May 17, 2017

Bank Technology, FinTechs and the Impact on the Bottom Line | Analyst Insights with Greenwich Associates

In this video blog, CMO of Numerix, James Jockle, sits down with Kevin McPartland, Managing Director of Greenwich Associates, to discuss the role the fintech industry is playing in banking. Mr. McPartland gives his insight on how banking technology is impacted by this shift in the financial industry and how banks are investing to accommodate for this new change in the industry.

VIDEO TRANSCRIPT:

James Jockle (Host): Hi welcome to Numerix Video Blog, I’m your host Jim Jockle. Joining me today, Kevin McPartland Managing Director of Greenwich Associates, Kevin how are you?

Kevin McPartland (Guest): Great, how are you?

Jockle: I want to talk a little bit about fintech and banking. So obviously, you troll LinkedIn and Twitter and everything else and all the rage is digitalization, automization, how do I partner with Fintech companies? And one of the things I find most interesting is finally McKinsey has come out and said there’s 30 sectors of different areas of Fintech, ranging from mobile and payments and digital banks all the way through capital markets transformation. Perhaps the first question to you is does it make sense for a bank to become an IT company?

McPartland: It’s a great question and banks need technology to do their business, the only way they’re going to remain relevant and retain their market share is with an underpinning of technology to make the user experience more efficient. I think that goes from the retail audience, all the way up to the institutional level. Now, I guess the question is how do they do that? Should they staff and run like a technology firm with hundreds of programmers and all that comes along with that or should they look to partner firms who are software companies to help them create and build that infrastructure? The right answer in the end is probably somewhere in between, but I suspect we’ll see different banks take different direction; but it’ll be interesting to see how that plays out.

Jockle: But this is also not a new trend. I think going back we’ve seen this in the 90s, we’ve seen spinouts of Risk Metrics, we’ve seen MSCI, things of that nature. So, you know, is history repeating itself in some cases?

McPartland: A little bit. So, my first job, I graduated from school with a computer science degree in the late 90s and joined JP Morgan in technology and probably the only reason I got that job was because they were so desperate for programmers back then because the banks wanted to invest in technology; they saw this was the next big thing. The dot.com bubble burst and banks said wait a second you know what, we’re bankers, we’re not technologists maybe we shouldn’t do this. And they shifted their sights outside and we saw this great big boom in all these institutional tech providers, but you’re right. So now I think we’re almost circling back because the banks are starting to sell technology and spin-off technology and buy technology and try to integrate it into their platforms because they see where the world is moving. So, I don’t think we’re at any equilibrium yet, I think everybody is still trying to flesh out what works in the long term.

Jockle: But, so I guess the question is are there areas that make sense versus areas that perhaps don’t make sense? I think right now you’re starting to see more regulation in terms of the payment space of where does the bank end and the fintech partner begin. But you know you go into more institutional kind of platforms and things of that nature like JP Morgan trying to monetize Athena or Goldman Sachs giving away its trading platform, or a version of it in SecDB, are there areas that make sense and others that don’t?

McPartland: Yeah I mean payments is a good example because payments... In the end for banks, a big part of what they do is help people move money around. It’s no surprise that the existing, like if you wire money or you need to do a transfer, the fact that it can take a couple of days is crazy given today’s technology. It’s not that way in other countries like it is in the U.S. So, it’s great that we’ve seen so much innovation in that space, but ultimately the banks owning the payments infrastructure because that’s so core to what they do, that over time makes sense. When you start to talk more about tools and analytics and risk management, you know do they need to own that technology? I think there’s parts of the secret sauce, especially for institutional investors where they feel like it’s a competitive advantage, but for parts that are less of a competitive advantage and more of just a requirement it seems like you know the more cost-efficient way going forward would be to work with outside providers.

Jockle: Well you know it’s interesting, one of the things, and I know you cover a lot on the buy-side, one of the barriers I hear about these types of large platforms is giving up my data, showing my positions. Who’s going to have access to that – that’s always been kind of a long, standing battle of owning your own data. But on the buy-side you see cloud adoption, hosted services, a less of a fear in terms of engaging technologies. How did those firms overcome their challenges or fear or just the nature of what we do and this is the tool I have?

McPartland: Yeah I mean it got to a point where the reduced costs and the efficiencies outweighed the concerns and I think we’ve seen over time as we’ve used things like cloud and more in our personal life you start to get a trust there and that has sort of come over into the work environment. If we think about the big cloud providers, Amazon, Microsoft, Google, their whole business is predicated on keeping those platforms up and running 110% secure and we could argue about whether a bank is better at securing their data center than one of these cloud providers are but I would tend to think that the cloud providers. I mean that’s all they do; we should feel safe.

Jockle: We haven’t heard about any Russian hacks of AWS or Amazon at this point but you know you do hear hacks on private data centers regularly.

McPartland: Right, so it’s on everybody’s mind but I think, I mean maybe this a good example where, you know, why don’t you outsource it to the experts. Focus on your core business and let the security folks focus on security and I think, you know, the other big holdback has always been compliance concerns or concerns that regulators will be nervous that your customer data is with a third party. But I think we’ve been getting past that, especially since we’re seeing U.S. regulators themselves using cloud computing.

Jockle: So how does management stay focused? When I sit back and I get my budget and I look at the line item of how much I’m investing in technology, whether its regulatory driven or competitive driven, staying in the league tables or even down in terms of keeping market share from small start-ups, there’s always that innate way of saying well how do I monetize this in some way? How does management take a measured approach when looking at these line items?

McPartland: Yeah I mean it’s always going to be back to return on investment which I think is why certain technologies that seem so obvious that they are the way forward. Why they can take so long to be adopted on Wall Street because maybe your back-office systems are 25 years old and they run on a mainframe and how could we run on a mainframe anymore but it works, its efficient, its robust, and it would cost us $25 million in the next two quarters to pull it out; we don’t want to take a $25 million hit for what looks like at least in the medium term not much of an improvement so let’s leave it. Those projects do slowly bubble up to the top and eventually realized they need to be replaced and the benefits do outweigh the upfront costs but it’s a slow process because in the end it is about return on investment and that’s going to be the metric, not banks don’t look to technology because they’re cool, they look to technology because it can help them make more money.

Jockle: You bring up legacy technologies and we hear this, you know, all the time when there’s so much cool stuff out. There’s so much new and innovative stuff. How do banks jump in? Is it a point-to-point type solution of, you know, here’s a market where I see opportunity, so let me figure that out and oh well it doesn’t work with this 25-year old stuff but we’ll fix it on the back end. At some point, that stuff is going to break.

McPartland: Sure, especially the bulge bracket banks. I mean they do have hundreds if not thousands of people looking at each element day to day. You know the biggest, global universal banks have so many different parts of their business – retail banking, commercial lending, investment banking, trading – the list goes on and on. And yeah, they have experts in each case looking at those areas, trying to make sure that they’re competitive. The jobs of the CEOs of those big banks that have so many irons in the fire, they earn their paycheck in my opinion. It’s a complex animal that they have to keep an eye on but I think the way they do it is by hiring smart people that do keep an eye out and make sure that if there’s an opportunity they get involved and if it’s a fad, they make sure that they stay away and save the cash.

Jockle: Very good, well Kevin I want to thank you so much for your insight on this debate because it’s going to obviously keep continuing.

McPartland: It’s not going anywhere.

Jockle: Please check out his blog and website produces great research on Greenwich.com and you can also follow him on LinkedIn and of course we want to talk about the topics you want to talk about, follow us on LinkedIn and on Twitter @nxanalytics. I’m Jim Jockle, thanks for joining.

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