An unseen operating environment
There is little doubt that 2020 will go down as a landmark year in the history and economics books as the COVID-19 crisis continues to significantly disrupt (and reset) economies and communities. While performance will see impacts across the board, resiliency measures and their efficacy in the current environment will determine the ‘winners’ of the next decade.
Financial Institutions (FIs) must strike a balance between resiliency and growth. The day-to-day operations of financial services firms are adversely affected by social distancing norms and lockdowns in many countries. They are stressed to keep their distribution channels working, comply with supervisory and regulatory duties, and manage customers’ and investors’ expectations. At the same time, they will need to stay conscious about their brand, reputation, and strategy with regard to potentially changed customer behavior once the crisis subsides.
A strong case for utilities, more than ever before
While many organizations will turn to aggressive cost management as the default priority in the next couple of quarters (and rightly so, for most parts), some of them will look to offer enhanced value to customers as their strategy to recover from the crisis. BPaaS cloud-based utilities are one of the options to consider. Utility is an entity that performs one or more common, non-differentiating functions, in a standardized and efficient manner, which were earlier carried out by the industry players themselves, or by vendors, but in ‘silos.’
A prime and early example created through a collaboration between JP Morgan, Goldman Sachs, and Morgan Stanley was a data utility company set up in 2015 to clean reams of reference data, efficiently as compared to the three individual firms. Over the years, utilities have taken on varied dimensions and forms, from a few players collaborating to industry-wide entities like SWIFT. Multiple models are running across many countries ranging from
- An ecosystem model: financial institutions working with market infrastructure firms to develop utilities,
- A leader backed model: leading individual institution could take up the task of developing such an entity and then offering it to their ecosystem,
- A technology vendor model: the vendor provides a technical backbone to several clients to collaborate.
Regulators around the world have also been generally supportive of utilities and allowed compliance functions like KYC to be carried out by them. Apart from KYC and regulatory compliance, there are wide-ranging areas where the application of utility models has been tested. A few such domains are trading and execution, anti-money laundering solutions, information exchanges to ward off cyber threats, etc.
To date, most firms have looked at utilities only from a cost perspective. However, by ridding financial institutions of routine tasks, utilities can prove to be a much more value-enhancing proposition. Merits of deploying utilities include:
- faster time to market,
- standardized service quality
- significantly lower capital requirements,
- improved response to regulatory changes,
- and undeniably, better cost leverage
However, financial institutions need to carefully analyze their process and workflows to identify areas most amenable to the utility model. Some key parameters of such identification are differentiating vs. non-differentiating capabilities, the repetitiveness of tasks, and whether it is a front-office or back-office function.
How can ‘Utility’ models steer FS firms through such crisis periods?
The definition of utilities itself is self-explanatory to discern how they can help in such troubled times. Utilities can enable FIs to achieve simplified architecture, streamlined processes, and standardized and mutualized workflows aided by rapid advancements in cloud technology. These abilities can prove crucial for companies in implementing advanced business continuity/contingency plans in numerous ways like: