of technology will need a better understanding of what technology can do. For instance, if I’m a lawyer, it would be valuable to understand what blockchain and smart contracts can do so that I can leverage them. Understanding key technology trends will help them take advantage of the opportunities posed by technological advances.
So I’m reassured to see that 88 percent of middle-office respondents believe their company is becoming a tech-driven business, even if this is slightly lower than in the even more technology-driven front (91 percent) and back (93 percent) offices. For while the middle office may not be seen as the flashiest part of the business, technology is redefining it just the same, driving greater productivity and collaboration and helping the middle office contribute to the bank’s competitive advantage.
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