David Easthope

About David Easthope

Senior Vice President at Celent, a FinTech advisor. Focused on innovation in capital markets. Trusted advisor to financial institutions and technology firms.

A New Architecture for a New Age: Digital Transformation of IT Infrastructure in Investment Banking

Digital Transformation of IT Infrastructure

I recently wrote an article for CIOReview. A full copy of the article can be found here. In the article, I state that investment banks are transitioning their IT infrastructure to a new architecture based on a new vision: digital. The goal of digital transformation is clearly to simplify IT and operations, reduce cost, and thus improve ROE. Digital is driving demand for cloud-based infrastructure, BPO, and IT outsourcing with banks moving many applications to cloud.

But to create  A New Architecture for a New Age, the new architecture is about more than movement from analogue to digital. Emerging technologies like machine intelligence can not only drive efficiency, but also offer advanced analytics and insights leading to investing and trade ideas, superior compliance practices, improved customer engagement, additional revenue opportunities, and more.

Moving from Known to Unknown: Blockchange

To create this aggressive form of digital transformation, a new financial technology stack is coalescing around Internet of Things (IoT) and blockchain, powered by cloud. The blockchain design pattern allows for cryptographically secured environments upon which to conduct wholesale and investment banking functions.

We believe financial institutions will deploy blockchain networks with distributed ledgers in increasing numbers. Smart contracts, which are agreements whose execution is both automatable and enforceable (according to Barclay’s CTO Lee Braine) will be powered by the networks and backed by digital assets, legal templates, and standards. IT and open source organizations will provide the fabric for blockchain networks, including cloud, while a number of technology firms will deploy and manage these networks to support applications atop this fabric.

Smart contracts will be enabled by confidentiality, security, and digital identity. The underlying technology will incorporate cryptography, programmable digital assets, distributed ledger technology (DLT), and interledger protocols. Yes, getting to smart contracts requires a lot of organizational change. Fortunately, blockchain creates some first mover advantages. So it’s not just cost reduction, but actual revenue opportunities that will encourage change.

Moving Ahead

Slow to move incumbents will be uncomfortably exposed to an unforgiving environment. Some will seek partnerships with fintech firms, a kind of hedging against the future (not a bad strategy, but an incomplete one), only to become hamstrung by the next quarter's results.

A better strategy is to decide what the future industry architecture will look like and then work toward becoming a leader by offering a new model for the future. Getting to the new architecture will take a minimum of three years, but most likely closer to 4 or 5. ‘Run the bank’ still overshadows ‘change the bank’ massively. To get from a known architecture to an unknown one requires courage.

Future architecture: All roads lead to Cloud

Present vs. Future-State Architecture

Our frenetic activity of client meetings, briefings, conferences, and events heated up in the last few months. We recently spoke to audiences in New York, London, and Tokyo.

The present environment of cost-cutting, evaluation of profitability, capital efficiency, and compliance implementation is consuming much management attention and IT budgets. Operational efficiency and operational risk mitigation are top of mind.

However, across our client base and network of financial institutions and vendors, there is also a continued desire to understand emerging technologies like blockchain/DL and artificial intelligence. Many of you are expressing a strong interest in our opinions on the future state of the technology architecture in parallel with these day-to-day operational considerations.

From this vantage point, we believe the potential of blockchain technology (including smart contracts), IoT, and artificial intelligence will drive incremental IT spending going forward as solutions are implemented, further uses cases are developed and tested, and ecosystems and IT partnerships are expanded.

All Roads Lead to Rome Cloud

With respect to the future IT architecture, one striking conclusion we've reached is that all roads lead to cloud. For instance, major blockchain use cases are being built atop cloud providers. Technology firms such as AWS, IBM, Microsoft, and others appear to be prime beneficiaries of this frenetic activity, some of which is strategic, and some of which may be simply tactical and later disappear. In addition, artificial intelligence may be best leveraged in the future with data that resides in the cloud as opposed to in siloed business operations. Moreover, wealth managers increasingly are considering cloud-deployed solutions. Even compliance (e.g. RegTech) is increasingly being sold "as a service".

Clearly not all capital markets, wealth management, and asset management operations are cloud-friendly, both now and in the future, but many types of operations will move to the cloud.

We see this happening gradually and powered by availability, greater standardization, and creative vendor offerings across a spectrum (from ITO and BPO to managed services, utilities, and yes … cloud possibilities throughout).

Blockchain on the brain

Blockchain technology has been the topic du jour on the conference circuit and in industry newsflow, starting with FinDEVr in San Francisco in 2015 and most recently The Blockchain Conference presented by Lighthouse Partners (and Pete Harris) also in San Francisco. There are now dozens of blockchain-related technology companies vying to attract developers to build new applications across this emerging technology stack. Although we are constantly on the lookout to counter industry marketing hype, the growth in the level of awareness of the blockchain and its potential has been notable. With vendors receiving industry financing, banks creating working groups to test use cases and deploy actual networks with software vendors, and technology companies challenging notions of what constitutes legacy, it appears we are on the cusp of rapid change in the industry. I even saw a swap contract on the blockchain last week. If we were to take a screen shot of capital markets technology and workflow and put it into a digital time capsule and open it in say five to ten years, we will likely consider things like T+0/1/2 and other concepts of settlement or straight-through processing quaint. Equally, our understanding of what the blockchain actually is may look quaint as well. For up to date views from Celent on blockchain, be sure to go to our web page and read this blog. Also, an interesting event coming up will also be DC Blockchain Summit – March 3, 2016, at GeorgetownUniversity. When DC starts paying attention you know that there is more to the story than hype. More info on the DC Blockchain Summit The Chamber of Digital Commerce, in conjunction with Georgetown University, is holding the Capital’s Inaugural Blockchain Conference. Market leading companies from every industry are pioneering with bitcoin, blockchain and distributed ledger technologies to change global finance as we know it. The event brings together the best and brightest minds from industry and government to Washington, DC, to provide thought leadership on the policy challenges facing this disruptive technology.

2015 year in review

For your end of year review purposes, please see a list of some of the most popular, shared and commented upon blog posts:   Capital markets The sun never sets on FIS/SunGard – update Intra-inter dealer broker deal: facing the future Challenging times for the post-trade industry: improving efficiency and achieving stability amidst growing complexity   Fintech and disruption-related The blockchain is totally forked Fiat currency on a blockchain Battle of the messaging systems, and more Symphony messaging: WhatsApp to business’ ears?   Wealth and asset management Wealth management trends 2015 The ascendance of the B2B robo Banks set to jump into robo Climbing the advice value chain: why the Orion-Jemstep tie-up makes sense Twilight of the ETF? Why Direct Indexing matters  

FinTech and Mexico – could we see a Unicorn arise from Guadalajara?

I recently moderated a FinTech panel at a conference hosted by AMEXCAP in San Francisco. AMEXCAP currently represents 59 venture capital/private equity firms that actively invest in Mexico. The event showed that Mexico is advancing relative to Brazil with respect to providing favorable conditions for FinTech entrepreneurship (internet penetration above 50M as one of those conditions). In Mexico, FinTech capital mostly flows from established VCs, but this is starting to evolve. The FinTech ecosystem has been evolving and maturing in Latin America for the last three years or so, mainly due to the effort of some participants including Celent, to connect all key players of the ecosystem.We believe is essential to work in an ecosystem, a network of participants, regardless of the geographic location in Latin America. The sustained and increasing development in the region requires the existence of this ecosystem. In the USA where there are geographical pockets of Innovation, such as Silicon Valley, that brings the actors together based on proximity, nothing exactly like this exists in Latin America. However, Guadalajara is emerging as a place that might create more density of entrepreneurship as established tech players are there, such as IBM, and entrepreneurs are increasingly choosing to locate there. For example, a crowdfunding platform called PitchBull decided to locate Mexican operations in Guadalajara. Technology allows business to be conceived locally, nationally, regionally, and internationally, and therefor provide the scale needed for a FinTech player to build from Mexico to beyond. Will Mexico specialize its FinTech around issues specific to Mexico, such as low bank account penetration, a lack of quality credit card data relevant to car issuers, and a mostly cash economy? Perhaps a FinTech unicorn can arise from Mexico based on solving for these unique business conditions.

Lessons of Bondcube

We have been following the development of Bondcube since early 2013 after its foundation in 2012. Founded by CEO Paul Reynolds and CTO Mark Germain, Bondcube had a unique vision to support trader workflow in fixed income to support greater liquidity in the market. While many FinTech start-ups focus on B2C and the client experience, Bondcube was squarely focused on B2B and workflow support for traders. While Bondcube leveraged new Web 2.0 capabilities such as chat and tracking, it was essentially a new tool for an existing audience with the vision created from former industry insiders trying to create something new. The central idea was that Bondcube could revive large order execution, minimize the market impact of search, and be disruptive to existing marketplaces like MarketAxess, Bloomberg and Tradeweb. It planned to optimize trading via chat and by leveraging historical inquiries. We understand it was marketed at zero cost to buyside and (relatively) cheap connectivity for dealers. Bondcube decided to focus on both the Europe and the US, like existing competitors. An investment by Deutsche Boerse AG suggested that Bondcube might have some legs to build traction, but today’s news on liquidation suggests that further funding was needed and the shareholders declined to do so. Brad Bailey is compiling an updated report on the platforms in the market today, but this is clearly a sign that the market is still sorting through the various ideas and that incumbency (and inertia?) still has great value. Also, sometimes the market asks for change but then does not actually adopt the change it’s clamoring for. All too often the buy side says “Yes! Yes!” but does not adopt new options rapidly, but only after long trials and testing. Capital (and patience) can disappear before the testing and optimization process is complete.

IT spending webinar April 30th

Please join members of the Celent Securities and Investments team as we discuss how firms in the Securities and Investments industry need to review and alter business and technology strategies with a long-term vision in mind, moving beyond short-term measures to address immediate needs. This webinar is based on a recently published report.   Register here    

2014 Year in Review: Most Popular Blog Entries

As we reflect on 2014 and move into 2015, I thought it would be interesting to review some of the most trafficked, discussed and otherwise popular blog entries from 2014. Naturally some focused on the potential for disruption in the wealth management industry, always a visible and hotly debated topic, but other topics such as fixed income trading, utility models/outsourcing, and market structure were of continued high interest as key themes. Enjoy. Fintech and the Democratization of Investments Buy side insight for Fixed Income platforms The Custodians Enter the Automated Advice Wars Utility Model in Capital Markets Social Trading The Next Generation Investor Outsourcing in Capital Markets The Market structure debate in Asian context    

Networks > social media

I have never really liked the term social media. All media has the potential to be social. What is really changing financial markets is the power of networks. Networks can be highly social (Twitter, Linkedin) somewhat social (lets not forget Bloomberg or even a Squawk Box as a type of network) or even anti-social (private networks). Financial institutions and financial advisors should be looking for ways to leverage networks, not necessarily media. Content, services, insight, and advice can be delivered and shared among communities of users. I am sure this is a lonely fight, but we should drop the term social media. Rather, we should emphasize the importance and power of networks to change financial markets.

Exchanges and innovation

I recently attended the 2014 IOMA/WFE conference in Moscow. An interesting panel debate was on the role of innovation in the exchange universe. Some observations: • While not all innovation begins at the product level, exchanges tend to focus energies there consistently • Exchanges seek early feedback from customers on product needs, particularly any products that offer risk hedging • In some geographies innovation must involve a wide array of stakeholders including regulators • Exchanges also concentrate on innovation along the value chain; seeking and filling gaps In summary, the current state of innovation at exchanges appears to be fairly customer-centric when launching new products (e.g. index options or futures products). To get beyond product innovation at exchanges, one must consider technology innovation. Since only a few exchanges think of themselves as technology vendors, technology innovation is difficult, but some exchanges may focus on driving down latency, improving capacity or delivering technology to a community of users. Collaborative innovation may be on the rise, as exchanges look outside their walls for partnerships. For example, CBOE plans to invest in Tradelegs, a developer of advanced decision-support software.