Steven O'Hanlon, President and Chief Executive Officer of Numerix, discusses what he sees as the new best practices capital markets players need to undertake to succeed in today's capital markets reality.
Since 2010, when the first of a series of critical reforms were implemented, namely Dodd-Frank, the pace of change in the capital markets has continuously accelerated with stricter regulatory supervision, disruptive technologies, and dynamic market environments. Investment banking, in particular, has been under pressure due to tighter liquidity and capital req
uirements, increased costs of compliance, and new forms of competition from the fintech industry.
New sectors of fintech that have emerged to disrupt or enable financial services have been fueled by a massive uptick in venture investment in private fintech companies. In fact, Accenture cited that more than $50 billion has been invested in almost 2,500 companies since 2010, redefining the way in which we invest, borrow, save and protect money1.
So business has not been easy the last seven years for the financial services industry. Before the financial crisis, financial companies (not including the Federal Reserve banks) accounted for nearly 30% of U.S. corporate profits. By 2015, that number had fallen to just 17%2. Globally, top investment banks saw RoE of just 6.7% in 2015, down from 9.2% in 20143.
Banks have been trying to adapt to a new reality. I have spent considerable time thinking about this from a number of dimensions. In my assessment, there are five key best practices for operating in today’s capital markets reality.
• Adopting Next-Generation Operating Models.
Because of events over the last decade, profit-making opportunities for banks have shrunk and billions of dollars in revenue have been lost. There is a growing consensus that, the current business climate requires the reinvention of operating models in order to enable the flexibility, scalability, operational efficiency, and differentiation required for success—while simultaneously reducing costs and recapturing profitability.
Banks must be ready to adapt quickly—a capability that requires agile technology. This means having a next-generation technology that can enable a bank to evolve alongside a changing capital markets environment and drive operational efficiencies across an organization.
With all these strong impetuses, one would be inclined to think that organizations are rushing to try to replace their legacy technology. Well, the reality is a bit different. According to recent market research conducted by NTT Data, only 15% of banks in the U.S. expect to start a significant operational modernization effort in the next three years.
I understand that their current systems have served them for years, but it’s time they start thinking that the status quo can cost an organization money in the long run. Sometimes the cost of not transforming is the expense you need to be thinking most about.
So how can banks tackle this new capital markets reality to regain a grip on profitability and emerge competitively stronger?
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Building on the above, O'Hanlon discusses what he sees as the new best practices banks need to undertake to succeed today. These include:
• Adopting Next-Generation Operating Models
• Solving for Bank Capital and Margin Requirements
• Embracing Innovative Fintech
• Digitalizing Processes
• Modernizing and Simplifying IT and Risk Oriented Technology Systems
