The Case for the Fourth Network
By John O’Hara, CEO, Taskize
It is often said that the banking industry owes its longevity to a collective capacity for reinvention. Many of the world’s leading banks can trace their roots back to the turn of the 20th century and well beyond. But today there is little room for complacency, as demonstrated by travails of 500 year-old Monte dei Paschi di Siena, among others. If the banking industry does not make the right calls over the next decade – in terms of reshaping itself to overcome current and foreseeable challenges – it won’t only be Italy’s third largest bank contemplating an existential crisis. If, on the other hand, banks recognise the need for greater operational flexibility – and take the necessary steps to put it into practice – they can look forward with confidence to serving clients’ best interests for decades if not centuries ahead.
Reinvention requires the capacity first to identify the forces and direction of change, then to respond decisively and quickly. For all its long pedigree in this respect, the banking industry has a chequered history of late, with necessary changes to its structure only arising from painstaking consensus building, often thwarted by commercial imperatives and proprietary pursuits.
In any field of activity, it can take the incumbents a long time to recognise the need for change and even longer to respond to it. You might think that the case for adapting to change in banking is overwhelming: a major systemic shock followed by wide-ranging reforms touching every aspect of the industry; a prolonged revenue-shrinking period of low economic growth and interest rates, with an outlook of profound geo-political uncertainty; and an era of technology innovation with the pace, breadth and disruptive power to revolutionise customer expectations and equip ‘fintech’ firms to develop new value propositions that could usurp established leaders.
But prior to the global financial crisis, the banking industry enjoyed several decades of sustained, indeed spectacular, growth. Franchises were built, fortunes were made and financialisation of the global economy progressed largely unfettered. But long periods of growth can embed the forces of inertia. Behaviours, structures and systems that were suited to the needs of one era can outlive their useful purpose and slow the ability of banks to respond to new realities. The crisis might have been a symptom of a growing disconnect between banks and their clients, but the aftermath has not always helped banks to redress the balance, with regulatory reform and macro-economic conditions cramping room for manoeuvre, and often obscuring the path to a sustainable long-term strategy.
Despite this, it is becoming clear that banks’ business strategies for the next decade must factor in low margins and higher levels of customer service, transparency and flexibility. To this end, a new level of inter-operability and industrialisation of banking processes must be supported, centred on greater levels of automation and standardisation than achieved to date. Many commentators criticised the complexity and inter-dependencies of banks following the crisis, but in truth they aren’t connected enough at the operational level to support the relationships and service provision between them. In other sectors, commercial relationships between rivals – such as the one that sees Samsung supply memory to Apple – are underpinned by a high degree of automation and standardisation and deep partner integration along the supply chain.
Banks can and do achieve similar levels of integration. After all, global networks already exist in trading, settlement and market data. But anyone who has been involved in the development of financial message standards – whether the FIX protocol in the front offices of securities market participants or more recently ISO 20022, which has gradually been adopted as the standards framework for any new securities or payments infrastructure initiative, knows the work is far from glamourous. Nor is it efficient. My own experience developing the Advanced Message Queuing Protocol (ISO 19464) tells me that decade-long consensus-building, will not deliver the tools required to construct the flexible operating infrastructure banks need in the timescale available.
The industry’s response to OTC derivatives markets reforms, however, does point a possible way forward. In a number of areas of the transaction chain – from portfolio compression to dispute resolution to collateral management – utility services have been embraced for their ability to fill a clear need using open standards to deliver a high-performance, low-cost, no-fuss service, not unlike how Gmail has revolutionised email. Similarly, a utility-type collaborative platform may well prove the best hope for banks looking to address the increasing pressures on the back office, where the shortcomings of the existing three networks, have only been shored up by exceptions management tools, and which further regulatory reforms could push to breaking point.
In their current circumstances, it is all but impossible for banks to rip out the underlying infrastructure that delivers today’s services – even if they had the budget. Increasingly, however, it is possible to implement systems that sit on top of – or alongside – existing ones to help banks to serve clients more efficiently and cost-effectively. New collaboration technology that links back-office staff to their peers at other firms to fix breaks systematically, can improve productivity and service levels without major investment or implementation delays. More than this, it points the way to a fourth, “problem-solving network” alongside the those already created for trading, settlement and market data flows.
An open but secure network that connects the whole industry and routes problems or tasks to those most qualified to address them, has value well beyond the back office. It can, for example, form the basis of structured, transparent, task-based communication along the supply chain, enabling the flexibility that banks will need in the coming decades to keep pace with evolving client demands, market circumstances and regulatory requirements. The reservations that prevent banks from embracing outsourcing arrangements, collaborative agreements with other service providers and more flexible forms of organisation, can be tackled through the accountability and accessibility provided by a common network, which would also enhance liquidity and fundability in operations sourcing. Moreover, a problem-solving network has the potential to encourage best practice, and drive out exceptions and inefficiencies through shared metrics and, in due course, the application of artificial intelligence.
There are many ways in which banks can act to rediscover their talent for reinvention. But improving the information flows between them to support much-needed operational flexibility, will yield returns quicker than most.