Nicholas Pratt examines whether the growing use of APIs will herald a new era of open innovation in the asset management world.
In 2018, the European Central Bank launched its open banking initiative across the continent’s retail banking and payments market. The project was designed to bring more competition and innovation to the market through the sharing of customer data. Under the second Payment Services Directive (PSD2), retail banks are now obliged to make their customers’ accounts accessible to third parties, including challenger banks and fintechs.
Since then, regulators have looked to expand the idea to a wider range of financial services under the guise of Open Finance. In December 2019, the UK’s Financial Conduct Authority issued a call for industry feedback on the possible opportunities on offer within open finance.
“Data and technology are increasingly driving changes in financial markets,” said Christopher Woolard, executive director of Strategy and Competition at the FCA. “We want to understand how open finance can develop to best meet consumers’ needs and enhance competition in the interests of consumers. We also want to understand what role [the FCA] should play in supporting it.”
In the UK, The Investing and Saving Alliance (TISA) is leading the effort to develop open finance for the investment industry. In October, it announced that it had completed the first phase of building an Open Savings and Investment (OSI) infrastructure. The work involved a number of market participants, including Fidelity, FNZ, Hargreaves Lansdown, Bravura Solutions, Morningstar, SS&C, Schroders, Northern Trust and the Investment Association.
“The consumer benefits of having an open savings and investment ecosystem are clear,” says Stuart Welch, head of personal investing for Fidelity International and a member of the OSI steering group. “Following on from open banking, innovation of this nature presents plenty of business opportunities for our industry.”
The OSI project’s first phase also involved the creation of standards and specifications for application programming interfaces (APIs) – technology that allows different applications to communicate with each other and is a crucial component for the data sharing at the heart of open finance.
While the use of APIs has been growing rapidly in the payments and retail banking market, they are still in the early days of adoption in the investment management world, especially the institutional world. However, there are encouraging signs. Vendors are releasing new suites of API products and more real-use cases are appearing.
On the vendor side, there is growing activity from both traditional providers looking to make their products more digital-friendly as well as digital-native providers from the wealth management side looking to make inroads in the institutional market.
From the former group, there is software vendor SimCorp, which has recently launched its Open Innovation Program. This includes the use of APIs to provide a new way to integrate technology, says its head of open innovation, Anders Kirkeby.
The use of APIs is also designed to make new fintech services more accessible to investors and vice versa. A lot of the vendors creating these new digital investment tools have come from the wealth management side, where there has typically been a greater focus on the client experience. But we are now starting to see fund managers using APIs and big data to run the research and back-testing that needs to be done prior to launching a new fund.
“It is areas such as product development, portfolio modelling and fund admin where APIs are most being used. This used to be a very manual process but the use of APIs are making it a more efficient and cost-effective process,” says Kirkeby.
He is confident that more innovation will emerge in the institutional space, as long as there is a willingness to commit the necessary resources to create what has been termed as an ‘ecosystem’, where traditional vendors, new fintechs and lone software developers can all look to distribute their tools via APIs. Indeed, he refers to SimCorp’s Open Innovation Program as ecosystem-enabled innovation.
“Everyone can be innovative but to get a higher cadence of innovation, you need more people working on more problems together,” he says. “The value SimCorp is looking to provide, through the use of APIs, is optionality for clients in the most critical areas of the investment lifecycle. At the same time, by working with fintechs, we can lower the barriers of entry for them.”
It’s worth considering two use cases that SimCorp is developing through its Open Innovation Program. One, on data integration and early predictive validation for firms’ upstream systems and their systems of record, aims to spot anomalies earlier, while another involves digitising documentation in the alternatives world, much of which still arrives via pdf.
Jim Warren is responsible for platforms across wealth management, banking, investment management and hedge funds at SEI, which recently launched its Developer Portal offering. This relies heavily on APIs for web, mobile, single-page and client/server development.
“We recognised a change and a more modular approach to technology and integration between internal systems using APIs that we could apply to third parties,” says Warren.
“The Developer Portal allows us to offer different APIs for processes such as client reporting and others. Clients can take the APIs and develop technology themselves. In theory it creates an easier way to enable development – for example, a small mobile app for investors or a more secure and efficient way to map out the integration of a CRM system,” he adds.
“In the near-term, we would anticipate our clients in wealth management or investment management to develop technology on our APIs, such as a dashboard or a digital client experience. We have trusted development partners. Down the line, we have development firms that we partner with for developing mobile apps. If you put these together, it should lead to more proof of concepts.”
The demand to improve the digital customer experience, via APIs, is a challenge for all service providers, says Warren. “Everyone will be pushed in that direction, especially when it comes to pushing information to end investors.” The use of APIs can also be important for managers looking to solve their legacy technology issues, he says. While some may argue that using APIs to link legacy systems to new applications may deter or delay firms from replacing technology that is no longer fit for purpose, he says that APIs should be considered in the context of improving the overall infrastructure. “It is not always the worst approach to take and allows you to manage the transition to a new operating model.”
Will greater use of APIs herald a new era of innovation in the institutional investment management world? “Any way you can create new capability and more accurate information, business will be engaged,” says Warren. “That said, the awareness of APIs is still at an early stage. It is used for technologists building out a platform. There are retail elements in the industry that are tuned into this. This is less so on the institutional market, where the organisations are larger and more bureaucratic.”
InvestCloud has provided these kinds of tools in the retail and wealth management space and is looking to do the same in the institutional space, says Mark Trousdale, its chief growth officer. “We are taking our wealth management know-how and bringing it to the institutional asset managers and they can use them how they wish.”
The use of APIs will be a critical component in this effort, he says. “APIs are not always great for large volumes of data, but for asset managers looking to instantly share position data for a segregated mandate, then APIs are perfect.”
At present, API use is becoming more prevalent in customer relationship management, content management and web analytics, says Trousdale. “Many asset managers are good users of API technology when it comes to the front office – client portals, mobile apps and marketing content. They are less so when it comes to using APIs in the back and middle office.”
He adds: “Books and records and accounting are the furthest behind and have the oldest technology. The same goes for the ones used in the wealth management space. We invested a lot in having an automated back-end. The further back in the operations you go, the less use of APIs and the more opportunity.”
There is no inherent limitation to explain why back-office processes don’t have the same level of innovation or API use as front-office processes or the retail market, says Trousdale. “It is a case of rebuilding the platforms and that is a painful process. But I think this will disappear over time. The providers that don’t currently offer APIs in that space will do so in time as more managers move on to the cloud and other API-native platforms.”
That said, InvestCloud is not expecting large asset managers to dump all of their old technology, according to Trousdale. Instead, it gives asset managers the option to leave back-office systems in place and puts in a data warehouse to act as a data overlay.
“Sometimes it is about isolating or extracting the data rather than replatforming,” he adds. “So I don’t see it as a permanent impediment. Appetite will be a huge factor. It’s still information at the end of the day – from the high-net-worths to the fund accountants to the investment consultant.”
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