Roy Choudhury, partner and principal of financial services advisory for EY, tells Waters that the environment banks are now in—one where new rules can severely constrain their capital—should provide an impetus to focus on technologies that lessen the bank’s reliance on legacy platforms.   

“Technology is a big part of investment banking but the technology infrastructure is fragmented with new builds tacked on when new regulations come in,” he says. “This piecemeal strategy has led to burdensome technology that’s not agile. Banks need to remember technology is a competitive advantage.”

At its core, in an environment of lower returns, firms have to focus on building more sustainable models for IT development.

Short, Long
EY suggests that in the short term, banks should harness technologies like robotic process automation, utilize digital portals to work with clients, and establish utilities and hosted platforms. Robotic process automation—more commonly known as artificial intelligence—is expected to cut costs for back-office tasks like reconciliation by as much as 50 to 60 percent. Artificial intelligence can also be used to analyze big data, which can be wielded in areas like credit evaluation of potential clients.

Digital portals can improve the customer experience, which can improve client retention and customer engagement, and make the relationship more profitable. And utilities prove valuable because they allow a firm to move regulatory needs like know-your-customer and anti-money-laundering (KYC/AML) processes to a common platform.

In the long-term, banks should invest in projects relating to blockchain, smart contracts and artificial intelligence, according to EY. Angus Champion de Crespigny, financial services blockchain and distributed infrastructure strategy leader at EY, notes that blockchain solutions could prove to be a more agile way of transmitting information, which will help to reduce settlement costs for both banks and clients. Blockchain, however, still has to overcome issues concerning resilience, scalability, and security.

Smart contracts are seen as a tool that could work within blockchain that will serve as a model for master service agreements or credit support annexes, particularly with derivatives contracts. The technology is seen to streamline the work that goes into transactions that normally take some time to complete due to their complexity.

The Next Wave
De Crespigny says the vendor industry is changing the way it targets end users as firms start to recognize the value of disruption. As a result, investment banks may find it increasingly beneficial to partner with financial technology firms, rather than rely on those proprietarily built legacy platforms of the past.

“There is a value to uniquely quantify assets that can’t be duplicated and offer new financial products,” de Crespigny says. “It’s interesting to see how financial technology companies will be able to help move value.”

Investment bank State Street states much of the same in a new report—“Finance Reimagined: Finding Long-Term Value in a Digital Age”—saying that partnering with technology firms, or even acquiring start-ups, allows firms like banks to transform models to those that prioritize innovation. Annie Morris, head of data strategy and operations at State Street Global Exchange, said in the report that an agile “fail fast” approach is crucial to test out new ideas.

“Success in the digital era requires investment institutions to embrace a culture of experimentation,” Morris said. “There needs to be a willingness to try new approaches, to tolerate failure, and to adapt quickly to market challenges and client needs.”

Like EY, State Street is pushing for blockchain and artificial intelligence. Cloud-based platforms are also seen as vital for providing advanced analytics tools, as well as providing a more agile infrastructure to bring new products to market much faster. For State Street, the investment bank of the future is also focused on deep-rooted digital innovation and understands the importance of integration, integrity and intelligence of data in order to generate value for customers.

THE BOTTOM LINE:
Investment banks need to focus on new technologies like blockchain, artificial intelligence, and advanced analytics to be ready to find new value and cut costs in an age of dwindling returns. It is not enough to rely on legacy platforms; firms should look at working directly with financial technology companies for solutions.