The future of systems in financial services

As we all know software firms have sprung up like dandelions in summer. Every week, virtually, we are seeing new systems or enhanced systems, with a regular introduction of new firms, all offering a system or functionality that they hope will be unique and a big seller. Unfortunately the success gateway is very narrow and the vast majority of software vendors will wither and either die or be absorbed into another company.

Those software vendors that do succeed, will tend to find themselves in a situation where they have to either sell the company, taking whatever profits are on the table or walk away. Or be faced with further investment required in order to grow, this usually entails research and development. We can see evidence of this in the Corporate Action vendor space that I know so well.

Ten years ago this sector was vibrant and developing fast and there was a certain global market for them to sell into. However, corporate actions was a niche market that could only stand so many software vendors in it. Essentially because of the speed of developing functionality and the standard system requirements of financial services firms, nearly all the leading software vendors in this space ended up with almost identical capabilities.

How then can they differentiate? Obviously there is the technology and architecture along with service and support capability, but in strict buyer's functionality needs, they will all look much the same. It's for this reason that as the decade passed, all the CA software vendors started to diversify into related business areas or developed new service based operations. It's why we see a number of these vendors offering custody functionality, in a modular architecture and moving into the Cloud, for offsite systems and services.

Whilst we find the software vendors under pressure to adapt and develop the same can be said for financial services firms. Financial services firms are clearly under pressure to enhance and develop new functionality to meet not only changing regulatory requirements, but also the demands of clients and the business. It is because of the legacy systems that underpin many financial services firms that an opportunity has been created to buy in solutions from a third party. This has been either for systems or services, as outsourcing has been particularly in vogue. However, all this is a major headache for the boards of financial services firms and in particular for the people expected to run operations in both technology and business.

Making a decision to buy a product whether this is a system or service is fraught with personal risk and business risk with of course financial cost to the firm. Making a case for investment in an external product to the board for budget is one of the most difficult assignments for any manager. It requires a raising of your head above the parapet and putting your personal expertise on the line. It also requires the manager to have to hand the knowledge and experience to be able to make these recommendations. It's therefore not surprising that legacy systems proliferate the financial services industry.

Another major problem that is recognised by everybody is the reactive nature of financial services firms, switching between projects that have already been started and the latest regulatory or compliance inspired project. Unfortunately, the industry tends to respond to crisis but never manages them. So investing in a third party product might be good today, but tomorrow a new objective may emerge.

Sometimes projects are put on hold or slimmed down, or put in the closet never to be seen again. Introducing a technology strategy has long been viewed as an almost comical decision, as people and times change extremely fast and any decision to build a strategy can be undone when a new man is at the helm.

Will this situation change in the future?

It's highly unlikely unless there is a board change, where more operational expertise is represented and more overall knowledge of how businesses are operated from top to bottom. The FCA could have a big impact if the corporate governance of financial services firms is scrutinised driving the need to have greater technology and operational expertise on the board.

It's very unlikely that software firms trying to sell end to end processing will succeed. On the face of it end to end processing looks ideal and a one stop shop to create a completely automated solution. In reality this is a false hope, as history has shown that these systems rarely achieve satisfactory results and are in fact the legacy system of the future.

The most likely future scenario will be that firms will develop systems and technology architecture, where they can buy best of breed modular systems, which can be decoupled if they begin to fall into the legacy bucket.

Software vendors need to revaluate their products and marketing strategy to sell modular functionality. For example corporate actions vendors should market and sell modules, like data management or taxation rather than an end to end processing, which appears to be too big a mouthful for financial services firms to
swallow.

So the future of the software industry has to be to adapt to the changing needs of financial services firms and cut down the risk of purchase.