Celent Roundtable: Exploring Digital in Financial Services

Will Trout

Post by Will Trout


If you get together a room full of bank and insurance executives and ask them to define the term ‘digital’, don’t be surprised if you get a lot of different answers. Some view digital in terms of devices, others think of delivery channels, a third group understands digital as a marketing tool.

We surveyed the participants at our recent Digital Roundtable in New York and got all those definitions and more.

What is incontestable is that digital, with its outsized impact on the customer experience, has become part and parcel of the front- or customer-facing end of the banking, investments and insurance businesses. Back-end processes that enable scale and automation, such as documentation and STP, are being lumped under the rather inglorious label of ‘e-business’.

That raises the question: given that many customers are ahead of their financial institutions in terms of technology use and adoption, what are the requirements for a powerful customer experience? If digital is going to anchor the client-advisor relationship (or the financial institution to client relationship), what needs to be in place?

One bank participant noted that digital offers must be ‘contextual’. An example of this might be mortgage offers prompted by a customer virtually touring a house for prospective purchase.

Digital interactions become even more powerful when context is coupled with data.  Presenter Tsukasa Makino of Tokio Fire and Nichido Marine insurance showed how his company used data to market special policies, such as one-day car insurance, to non-car owners, as well as medical insurance offers linked to the physical activity levels captured in clients’ mobile devices.

In the wealth management arena, evolving client characteristics are presenting new opportunities for remote servicing, including via video, chat and tablet. Time-starved and increasingly tech savvy clients, 20% of whom live more than 50 miles from their advisor, often prefer mobile delivery. In the same vein, firms need to step up efforts to develop real-time, device-neutral client reporting systems, while encouraging advisor use of social media for thought leadership and networking. Today, 98% of affluent investors choose not to use the same financial advisor as their parents, and social media is one of the first places they look for ideas and recommendations.

It’s clear that the financial services industry has entered a new, more competitive era. From the mass market to the ultra-affluent, customers are increasingly collecting more data about themselves, and they are largely willing to share. Inspired by the example of non-financial firms such as Zappos, Amazon and the airlines, these customers are driving the most fundamental change in delivery that the industry has ever seen. They ask: As a flier, I can pull up real-time seat assignments on my phone; why can’t my bank let me do cool and convenient stuff, too?


The Next Generation Investor

Isabella Fonseca

Post by Isabella Fonseca

The “next generation investor” will leverage digital channels provided by brokerage firms to better enhance their user experience. These tech savvy investors are well educated and tend to be of high socio-economic status.  As the market evolves and investment needs continue to change, this group will rely on a new breed of interactive, data-driven tools to help them save time and generate new investment ideas. Online brokers have been leading the charge as early adopters in developing a digital strategy that delivers a more customized, end-user experience. Self-directed brokers and full service firms are increasingly looking to develop innovative technology solutions as a competitive differentiator. . So what are the key, user-focused functionalities the next generation investor is looking for in the online brokerage space?


For investors that utilize a brokerage firm for both banking and brokerage services, they will look to a single-sign-on authentication process and common User Interface to eliminate the hassle of multiple log-ins. The ability to view holdings and move money across multiple accounts, combined with traditional banking/brokerage app functionality (remote deposit capture, place trades, access news, etc.)  will create a more seamless end user experience.

-For apps targeting the traditional investor segment: the ability to contact an advisor or representative directly through the app will save time.

-For more advanced traders: adding FX and/or futures trading into one platform, more technical indicators, customizable/configurable layouts, streaming videos, and second-level details.

-For all investors: increasing focus on new charting, usability enhancements. Tablet apps will also facilitate more configurability/custom layout tools.

Large firms are continuing to focus on developing native apps to drive their mobile experience. However, smaller players are beginning to develop hybrid applications that support a wide array of devices and user interfaces.  The rise in custom applications that can adapt to various mobile devices will drive new business opportunities and capture additional market share for these players.

Social Media

Within the world of social media, there has been little change in the online brokerage space, but those firms that have remained active are continuing to attract new business  from retail investors. Some of the key functionality that will be attractive for the next generation investor will focus on:

-The ability to engage with customer service representatives and traders within the community platform.

-Building and developing more interactive functionalities such as sharing trades or trading ideas.

-Offering new “sharing” or “community-like” features that can be available in private trading networks, including the ability to follow other investors, share charts, view top performers, and compare portfolio performance.

-The ability to review and tailor individual portfolios and the ability to discuss  investment ideas in an online forum.

-Crowd-investment – investors can view investment activity and communicate with peers in real-time.


In summary, the next generation investor will leverage  digital capabilities as an integral part of their relationship with and the services provide by their brokerage firm. On the other end of the spectrum, brokerage firms will look to integrate digital strategies with existing business service models, while continuing to provide innovative solutions that provide a more seamless user experience, differentiating themselves from competitors.

This blog is also available on  http://www.scivantage.com/vantagepoint/

The Real Driver Behind Cost Basis Reporting Spending

Isabella Fonseca

Post by Isabella Fonseca

Celent recently conducted research which confirms that financial institutions continue to face a number of challenges that are forcing them to reconsider their overall cost basis reporting strategy.  During our nearly 60 interviews with financial institutions for Cost Basis Reporting: Total Cost of Ownership, firms stated that they were neutral in their assessment of satisfaction with either third party systems or in-house systems. What we found though, is firms that decided to build in-house CBR systems have undergone significant growing pains. One of the most significant challenges has been the maintenance of the technology development, making the size and scope of CBR projects difficult to manage.

Research confirmed that the larger firms typically deploy a mix of build and buy best-in-class tools. Medium-size firms are more open to a SaaS environment due to lower costs. Smaller firms are more apt to obtain CBR functionality from back office solutions, rather than buying expensive CBR specific suites.

Ultimately it all comes down to cost, and many firms have underestimated the resources necessary to customize their requirements and keep up with on-going regulations.  Since firms began to implement systems in 2010, perspectives on CBR systems cost have evolved.  Developing the technology has been a larger project than previously expected; and maintaining the technology and making the necessary enhancements have proved more difficult than anticipated. This has led to higher than expected costs. During our interviews, we asked participants to express their views on cost basis reporting spending over the next year, and the majority stated that it would be higher than the previous year, as shown in the Figure below.

So in either scenario, where firms had built in-house systems, or worked with third party solutions, there are gaps and challenges to overcome on existing workflows and operations:

Consolidating and integrating systems. Firms are looking to consolidate their systems. Tighter integration of cost basis reporting solutions is one of several projects that increase operational efficiency.

Increasing collaboration across systems. There needs to be collaboration between operations and tax staff.

Client service. As more securities become covered under the cost basis reporting regulations, firms expect increased call volumes. As tax reporting season approaches, firms are gearing up by adding new staff members to handle client inquiries. This year, firms have considered adding more information to investors earlier, such as more client facing tools and email blasts.

Overall, the results from our research demonstrated that many firms have been stymied by the high costs associated with developing their own CBR solutions whereas third-party providers have used their expertise and economies of scale to optimize processes, reducing costs and enhancing client service.

This blog is also available at http://www.scivantage.com/vantagepoint/?p=989

Flash boys…flash in the pan?

Post by David Easthope

April 1st, 2014 | Tags:

What the Michael Lewis article (Flash Boys) in the New York Times shows is that there are:

• Simply a variety of market centres (including exchanges) out there with different business models.
• Long gone are the days of utility-like exchange models out there for US investors.
• Trading needs can be organized (mostly) by speed or by price. The HFT guys mostly care about speed, and the long only funds care most about price.
• Market centers (exchanges, ATSs, dark pools) are typically good at either speed or price.
• Readers of our execution quality reports know this aspect of the market. @JaswalCelent (see the latest here: http://www.celent.com/reports/execution-quality-nyse-market-8)
• Non top-tier investment banks, have been squeezed by the technology arms race and need to find innovative ways to compete beyond IT spending and hiring smart coders. They can also buy or lease tech from the top banks.
• Market structure expertise is not a nice to have, it’s a must have, for desks of serious money managers. Firms like Rosenblatt offer this advice.
• Some exchanges have known about and have used order book ‘throttling’ for a long time
• Observers of the market have long known that location of data centers, order types, and the rules of engagement in dark pools are important.
• Others are simply catching up. Saying co-location is an unfair advantage, if it’s offered at an equal price to all comers, is not reasonable.

All in all, the book (excerpt) is a good read and good story, but it mostly catches people up on some of the things that have been happening in the last decade and only covers one potential solution to the issue of market impact, when there are many possible solutions.

Outsourcing in Capital Markets

Post by Arin Ray

Since our last blog on the issue of back office outsourcing by capital market firms, we have received quite a few questions and comments on the issue of outsourcing/ shared services in the capital markets. Here is a quick summary of the key themes that run across most of the queries we receive.

Drivers for adoption of Outsourcing

There are broadly three or four forces that are forcing capital market firms to outsource more:

Over capacity – till 2007-08 buoyed by favourable economic climate capital market firms had built up significant capacities (many divisions, larger teams, multiple platforms for several asset classes). Often capacity was built on an ad-hoc basis from a technology point of view without a holistic firm wide strategy. In the aftermath of the crisis profitability has been hurt and firms have taken recourse to short term measures like shutting down divisions and headcount reduction. Now it is time to take longer term approach to reduce costs on a longer term basis by focusing on core business and getting rid of non-core parts by outsourcing.

Weak volumes – due to the weak macro-economic climate trading volume has suffered drastically resulting in lower commission revenue for capital market firms. At a time when top line has been hurt and unlikely to recover quickly firms need to manage costs better to stay competitive.

Electronification of markets – Electronification in the areas of trading and execution in recent years and intense competition among providers of electronic trading tools have put further pressure on profitability as fee per trade is continuously declining.

Regulations – While firms grapple with the above challenges, they have also had to adhere to a plethora of regulations, which not only increase the cost of doing business, but also impact how, or if, they can carry out certain businesses.

Many of these regulations require firms to make changes in operations (e.g., reporting, compliance etc) under a shrinking technology budget. Outsourcing is being seen as a viable route to manage all these challenges. Since many firms in the ecosystem are having to adhere to same regulations and therefore make similar changes in their technology and processes there is a case for shared services to gain traction. Moreover, many firms are deciding to limit building in-house technology capabilities; rather than becoming technology behemoths they are deciding to focus on their core businesses. Sensing this opportunity some outsourcing service providers are considering developing a common platform that firms can use on a pay per use basis. Service providers are unlikely to do this all by themselves, rather they are partnering with product-platform providers to come up with a complete solution. While the ultimate goal is to develop an end to end shared platform, it is unlikely to happen in the short term. The instances that have emerged so far are more on provision of shared services for particular functions/modules (e.g., regulatory reporting, client on-boarding etc).

Outsourcing at the industry level

Target2-Securities (T2S) in Europe is a good example where the settlement of trades is being outsourced to a common platform developed and run by industry and the Eurosystem. Beyond that, most initiatives in this regard are being carried out by individual firms. Typically it takes the form of partnership – either between a financial institution and a technology vendor, or between technology service and platform providers. Any initiative at an industry level will be a long drawn process (T2S has been in development since 2006-07) and therefore in the short-medium term we are likely to see more partnership type of offerings.

Emerging areas in Outsourcing

Wealth management is definitely an area that has traditionally not been outsourced, but is being outsourced now.

Functions that are still unlikely to be Outsourced

For outsourcing, almost everything in the mid/back office can be, and is being, outsourced. This includes: order management, risk management, risk analytics, regulatory reporting, reconciliation, fund accounting, fund administration, corporate actions, clearing and settlement. However, extent of outsourcing in the front-office is less as that is sensitive to end clients and therefore firms want to maintain more control over those functions. Even then, we see functions like client on-boarding, certain aspects of customer relationship management (e.g., reporting, portfolio viewing, portfolio aggregation etc) are being outsourced. Research, marketing and product development are areas that have gained limited traction in outsourcing.

Shared services is still a nascent phenomenon and what can and cannot be outsourced to a shared platform still remains to be seen.

Furthermore, in the aftermath of the crisis, some financial institutions themselves are offering their proprietary technology and platforms to other firms. We have seen brokerages offering their electronic trading execution tools, technologies, and even white labelled algorithms to smaller firms that do not have the necessary resources to build it themselves. Many prime brokers are doing the same by offering their trading and clearing platforms to new start-up hedge funds. This offers the provider firms with fee income which is more stable and less volatile compared to trading commission.

Risks involved with Outsourcing

Outsourcing in capital market firms, particularly in mid and back office area, is not a new phenomenon and has been in place for well over a decade now. Over this period of time, firms – both financial institutions and their service providers – have developed set of best practices that alleviate concerns about risks on outsourcing. Regulators have also come up with broad guidelines to address management of risk for outsourced functions and accountability issues.

Outsourcing in wealth management is a recent phenomenon. Because of privacy and confidentiality issues involved in the wealth management business, wealth managers have traditionally been reluctant to outsource. The situation is changing now and some have started outsourcing their mid-back office functions. Safeguarding client confidentiality and potential for reputational damage due to lack thereof are perceived as areas of concern.

Regulators’ attitude

As discussed above, regulators are not particularly concerned about outsourcing at the moment as they have already addressed them over a period of time and also because they are having to deal with several other issues (e.g., market reforms, oversight etc). Outsourcing is not a top priority at the moment. Shared service is an emerging area and has not gained sufficient traction in the market to come under regulators’ purview. Therefore some concrete guideline is unlikely to come by in the near term.

In the second of three reports that analyze the retail investor market, this report addresses six Western European countries with respect to their retail investor market, country’s overall economic health, regulatory drivers, and wealth management market maturity and sophistication. Celent will conclude by stating its findings on these six countries and in which of these countries wealth management solutions providers should focus their attention in the near term.  The other report in this series is entitled, Sizing the Retail Investor Market: An Analysis of the North and Latin American Markets and Sizing the Retail Investor Market: An Analysis of the Asian Market.

The following countries are included in this report: France, Germany, Italy, Spain, Switzerland, and the United Kingdom.

European retail investors are a diverse group with differing levels of affluence, investment knowledge, preferences, and expertise. Factors such as investor confidence and regulatory reform in the aftermath of the financial crisis and the ongoing European debt crisis are some of the many factors influencing the size and characteristics of the retail investor market.

Since the financial crisis, there has been a mixed growth rate across Europe in terms of retail investor population. A few of the many factors contributing to the retail investor population growth rate include: cultural and historical views towards financial markets, loss and recovery of financial asset due to financial crisis, and more stringent regulations of financial markets. It is without question that the financial markets play a significant role in European household and personal wealth regardless of country (albeit to varying degrees).

The other report in this series is entitled, Sizing the Retail Investor Market: An Analysis of the North and Latin American Markets and Sizing the Retail Investor Market: An Analysis of the Asian Market.  This series of reports will be available to subscribers in Q2 2014.

Celent’s upcoming report, Sizing the Retail Investor Market – An Analysis of the North and Latin American Markets, is the first of three reports that analyze the retail investor market. This report addresses four countries across North America and Latin America with respect to their overall economic health, regulatory drivers, retail investor population (including growth, breakdown, and investment preferences), and wealth management market maturity and sophistication. Celent will conclude by stating its findings on these four countries and its recommendations in which of these countries wealth management solutions providers should focus their attention in the near term. Celent’s other reports in this series are: Sizing the Retail Investor Market: An Analysis of Western European Market and Sizing the Retail Investor Market: An Analysis of the Asian Market.

Celent conducted a broad preliminary study of North and Latin American countries and concluded that Brazil, Chile, Mexico, and the United States show the greatest signs of retail market growth due to their recent economic developments and potential opportunities for wealth managers and service providers.

This report aims to provide firms with an understanding of the retail investor landscape across four countries in both North and Latin America.  Additionally, firms that provide services to a global client base may draw comparisons between the retail trading markets domestically and internationally.  Finally, this report will encourage firms to assess their strategic plans with a further understanding of the products and services offered to retail investors in the Americas.

A sample of Celent’s findings include:

  • The percentage of retail investors of the adult population in Brazil, Chile, and Mexico are lower than the United States and Western Europe, however, the number of retail investors in these markets is expected to grow through 2014.
    • The emerging millennial women are positively contributing to the size of the self-directed investor population, particularly in the United States.  The millennial generation as a whole is generally more self-directed and tech-savvy.
  • The degree to which individuals’ assets were affected by the financial crisis varies per country; however, as a whole, investors continue to seek recovery of their financial losses from the financial crisis and will continue to do so as the global economy continues to improve.
  • Overall, there has been a balanced growth across customer segments (mass market through to upper high net worth individuals).


Challenges with China’s RMB Internationalization Process

Post by Arin Ray

Chinese authorities have been making concerted efforts of late to internationalize its currency (renminbi, RMB) by trying to increase its use in international trade settlement and investment. Their efforts are paying off as international RMB payments and trade settlement have grown rapidly since 2010. The whole process consists of three broad steps beginning with the use of RMB in trade settlement, then investment and then as a global reserve currency. The first step is well underway and has received the most traction of the three – around 10-15% of China’s international trade is settled in RMB at present. China has currency swap agreements with 24 central banks allowing them to directly settle international RMB trade. Use of RMB for investment purposes is still limited due to lack of development of the Chinese capital markets and strict controls imposed by the Chinese authorities. Use of RMB as a global reserve currency is the most ambitious step and likely to take the longest time. At present several central banks have expressed interest for increasing RMB holding as part of their reserve. However, the quantum of holding is small at present and primarily geared towards diversification of foreign assets.

In spite of these developments, there are challenges with China’s efforts to internationalize the RMB. Even though the Chinese currency recently broke into the list of top ten currencies globally, its share is still miniscule (~1%) in total global payments. At a broad level, RMB is mostly used to settle imports, but not exports – roughly a third of imports and less than 5% of exports are settled in RMB at present. Even in imports, invoicing is often done in US dollars while settlement happens in RMB.

A necessary requirement for RMB internationalization is to first make it fully convertible. China is planning to do this first through the offshore markets. Doing the same in the onshore market by opening capital account and liberalizing interest rate regime will be more challenging.

Then there are operational challenges for banks that need to be addressed. New systems and processes will be required to support clearing and settlement of payments in real time by domestic and international players. They also need to support different languages including Chinese, English and other regional ones and to accommodate working hours in different time zones to bring about a truly international system of operations.

These will also require strengthening of China’s anti-money laundering (AML) framework. AML practices in China have been in development for over 15 years, however, the AML regulations were largely inadequate until as late as 2006-07. As a result the internal control systems and company culture at banks in China tend to be inadequate, and they do not go beyond meeting basic regulatory requirements at present.

Given the rapid developments in the RMB internationalization process over the last three years, there has been a lot of enthusiasm and optimism expressed by several players regarding its potential to bring in major changes in the immediate future. However, it is safe to assume from past experiences that China will follow a planned, controlled, and slow but steady path in trying to raise the importance of its currency at a global level. True internationalization of RMB will require fundamental changes on many fronts including regulatory, market infrastructure, political and geopolitical aspects. An intermediate step in realizing the ultimate goal may be to first make RMB a dominant currency at a regional level (ASEAN/Asian). The extent of its adoption at a global level will however be long drawn and closely watched.