Fake it ‘til you make it
01 Nov 2017
As technology developments shape the world around them, financial services firms are starting to adapt. This year’s Sibos conference outlined where the industry is settling in, and where there are still milestones to pass
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Technology chat is a staple at Sibos, as financial technology and payments professionals gather to assess new innovations and discuss how they can be applied to industry pain points. Last month’s Toronto event was no exception, with debates centring around the likes of blockchain and distributed ledger technology (DLT), and artificial intelligence (AI).
However, data undoubtedly stole the show, with almost every conversation circling back to the exponentially growing datasets available to institutions, and how to find value in them.
DL-Teething pains
Predictably, blockchain and DLT still dominated their fair share of discussions. However, in one panel discussion, speakers suggested that while the technology could lead to cost savings in the back office, cultural change and collaboration are required before the industry can make the best use of it.
HSBC’s John van Verre named corporate actions as an example of where blockchain could have a significant impact, as it’s a very manual process with a lot of separate steps and duplication of efforts.
Creating a solution that captures the information once and makes it available to many would have “enormous economies of scale”, he said.
However, implementing blockchain will ultimately require participants to give up their own processes and become part of the ecosystem, and so the move will be a more significant cultural change than technology change.
Conference moderator Jean-Philippe Vergne agreed that widespread implementation of blockchain will be “a cultural and organisational issue”, requiring industry cooperation.
From a central securities depository (CSD) perspective, Sergey Putyatinskiy of Russia’s National Settlement Depository, said that, while blockchain has the potential to reduce risk, CSDs need to understand the technology they’re using. All institutions also need support from their central banks and regulators in order to create anything so drastically different to their current systems, as well as support from senior management internally.
Bernie Kennedy of HKEX added that the technology has to be capable and proven for market infrastructures.
Market infrastructures’ current technology is old, but “does what it says on the tin”, she said. However, infrastructures have to reduce costs somehow, and this could include finding any areas in which blockchain could add real value.
Equally, infrastructures working together could have the power to drive change, creating a network effect, she said.
Another session addressed the lingering concern around whether DLT solutions are secure enough to be put to use in an industry as heavily regulated, and as systematically important, as financial services.
Blythe Masters, CEO of Digital Asset, stressed that her company has not had to change its approach or direction in order to address security concerns, as it has “been developing systems to specification for market infrastructure providers who, themselves, are highly regulated”.
When working with such systemically consequential platforms, security aspects should be the starting point of the design of a solution, and should ultimately meet, or preferably exceed, the existing regulatory requirements.
Thomas Zschach, chief information officer at market solutions provider CLS, added that his firm worries about, invests in and innovates around security every day.
The shift towards a distributed environment has, however, made confidentiality aspects more complicated.
DLT may have led to an uptick in systems’ resiliency, however it could potentially pose a risk to data integrity, depending on how it is implemented. If things aren’t monitored properly, for example, this could “create vulnerabilities that you didn’t expect”.
Another panelist, Alicia Pertusa of BBVA, pointed out that, while the session’s speakers came from very different backgrounds, they were all either from financial institutions or companies that serve financial institutions or infrastructures. The security requirements in these areas are extremely high, and so service providers have to make sure they are implementing the same checks as they would with traditional solutions.
A lot of this will come down to standards as “the key to making sure all this security is achieved”, Pertusa said. Technology providers will have to be very comfortable providing solutions to these institutions and infrastructures, as “no mistakes” will be allowed.
Later in the session, Pertusa added that, no matter how cryptographically and mathematically secure a DLT solution is, it will still require a clear business use case, and backing from the regulators, in order to achieve the desired network effect, and subsequent market integration.
She said: “Integration is the key, and for that we need standards.”
Taking baby steps
AI also emerged a “transformational technology” that will improve productivity and security, and provide a competitive advantage, in a live poll at the conference.
In the plenary session on the significance of disruptive innovation and AI, 76 percent of poll respondents agreed with the above statement, while 22 percent said they think AI’s effect on financial institutions is still up for debate, and that the benefits are “unclear”.
Only 1 percent of respondents said they do not consider AI a priority at all.
Speaking on the panel, Amber Case, a fellow of the Berkman Klein Center for Internet and Society at Harvard University, noted that the AI and machine learning solutions we have today are not recognisable as those from science fiction. Rather, we are the robot stage of automation, using “narrow AI” with a small knowledge base.
Ultimately, computers will not being doing things for humans, but augmenting them, giving suggestions, information and options as and when required, thereby freeing up time. We have not yet reached that stage, Case said. However, she added: “We have co-evolved with technology since the beginning of time. We will continue to do so.”
Standard Chartered’s Alex Manson added, in response to the audience poll, that data is critical going forward, but that it is useless unless it offers insight, leading to intelligence and therefore actions. While the human brain can process information in this way on a small scale, this industry deals with huge amounts of data, and that’s where AI comes in.
He added that AI is “more than a buzzword” today, and that if people in the business are not a little paranoid about it, they are at risk of becoming complacent. However, any innovation must ultimately be relevant to customers. Manson said: “The last thing we want is a bunch of solutions looking for a problem.”
On this issue, Axel Lehmann, group COO of UBS, noted that the challenge is not necessarily in the technology—large institutions have the capacity to buy technology or develop it themselves.
The challenge lies in how to generate real use cases and develop value from them.
This will not only affect mundane activities, but will go to the core of organisations, affecting aspects like portfolio composition, monitoring and predictive pricing, he said.
The data game
The standout recurring theme of the conference was around data. In fact, in the ever-popular Future of Money plenary session, 57 percent of polled attendees said they now consider data to be more important than money.
Speaking in the session, Ather Williams III, head of business banking at Bank of America Merrill Lynch, noted that the question is “not an either-or” and explained that companies are fuelled by data, but that this data offers insight.
Data can be used to better understand counterparties and to manage the risk of cybercrime and fraud, while also offering automated “pro-active insight” into what firms should do with their capital.
Richard Koh, founder and CEO of M-DAQ Group, went further, calling data a currency in itself. He suggested that ‘fintech 1.0’ focused on using information technology to create better, faster and cheaper processes in financial services, while ‘fintech 2.0’ will be about using better technology to completely “re-imagine” financial services.
He added that data and money are “two ends of the same spectrum”. Data will allow firms to get better insights and create new products and services that will truly drive revenue, he said.
Elsewhere, Steven Wolff, president and CEO of CIBC Mellon highlighted a series of changes coming about in the asset servicing space, claiming that “it’s all about the data”.
Data can have an effect on client experience, client confidence and risk management, and aid asset managers in making sound investment decisions. However, many firms are only just beginning to consider data as a part of their growth strategies.
Samir Pandiri, executive vice president and CEO of asset servicing at BNY Mellon, added that the use of data in this way is very much “in its infancy”, adding that no one firm has perfected it yet.
BNY Mellon, for example, provides macro market data, transactional data relevant to the specific asset manager, core and critical data, plus additional information that has the potential to inform trading decisions and strategies, Pandiri said.
Historically, access to such data was customised, but new platforms have allowed for building of one platform that can be expanded to several asset managers through an application programming interface, and accessed individually and on demand. This method, Pandiri said, “allows you to scale the information without driving up the costs”.
Wolff also noted the increasing importance of data management as risk management. He added that this risk management must extend to third-party vendors, saying: “Your vendor is you.”
He added that the regulatory and risk burden in this respect “continues to amplify”.
Finally, Pandiri suggested that the financial services business models are shifting, moving from a focus on process to a focus on knowledge—knowledge that is powered by data.
Global custodians carry significant data that can be helpful to their clients “in terms of where they are relative to their peer group”.Utilising this data to help clients make business decisions and to drive more effective processes is “where the value-add will really be,” Pandiri concluded.
Gleaning value from data in this way will be the key for financial institutions to remain competitive, according to Dave McKay, president and CEO of the Royal Bank of Canada. McKay said the decade since the beginning of the global financial crisis has been “arguably the most disruptive and creative period ever seen in our industry”.
Outside of the financial sector, technology advancements have “completely altered consumers’ lives” and are responsible for a “fundamental transformation in the goods and services economy”.
However, while some of these changes have comes about in retail banking, progress has been slower on the institutional side, with examples of innovation available, but not with the same levels of demand. Now, this is changing, McKay said. He stressed that use of data in banking is not a new concept. Rather, the industry has seen an “exponential increase in computer power”, particularly in AI and machine learning.
Industry players must find ways to increase flexibility and reduce friction in the ways they store and move data, he said.
The payments space, in particular, has seen several new entrants, leading to increased fragmentation in the market.
Here, banks must consider how they will compete—either bringing clients in through existing channels, or serving them through new channels—and may have to re-consider their core value strategies.
In this world of fresh competition, “the battleground will be data”, McKay said.
Data was also found to be key in managing cyber risk in securities transactions. In a different panel discussion, Yves Poullet, CTO of Euroclear, noted that fraud occurs on the securities side of things as well as in the payments space, and suggested that, with further digitalisation, this is likely to increase.
It is important to consider data activity here, and to ensure that data remains available, he said. Confidentiality, integrity and availability are “absolutely paramount in our business”.
Roy Thetford of EY added that there is an opportunity here in “data fusion”. There may be established processes in a business that could help in protection against cybercrime—fraud or otherwise—and “the merging of some of these disciplines is a big opportunity”.
Representing Microsoft on the panel, Rupesh Khendry stressed: “Trust is paramount when you’re operating in a cloud environment.”
While there has been a focus on cybersecurity in the payments space, the digitisation of securities means “a single event can lead to a huge reputational risk”.
He advised attendees to start from a point of assuming a breach, working on a response to an event, rather than on a strategic approach to the threat, thereby creating the capability to intercept more sophisticated threats before they become widespread.
This is not a question of technology, he said, but of data, and of how any available data can be harnessed to the biggest benefit of an institution.
However, data undoubtedly stole the show, with almost every conversation circling back to the exponentially growing datasets available to institutions, and how to find value in them.
DL-Teething pains
Predictably, blockchain and DLT still dominated their fair share of discussions. However, in one panel discussion, speakers suggested that while the technology could lead to cost savings in the back office, cultural change and collaboration are required before the industry can make the best use of it.
HSBC’s John van Verre named corporate actions as an example of where blockchain could have a significant impact, as it’s a very manual process with a lot of separate steps and duplication of efforts.
Creating a solution that captures the information once and makes it available to many would have “enormous economies of scale”, he said.
However, implementing blockchain will ultimately require participants to give up their own processes and become part of the ecosystem, and so the move will be a more significant cultural change than technology change.
Conference moderator Jean-Philippe Vergne agreed that widespread implementation of blockchain will be “a cultural and organisational issue”, requiring industry cooperation.
From a central securities depository (CSD) perspective, Sergey Putyatinskiy of Russia’s National Settlement Depository, said that, while blockchain has the potential to reduce risk, CSDs need to understand the technology they’re using. All institutions also need support from their central banks and regulators in order to create anything so drastically different to their current systems, as well as support from senior management internally.
Bernie Kennedy of HKEX added that the technology has to be capable and proven for market infrastructures.
Market infrastructures’ current technology is old, but “does what it says on the tin”, she said. However, infrastructures have to reduce costs somehow, and this could include finding any areas in which blockchain could add real value.
Equally, infrastructures working together could have the power to drive change, creating a network effect, she said.
Another session addressed the lingering concern around whether DLT solutions are secure enough to be put to use in an industry as heavily regulated, and as systematically important, as financial services.
Blythe Masters, CEO of Digital Asset, stressed that her company has not had to change its approach or direction in order to address security concerns, as it has “been developing systems to specification for market infrastructure providers who, themselves, are highly regulated”.
When working with such systemically consequential platforms, security aspects should be the starting point of the design of a solution, and should ultimately meet, or preferably exceed, the existing regulatory requirements.
Thomas Zschach, chief information officer at market solutions provider CLS, added that his firm worries about, invests in and innovates around security every day.
The shift towards a distributed environment has, however, made confidentiality aspects more complicated.
DLT may have led to an uptick in systems’ resiliency, however it could potentially pose a risk to data integrity, depending on how it is implemented. If things aren’t monitored properly, for example, this could “create vulnerabilities that you didn’t expect”.
Another panelist, Alicia Pertusa of BBVA, pointed out that, while the session’s speakers came from very different backgrounds, they were all either from financial institutions or companies that serve financial institutions or infrastructures. The security requirements in these areas are extremely high, and so service providers have to make sure they are implementing the same checks as they would with traditional solutions.
A lot of this will come down to standards as “the key to making sure all this security is achieved”, Pertusa said. Technology providers will have to be very comfortable providing solutions to these institutions and infrastructures, as “no mistakes” will be allowed.
Later in the session, Pertusa added that, no matter how cryptographically and mathematically secure a DLT solution is, it will still require a clear business use case, and backing from the regulators, in order to achieve the desired network effect, and subsequent market integration.
She said: “Integration is the key, and for that we need standards.”
Taking baby steps
AI also emerged a “transformational technology” that will improve productivity and security, and provide a competitive advantage, in a live poll at the conference.
In the plenary session on the significance of disruptive innovation and AI, 76 percent of poll respondents agreed with the above statement, while 22 percent said they think AI’s effect on financial institutions is still up for debate, and that the benefits are “unclear”.
Only 1 percent of respondents said they do not consider AI a priority at all.
Speaking on the panel, Amber Case, a fellow of the Berkman Klein Center for Internet and Society at Harvard University, noted that the AI and machine learning solutions we have today are not recognisable as those from science fiction. Rather, we are the robot stage of automation, using “narrow AI” with a small knowledge base.
Ultimately, computers will not being doing things for humans, but augmenting them, giving suggestions, information and options as and when required, thereby freeing up time. We have not yet reached that stage, Case said. However, she added: “We have co-evolved with technology since the beginning of time. We will continue to do so.”
Standard Chartered’s Alex Manson added, in response to the audience poll, that data is critical going forward, but that it is useless unless it offers insight, leading to intelligence and therefore actions. While the human brain can process information in this way on a small scale, this industry deals with huge amounts of data, and that’s where AI comes in.
He added that AI is “more than a buzzword” today, and that if people in the business are not a little paranoid about it, they are at risk of becoming complacent. However, any innovation must ultimately be relevant to customers. Manson said: “The last thing we want is a bunch of solutions looking for a problem.”
On this issue, Axel Lehmann, group COO of UBS, noted that the challenge is not necessarily in the technology—large institutions have the capacity to buy technology or develop it themselves.
The challenge lies in how to generate real use cases and develop value from them.
This will not only affect mundane activities, but will go to the core of organisations, affecting aspects like portfolio composition, monitoring and predictive pricing, he said.
The data game
The standout recurring theme of the conference was around data. In fact, in the ever-popular Future of Money plenary session, 57 percent of polled attendees said they now consider data to be more important than money.
Speaking in the session, Ather Williams III, head of business banking at Bank of America Merrill Lynch, noted that the question is “not an either-or” and explained that companies are fuelled by data, but that this data offers insight.
Data can be used to better understand counterparties and to manage the risk of cybercrime and fraud, while also offering automated “pro-active insight” into what firms should do with their capital.
Richard Koh, founder and CEO of M-DAQ Group, went further, calling data a currency in itself. He suggested that ‘fintech 1.0’ focused on using information technology to create better, faster and cheaper processes in financial services, while ‘fintech 2.0’ will be about using better technology to completely “re-imagine” financial services.
He added that data and money are “two ends of the same spectrum”. Data will allow firms to get better insights and create new products and services that will truly drive revenue, he said.
Elsewhere, Steven Wolff, president and CEO of CIBC Mellon highlighted a series of changes coming about in the asset servicing space, claiming that “it’s all about the data”.
Data can have an effect on client experience, client confidence and risk management, and aid asset managers in making sound investment decisions. However, many firms are only just beginning to consider data as a part of their growth strategies.
Samir Pandiri, executive vice president and CEO of asset servicing at BNY Mellon, added that the use of data in this way is very much “in its infancy”, adding that no one firm has perfected it yet.
BNY Mellon, for example, provides macro market data, transactional data relevant to the specific asset manager, core and critical data, plus additional information that has the potential to inform trading decisions and strategies, Pandiri said.
Historically, access to such data was customised, but new platforms have allowed for building of one platform that can be expanded to several asset managers through an application programming interface, and accessed individually and on demand. This method, Pandiri said, “allows you to scale the information without driving up the costs”.
Wolff also noted the increasing importance of data management as risk management. He added that this risk management must extend to third-party vendors, saying: “Your vendor is you.”
He added that the regulatory and risk burden in this respect “continues to amplify”.
Finally, Pandiri suggested that the financial services business models are shifting, moving from a focus on process to a focus on knowledge—knowledge that is powered by data.
Global custodians carry significant data that can be helpful to their clients “in terms of where they are relative to their peer group”.Utilising this data to help clients make business decisions and to drive more effective processes is “where the value-add will really be,” Pandiri concluded.
Gleaning value from data in this way will be the key for financial institutions to remain competitive, according to Dave McKay, president and CEO of the Royal Bank of Canada. McKay said the decade since the beginning of the global financial crisis has been “arguably the most disruptive and creative period ever seen in our industry”.
Outside of the financial sector, technology advancements have “completely altered consumers’ lives” and are responsible for a “fundamental transformation in the goods and services economy”.
However, while some of these changes have comes about in retail banking, progress has been slower on the institutional side, with examples of innovation available, but not with the same levels of demand. Now, this is changing, McKay said. He stressed that use of data in banking is not a new concept. Rather, the industry has seen an “exponential increase in computer power”, particularly in AI and machine learning.
Industry players must find ways to increase flexibility and reduce friction in the ways they store and move data, he said.
The payments space, in particular, has seen several new entrants, leading to increased fragmentation in the market.
Here, banks must consider how they will compete—either bringing clients in through existing channels, or serving them through new channels—and may have to re-consider their core value strategies.
In this world of fresh competition, “the battleground will be data”, McKay said.
Data was also found to be key in managing cyber risk in securities transactions. In a different panel discussion, Yves Poullet, CTO of Euroclear, noted that fraud occurs on the securities side of things as well as in the payments space, and suggested that, with further digitalisation, this is likely to increase.
It is important to consider data activity here, and to ensure that data remains available, he said. Confidentiality, integrity and availability are “absolutely paramount in our business”.
Roy Thetford of EY added that there is an opportunity here in “data fusion”. There may be established processes in a business that could help in protection against cybercrime—fraud or otherwise—and “the merging of some of these disciplines is a big opportunity”.
Representing Microsoft on the panel, Rupesh Khendry stressed: “Trust is paramount when you’re operating in a cloud environment.”
While there has been a focus on cybersecurity in the payments space, the digitisation of securities means “a single event can lead to a huge reputational risk”.
He advised attendees to start from a point of assuming a breach, working on a response to an event, rather than on a strategic approach to the threat, thereby creating the capability to intercept more sophisticated threats before they become widespread.
This is not a question of technology, he said, but of data, and of how any available data can be harnessed to the biggest benefit of an institution.
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