There are few industries that, after being at the centre of two major economic crises and skipping a technological revolution, are not only still in business but have remained almost entirely unchanged. The resilience of the financial industry, despite the dot-com crash of 2000 and the 2008 credit crunch, not to mention the emergence and domination of giant technological companies equivalent to several Skynets, is quite remarkable.
For my generation, which bore witness to the collapse of the steel and coal industries, such survival skills are an anomaly. All the more so when my experiences as a user of the retail banking system remind me of the exasperation I felt when, after years of relying on the comforts of nuclear-powered electricity, I had to make do with a coal heater for warmth, hot water and cooking on a weekend away in the countryside.
Take the fact that some new financial companies have gamma-ray vision when it comes to replacing commercial banking services with better, faster tech-savvy solutions. Think of how easy it is to pay petty cash electronically, to transfer dollars or euros instantly, or to settle our bills with friends and family in just one click. Yet it still takes days for a replacement for a stolen credit card to arrive and, as once happened to me, several hours of waiting at my local branch to receive an apology for the lack of tellers, let alone assistance or cash.
As a technologist of about twenty-five years’ standing, how can I square my professional understanding of the industry with my experiences as a customer? To put it more bluntly, will Google soon be insisting that we implement one of the niche vendor solutions that are our specialism, or will it just replace us altogether with the technological blueprint that has ensured its world domination?
From my admittedly limited perspective, I would say both yes and no. There are, of course, cultural and sociological reasons for this. As has been well-documented, for example, people are reluctant to change banks, and there is also a huge difference between handling a small pounds-to-euro transaction on your phone, and deciding to entrust your mortgage or life savings to a start-up. What I would like to focus on, though, is what I know best: financial technology, the business that it serves, and the people who work in it.
The very foundations of technology in the financial industry, especially in the capital market, have been hit extremely hard over the last few years by reducing margins, suffocating regulatory pressure and drastic cost reductions. Twelve years ago we had an innovative, well-funded infrastructure; compare that to the world of cost-cutting and flatlining investment that followed it. The result has been a deplorable regression, even as the technological revolution continued apace elsewhere. During this period, we started calling corrective maintenance ‘RTB’, or ‘run the bank’. This swiftly became ‘maintain the bank’ (MTB) and, finally, ‘KTLO’: ‘keep the lights on’.
Whilst some rationalisation was probably required, and was in fact already being initiated within the industry pre-2008, the systemic job-cutting exercise in Europe and forced workforce displacement in labour-arbitrage enabled countries has deeply damaged banks’ image. Whereas banks were once associated with employment stability and technological innovation, undergraduates today are choosing to work for start-ups, the manufacturing industries and not-for-profit organisations, which are a better fit for their ethical and monetary aspirations.
Despite these efforts to save money, the businesses that the financial technology industry is supposed to service are scarcely in better shape. They have been hit just as hard by loss of revenue, lack of new market initiatives and overall cost reduction, and have suffered even more from the regulatory changes that have been put in place. One of the big French banks, for instance, has recently revealed that the effect of the last two years of new regulatory implementations has been to increase the time that it takes to agree and settle a transaction fourfold. Even clients are now complaining about the massive and mostly redundant level of disclosure that they receive from their banks, and are choosing to become non-compliant rather than put up with the lengthy waits and escalating costs associated with properly processing information, which would eventually lead to better and more transparent banking practices.
Should we therefore conclude that the banking industry is ripe (or, perhaps, sufficiently rotten) to fall into the hands of the GAFAs?
Some low-hanging fruit will certainly be plucked; some, in fact, has already been devoured. Just think of FX payments, credit cards and short-term consumption loans. Others are due to fall, among them commercial corporate services, and maybe also pensions and wealth management, which has hundreds of small funds that are ready to be bought and integrated.
All of this said, I do not think that the core financial functions of capital markets could be easily replicated outside of the organisations that have the deepest knowledge of them. As anyone who works in the financial technology industry will tell you, generations of specialised resources have been developed that are specific to an array of culturally diverse institutions, both small and very large, in Frankfurt, Paris, London, New York, Hong Kong, Tokyo and beyond. The ‘sweatshop’ culture that some of my friends refer to relates both to the tailor-made aspects of the work that we do, and to the fact that we have known each other for ten to twenty years as we continually meet at the same five to ten institutions.
Together, people, technology and businesses built systems that were at the cutting edge in the ’90s and ’00s, at a time when processors and memory were a rare commodity, even if those same systems were then used to bankrupt the world in 2008. In other words, the level of engineering and optimisation required to enable the birth of algorithmic trading (meaning no disrespect to the users and developers of Tensorflow, Google Vision and other big data APIs) was achieved without the vast number of CPUs that are now required by leading-edge technology, and before the days of memory being available at a click (no disrespect to AWS and Redis, either…).
Such resources were simply not available at the time that transaction-based software and its pricing counterparts were being created, when optimisation had its own testing cycle (as crazy as that sounds today). Remember, too, that IT specialists could not rely on Google or YouTube to track down information relating to secretly-held APIs, hidden away by vendors and integrators to safeguard trade.
This level of complexity still exists in financial libraries, and in the dedicated settlement and straight-through processing systems that today handle the transactions of core financial systems. We are talking about millions of lines of extremely specific and structured code, very much unlike the data that the GAFAs are used to process.
In the same way that the trap doors and hidden entrances of Egyptian tombs have hoodwinked thieves for millennia without any intervention, these systems can continue to deliver their outputs for years, even with degraded maintenance and a simplified operating model. They have needed to, too, as banks have hurried to ‘disinvest’ in such ‘expensive’ platforms, in a way that is reminiscent of the speed at which they implemented regulatory processes; more to satisfy political agendas than to deliver any real improvements in transparency that would actually benefit clients.
It has certainly reduced costs, but the effect has been to leave newly-promoted centres of excellence in ‘offshore’ locations in complete despair, facing the largest number of manual processes since the early days of the technological revolution. What is most definitely apparent is that banking technology has failed to deliver on what has become the bread-and-butter of the GAFAs: customer service and user experience. I challenge you to retain your sanity after reading most banks’ ‘know your customer' key operating processes, or simply following their employee regulatory training. It is obvious that their response to the rise of customer-centred data has been woefully inadequate, as they view anything that does not have obvious commercial value as an aberration (in line with most for-profit organisations). Yet this is precisely where Facebook, Google and Amazon excel: providing focus and attention for unstructured, useless and initially non-commercial data (yes, my daughter uses Instagram…), presented in a friendly, easy-to-understand and intuitive way on your PC, phone, tablet or watch.
So we stand at a crossroads. On the one hand, banks are under pressure to earn back the confidence of their clients by taking the lead once more in innovation and net benefits. On the other, the transaction processing efficiency of the ’90s and ’00s, with its emphasis on combining the best price with the fastest possible service, has become difficult to achieve in a commodity-based market where customer service is just as important as price, and innovation is being stymied by regulation.
For now, banks will maintain their hegemony of the capital market, due to their technological legacy. The question is for how long, and for what purpose, given that electronic exchange platforms are rapidly replacing most of the systematic internalisation trading schemes that were previously in place. The internet giants are poised to make the most of this, and will quickly gain a market share when there is no complexity to hinder them, and a decent level of standardisation to help them. Branding and UX will only accelerate this process.
The next few years are going to be key. Banks need to stop complaining and always listening to their shareholders went it comes to prioritising short-term gains, and start investing wisely in technology and people again. The best approach with Big Data infrastructure is probably not to behave like over-excited children with a new toy, or like IT managers looking to enrich their CVs with Google Cloud buzzwords. What they should really be doing is finding new solutions to old problems. Forward-thinking specialists could try to convince to them to find new solutions to new problems with new technology, but they do not currently have the luxury to invest in such schemes.
Putting the client back at the centre of attention means appreciating what some companies have achieved with ex-nihilo IT platforms in less time than banks have taken to think about replacing their legacy systems, then start replacing them, and ultimately abandon said replacements (or spend years completing such projects only to find that interim solutions using ‘obsolete’ systems actually work just as well). It doesn’t have to be this way. Huge progress can be achieved by harnessing the talent that the financial industry has nurtured for years in IT and business, giving free range to its desire for innovation and constructive roles, and working with ambitious FinTech start-ups that have been founded by veterans of the industry. This will only be possible if we stop asking for projects to be delivered on a cost basis, and demand that they be operated on a benefit basis instead. Is it acceptable to pay more? The answer is a resounding yes, if it drives up revenue, but very few IT RFI and RFQ currently try to evaluate the return (ROR) offered by solutions that are based on-shore, focusing only on cost.
What is needed is a substantial, shrewdly-targeted investment in infrastructure to reduce the technological debts that have been accumulated by the organic growth of legacy and regulatory systems over the last few years, which is at odds with the vertical integration of asset-class aligned systems. This form of integration might make sense at product level, but SDLC, DevOps and common development practice (starting with Agile) have to be enterprise-wide and able to withstand the immediate termination of a project when they are not in use. On the core infrastructure side, companies are being charged ridiculous prices to end deals with the giants of the data centre industry, only to realise belatedly that any unplanned work on hardware or innovation is locked in at horrendous costs by ten-year contracts. Several smaller data centres are also using clever and aggressive management solutions, and yesterday’s emerging cloud solutions are now serious competition for Amazon (see Redis, for example).
If these changes are to happen, the nature of the engagement between banks and technologists itself needs to change. Bank stakeholders and sponsors must provide a long-term vision that internal IT staff support, and then collaborate with the consultancies and start-up companies in their respective financial centres. London, in particular, has become the European capital of the internet and innovative start-ups due to its proximity to the City, and the huge number of former financial specialists who now work for such companies. It is time for the banks to get a return on the investment that they made in these erstwhile members of staff and, in the process, achieve far better integration in the new world of Big Data than they have ever done before.
So I am definitely not looking for a job at Google... yet. I still strongly believe that banks can remain ahead of the curve, and yet enjoy all of the amazing innovations that the GAFAs have brought us. But it has to be people and ideas that feel the benefits first, for a substantial period of time.
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