03.29.2019
By Shanny Basar

Digital Transformation Could Cut $150bn Of Costs

Participants in capital markets incur approximately $150bn (€133bn) of complexity costs that could be reduced, or nearly eliminated, through digital transformation according to research from Accenture.

The consultancy said in a report that while massive investments have been made in trade and post-trade automation, about $150bn of industry costs are “pure” complexity costs that could be reduced significantly, potentially close to zero, through using distributed ledger technology and utilities.

Approximately 80% of the cost structure comes from market participants reconciling different views on the same underlying information on holdings and trades.

“We believe this is highly inefficient,” said Accenture. “The industry as a whole is ripe for change, with digital being a key enabler.”

The consultancy recommended that while waiting for DLT to be adopted, utilities offer an opportunity to standardize technologies and intra-party processes.

Markus Boehme, Accenture Strategy

Markus Boehme, managing director at Accenture Strategy, said in a blog that digital innovation is shifting the whole balance of the industry as investors become  dominant and and market access becomes all-to-all, where the buy side can make, as well as take, prices.

“On top of this, the impact of artificial intelligence (AI) is already being felt across the industry, and significant advances should be expected in AI-augmented research and risk analysis, automated deal-making and back office efficiencies, “ added Boehme.

He continued that distributed ledger technology may bring even more profound change through providing data that acts as a single source of truth that enables friction-free transactions.

“We believe that both AI and DLT have the potential to grow substantially as we head towards 2022 and beyond,” added Accenture.  “Their use cases could extend not only to optimizing and mutualizing current processes, but also to unlocking value in existing data and assets and allowing the industry to target completely new revenue streams.”

Electronic trading

The report continued that price discovery is increasingly shifting to platforms and the traditional balance between sell-side, buy-side and market infrastructure is being changed.

Accenture said that for many asset classes trading is now more than 50% electronic but some banks will have to rethink their efforts.

“For example, some players connect to over 600 different pieces of market infrastructure today,” added the report. “These firms have started to question the value of existing and further investments both in the multi- and single-dealer platform space.”

Despite this increase in electronic trading, the study found that asset managers still employ more than 35,000 sales and service people, with roughly the same at the top investment banks.

“This will surely change in the future with new digital developments.” said Accenture.

Shareholder value

The capital markets industry generates around $1 trillion in net annual revenue and shows high profitability overall according to the research.

However Accenture said: “Other than buy-side players, only a few capital markets businesses are actually creating real shareholder value. The truth is that most of them are failing to generate their cost of capital.”

Although asset managers have the highest profit margins, Accenture said they still need to truly industrialize their businesses due the contraction in fees which will offset likely future growth in assets under management.

“We believe that all buy-side players should prepare for a squeeze scenario in which volume will likely grow but margins will continue to shrink,” added Accenture. “The only questions are by how much and how quickly this will happen in the period leading up to 2022.”

Related articles

  1. From The Markets

    Liquidnet Acquires Prattle

    Deal brings investment analytics leveraging AI across structured and unstructured data.

  2. UN eyes AI for improved performance and greater team safety.

  3. Contributed Content

    AI and LIBOR

    Fintech exec explains how practical AI can accelerate the transition away from LIBOR.

  4. Invesco seeks a differentiated view in a data-rich world.

  5. Machines 'Learn' Front Office

    Refinitiv says 90% of financial firms are using it, though inadequate data remains a constraint.