How automation will eat your lunch

In the post-trade world, banks and other financial market participants are pouring resources into automation. There are numerous drivers for these investments, from a desire to offer higher levels of service to aligning with regulatory expectations and reducing error rates. However, by far the most powerful driver relates to costs, reflecting persistently high cost-to-income ratios across the financial industry. The stark truth is that there is a natural, though often unspoken, connection between automation and reductions in FTEs.

From chief operating officers to broker control, automation is slowly eating away at rule-based and transactional processes. This often frees up people to undertake more valuable, client-facing opportunities. However, equally, it may simply make human tasks and processes obsolete.  One of the starkest examples of the potential impact is in the processes, intermediaries, and infrastructures conducted between when a trade is agreed and when it is settled. Here, order management—including trade validation, clearing, and settlement—requires a whole host of functions that until recently were subject to significant human oversight. Processes requiring at least some manual input ranged from trade booking and scrutiny to margin financing, matching, confirmation, and error resolution. The whole clearing process was largely manual, as were payments and reconciliations. Across the industry, these activities added up to billions of dollars of annual costs.

In an increasingly technology-driven marketplace, all of that is starting to change. Not only are banks adopting an “automate everything” mindset, but their approach to automation is evolving. Whereas previously, automated solutions were applied to discrete elements in the value chain, banks and others are increasingly looking to break out of siloes and automate front to back. This kind of vision is predicated on a new generation of core banking systems. These cost less, accelerate time to market, and support advanced data capabilities, as well offering banks a chance to create ecosystems of partners and peers.

A key function of modern technology stacks is that they enable a range of solutions under the broad rubric of artificial intelligence. So-called intelligent automation enables banks to move away from traditional trade lifecycle management to more efficient trade capture processing and resolution. According to financial research firm Autonomous, the adoption of AI technology alone can help traditional financial institutions save 22% in costs by 2030.

In the back office, a key application of AI is robotic process automation, which can be used to track data movements and undertake labour-intensive processes. Providers offer solutions in activities including confirmations, settlements and payments, asset servicing, data management, and transaction reporting. These lead to shorter transaction times, higher levels of accuracy, and effort reduction of in-scope FTES of more than 40 per cent. Technology services and consulting company Wipro estimates there is at least 15-20% cost benefit to be realized in back-office operations through RPA alone.

As these transitions play out, another area seeing significant investment is distributed ledger technologies (DLT). Indeed, an executive at a leading US bank said recently that the past few months have seen a step change in the way that banks view DLTs, moving from cautious interest to full commitment. Indeed, that transformation has played out across the wider investment community. Investors put more money into DLT in the first half of 2021 than over the course of any full year in history, according to CB Insights. Blockchain companies raised more $7 billion in venture capital and private equity funding from January to July last year, with institutions across markets and geographies investing in the space.

DLTs are making themselves particularly felt in capital markets. Across the securities lifecycle, there is growing evidence of benefits in terms of speed, transparency, costs, and risk management. The most significant structural change relates to disintermediation. Through DLTs, data is validated and maintained on a single system, or multiple interoperable systems, rather than on both sides of every transaction. This creates a so-called ‘trustless’ environment: There is no need for reconciliations or many other data processing steps.

Another area in which DLTs could lead to significant pressure on jobs is in primary markets. Here, so-called native issuance would mean that borrowers issue securities directly onto DLTs and would service securities – for example, make coupon or dividend payments – through automated instructions called smart contracts.  For many in the financial markets, this will imply a loss of income. However, from a business perspective, that negative will be offset by lower costs and higher levels of innovative potential.

From a personnel perspective, or course, things will look very different. Not only do automation and DLT present a potentially significant threat to job security. They are designed to be exactly that. The task for everybody in financial services, therefore, must be to skill up, evolve with the needs of technology, and keep on working to unlock new ways to create value.