Need to cut cost to boost sub-optimal levels of RoE is becoming essential for capital market firms in the backdrop of tepid revenue growth and increasing compliance burden. Firms have tried short term measures to cut cost, but should now consider long term strategic review of business and operations.
Moving beyond traditional outsourcing arrangements, mutualization of costs at a group or industry level through adoption of shared service and industry utilities would enable long term cost reduction.
Celent has been tracking the utility landscape for the last two years starting initially its coverage of the utility solutions in the Know Your Customer space, as that area saw a number of solutions emerge in a quick period of time. However, the industry has seen development and launch of newer solutions under the managed service/utility model that span across the value chain of capital market ecosystem – such as post-trade operations, reference data management, collateral management, regulatory reporting etc.
The utilities in capital markets are a new phenomenon with the potential to significantly transform how operations are carried out at financial institutions. Understandably, this has created a lot of interest and curiosity among several participants as they look to redesign their operations and solutions around the utilities to adapt to the changing situation. Uptake of the utility and shared services will be driven by a growing realization of value and can take a while.
Many large banks have already realized the valuable proposition that a utility can bring and have therefore taken an active role in adopting, and even in the development of, some of the utility solutions. Such large institutions are best suited for utility adoption in the near term. Some of the utility providers are large industry players with significant industry penetration in their respective markets; they can hand hold and provide a level of comfort to clients who are now considering adopting utility solutions. This would pave the way for next wave of adoption of the utility model and will likely take place over the short-to-medium term. As the firms in the above two categories adopt utility solutions in the short-to-medium term and demonstrate successful use cases, others who are currently on the wait and watch mode are likely to adopt this new model in the medium-to-long term.
A recent Celent analyzes salient features of the emerging utility-managed service in capital markets including detailed discussion on thirteen such solutions; the report is available for download here.