Practical steps: Strategies for Successful Innovation Within Capital Markets

Roundtable discussion hosted by The Realization Group, led by Ascendant Strategy, TreoTrade and Nomura on 3 October, 2018.

The importance of creating a culture of innovation has long been recognised in the capital markets industry, but why this can prove hard to achieve continues to be a matter of some debate. The reasons given for these difficulties can also be complex and seemingly insurmountable, from long procurement cycles through to lack of diversity within larger organisations – and everything inbetween. Yet instead of focusing only on the hurdles, it may now be time to embark on more constructive dialogue and look at the growing number of examples in the market where firms have successfully implemented, and embraced, strategies to develop a true culture of innovation.

Moderated by Mike O’Hara, The Realization Group’s roundtable event focused on bringing together a diverse mix of senior figures from across the industry in order to examine these issues in greater depth and share ideas on how this can be achieved in a practical sense. James Maxfield, managing director at Ascendant Strategy, opened the discussion by explaining that despite the claims of negativity towards innovation, his experience with larger investment managers and banks “has been exactly the opposite, with most being used to working in fast paced environments driven by ongoing market and product innovation”. Instead, he argued that the real challenge is how to implement the necessary changes to deliver a successful outcome within a large and siloed organisation.

According to Maxfield, some of this challenge can be down to governance or lack of a shared goal. It can also be driven by wrong decisions around choice of technology, where a solution can be overly complex or far reaching for the problem it is trying to solve; the concept of ‘over-teching’ the solution that creates integration challenges.

Product Innovation vs Technology Innovation

In addition, innovation can sometimes come out of the blue and be sparked off by structural changes to the market, such as the introduction of new regulation. MiFID I was a good example of this, according to George Andreadis, co-founder of TreoTrade. This opened up national exchanges to competition and paved the way for new venues such as CHI-X and BATS to innovate around trading technology in order to capture market share.

One participant then made an excellent point that the concepts of technology innovation and product innovation need to be de-coupled. Although the Capital Markets industry has a strong history of product innovation, to capitalise on changes to market structure for example, it still relies on legacy technologies in a number of areas. So how can the industry take some of the excitement and interest from the product side and apply it to introducing newer technologies?

Regulatory drivers

One participant also explained that even large institutions can recognise “there is in an innovator in all of us” and that the role of the banks should be to empower all in its organisation to put forward their ideas. This includes forgetting the ‘myth of the Millennial’ as many of an organisation’s best innovators are in reality unlikely to come from that generation. This point was echoed by a number of participants, who recognised that institutional expertise was integral to successful innovation, where “experience of the old supports blending with the new”.

In general, the consensus view was that the firms that keep their ideas and technology fresh are the most likely to gain a competitive edge. Yet while in the past this was driven by a need to remain competitive, today innovation is instead much more likely to be driven by regulation. Yet as one contributor explained, for smaller firms the impact of new regulation has thrown up a number of pain points, with many still struggling to catch up.

For example, the data reporting challenges which have been created since MiFID II’s introduction in January have highlighted the problems of relying on legacy architecture. It simply is not a viable option for most to rip out all their existing technology and wait another two to three years to install a system, explained one sell-side participant. In addition, by that time the technology would most likely have become redundant, they argued. “The cost of competing is coming down, but the operational costs are going up,” the participant observed.

Innovation examples

Instead, the group was then invited to take a step back and share some examples of when firms have been able to successfully innovate. One participant mentioned the successful roll-out of banking services in Africa, which leveraged mobile phone technology as a means of overcoming what had previously been deemed impossible logistical challenges.

Others cited Capital Markets industry examples such as leveraging liquidity regulation changes to overhaul data architecture in Nomura, and the Goldman Sachs commitment to data lakes.

Another example cited was where senior leaders look forward at upcoming regulation on a multi-year basis and use this momentum to change their architecture. Common to this last example were commitment and buy-in by all senior executives supporting the budget and understanding the simple plan.

Certain banks were also agreed to have taken an innovative approach to market and regulatory changes, either by taking a strategic approach to becoming a more data-centric organisation, or even in one example by being open to the possibility that it in a few years the organisation may no longer be recognisable as a bank.

Knowing the true risk

For most larger institutions however, the problem remained how to introduce innovation into a very siloed organisational structure. As one commentator argued, larger firms can only achieve this if they change their attitude to risk and adversity to failure. “The reality is that the risk of falling behind is greater than the risk of working with a FinTech that fails,” the participant added. The panel agreed, with one participant observing that firms will generally not pay for information, but they will pay for knowledge.

Kim Johannessen, co-founder of TreoTrade, agreed, adding that the future will instead be owned by those who are able to “ask the right questions”. The way to ensure this happens is for innovation culture to become embedded in the organisation from the top down, he adds, which in turn will enable the bank to become nimble and adapt more rapidly to change. The group agreed, with one participant observing the need to break down the silos in larger organisations in order for this to happen. FinTechs also need to be supported more effectively by banks, who in turn should view them as long term partnerships, one participant claimed.

Buyer behaviour requires a change in mindset to deliver successful innovation, as financial institutions must recognise that smaller firms don’t have the budget or cashflow to subsidise their innovation. Committing funding to proof of concepts, recognising the practical cost of competing with cheap legacy (usually depreciated) infrastructure and accelerating commercial terms to provide cash flow were all noted as being additive to supporting innovation, which in turn would encourage greater competition in this sector.

Not only a technology challenge

Participants generally agreed that FinTechs also need to work harder at “speaking the same language” as the banks. As one participant explained, too many quants are “fixed on trying to solve the problem that they think needs solving”. This results in a solution that is much harder to sell, particularly if it has been developed from outside an organisation. The criteria for adoption will always be that the technology is aligned to a true business need, he added.

“Yet even when FinTechs get this part right and have their proof of concept, they often struggle with the actual implementation stage,” added Ali Rutherford, managing director, Ascendant Strategy. “When they have failed to understand the legacy architecture, particularly from a back office perspective, this can be a huge barrier to adoption.” Instead, he urges FinTechs to aim for small scale integration then to build up from there. Another participant observed that many incumbent institutions are missing out on the opportunities presented by OpenSource IP, which although freely available, still requires firms to have innovators in their organisation who know how to make best use of this technology. “This requires thought leadership from the banks,” he added.

Ultimately, the group agreed with the view that regulation could be treated as more of an opportunity to innovate, with firms and FinTechs alike now needing to be more realistic about the importance of successfully integrating new solutions. Legacy architecture was found not to be an insurmountable challenge, as by scaling down the size of projects to a manageable level and making better use of available resources, innovation could be successfully achieved. As one participant from a larger organisation noted, it is now important for banks to not only focus on ‘Know Your Customer’ but to also ‘Know Your Organisation’. Maxfield agreed, adding that innovation in technology is important, but so are changes in organisational behaviour to support successful innovation “Although that may be much harder to implement,” he concluded.


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