Blurring the lines
David Lewis, FIS
September 04, 2019
David Lewis of FIS explains that efficiency is a keyword in the securities lending industry right now, and it is unlikely to get any less important anytime soon.
The word “industry” was chosen very specifically, with the intention of encompassing every facet of the securities nuance and collateral management ecosystem, because the need to be efficient to preserve or grow margins affects everyone’s segment, from technology vendor to prime broker to the beneficial owner to hedge fund. There isn’t, of course, one magic formula for improving the efficiency of your business and enabling healthier returns. If there was, we would all be doing it, and then, most likely, it wouldn’t work anymore.
As a technology provider delivering solutions across the breadth of the banking industry, FIS can meet competition from not only other providers but from internal build projects. As banks move to improve automation, increase learning and artificial intelligence, even address tasks that were believed well beyond the wit of machines only a short while ago. Once the strategic decision to invest has been made, the question of build or buy is almost inevitable, and when it arises, we should also be thinking about whether there should be some delineation as to who does what in this space.
When an organization steps beyond its specialization, or where it has previously brought value, should we really expect it to be the best at making those wished for returns come to life? Certainly, in a downturn, it appears very common that the recovery process that many companies undergo will involve the divestment of “non-core” activities, which would suggest that they underperform in the long term and act as a drag on the main activity the organization is good at. At the moment, there are a number of these lines being blurred across our industry, and it must be considered as to whether this is firstly a good idea long-term, and secondly, whether it actually makes the markets more efficient in real terms.
When considering the rise of online retailers, consumers are swapping convenience for immediacy, valuing the convenience of ordering goods from their couch at home higher than getting the items themselves the same day. For the companies themselves, they get to hold no inventory and little risk, simply taking a turn for connecting the buyer to the seller. Across many events and publications focusing on the rise of technology and the value of the companies that develop new services, the point is consistently made that the largest cab company in the world owns no vehicles, the largest retailers have no stores and the biggest food delivery companies, no restaurants. Is there a parallel to be drawn in finance?
In market making, banks utilize their balance sheet and banks must either make those processes more efficient or find other lines of business. One of the pressures compressing margins in this part of the market comes from disintermediation, where technology companies are offering to connect buyers and sellers of assets directly, both in the cash markets and the financing business, and the banks need to respond, whether defending their existing services or attempting to beat the new entrants at their own game.
Like its retail cousins, buyers of services in the online matching arenas are looking for convenience and cost savings, potentially at the loss of immediacy and the protection afforded by the balance sheet of their agent or broker. Liquidity is key to the success of any such exchange-like service, replacing the market-making capabilities of the bank, but where supply is dependent entirely on the suitability and availability of buyers and sellers, or borrowers and lenders, immediacy can be difficult to guarantee.
Now banks are either building their own technology solutions or muscling in on others in an attempt to beat the nimble young start-ups on their own turf and technology companies offering services similar to the traditional banking world, both with the ultimate aim of protecting their overall business and client base. If this happens to the new offerings in the securities nuance and collateral markets, are we missing out on an opportunity to advance the services we both use and offer?
That would certainly be the case if those services started to see the same issues that can appear in the online retail markets, where adverts on one platform are simply showing new goods available from other providers that the buyer could utilize if they searched just that bit harder. Realizing the client’s need for immediacy above value or moving into the mortgage nuancing business.
There is no one hard and fast rule that suits all providers and all clients, and therein lies the richness of our industry, but there is a place for both automation technology and banks. Immediacy may be key in some trades, whereas value and efficiency may be the most important aspect of another. Whether automated or manual, market data is key to getting the right deal, and getting the right value for an asset is a fiduciary responsibility of all the participants in our market. We must all do more with less, and automation of processes and the intelligent employment of technology is key to achieving that, but we must also keep a keen eye on what each of us does best, bring that expertise to the market and not simply mimic others to replicate what they do.