INSIDE VIEW: Small changes, big problems

KNEIP’s Lauri Paal draws on his experience working at Skype to see how technology and outsourcing can play a role in standardising operations.

There is huge scope to standardise practices in the financial services industry. By defining what our core businesses are, we can make sure that those goals are our focus and that non-core activity is left to experts in that area. Having spent many years at Skype, I have seen the benefits of focusing innovation within our key business areas and leaving other activity to experts in those fields.

When it comes to data management in the financial services industry, there is a clear need for standardisation. Over the last year, with the introduction of Priips and MiFID templates, we have seen a step in the right direction. These new regulations are promoting transparency at its core and offering guidance on formats. On the one hand, we need to look at data formats interpretation and on the other, exchanging data between industry participants.

Small changes in the way data is recorded can cause big problems. A certain country may have different standards with regards to data fields. For example, a date could be written 01.02.2018, 01/02/2018 or 2018-02-01, creating a risk of the full data set being rejected by a recipient. Another example is whether a decimal separator is a comma or a dot. Maintaining these small variations at individual data-recipient level makes exchanging data amongst others challenging.

If data would be exchanged in a controlled environment, or in a standardised hub, then it would make access easier and more efficient for all market participants. Let me give you an example from recent implementation of the European Priips Template (EPT). Insurance companies are under an obligation to collect data from asset managers. Now, when life products have hundreds of underlying assets, you will deal with hundreds or thousands of data sets. While theoretically EPT is the standard that the market is following, we see interpretation of standards, missing fields and challenges on both the sender and recipient side.

You would want to leverage technology rather than hire people – automated quality checks on each step, full transparency across the value chain, artificial intelligence-based error fixes. Consistency would allow for data to be easily analysed and broken down and most importantly, it would streamline the industry. In the end, a standardised data flow would also be beneficial to the end investor as product availability and performance data is up to date.

Changing approaches
More and more companies are coming to me and asking, “Why do we have back-office functions at all?” With growing regulatory complexity, companies are facing a decision whether to continue investing in semi-manual in-house capabilities, often taking individuals away from core functions, or leverage technology.

In the long term, this may mean that companies look to automated systems more and more. But in the meantime, outsourcing needs to be looked at as a serious option when we review our businesses. Why do we have an internal department for every small function? What we need is a lean team so that our people can focus on their customers and value creation for investors.

During my time at Skype, we were always a small team. We made a conscious decision to outsource any function that we did not define as core. Our main goal was to drive our user base. This fed into all our decision-making. When we had to make decisions about how to allow our users to access conventional phone lines through Skype, we kept our principle in mind. It was never part of our plan to build our own infrastructure, but rather focus on achieving quality and scale.

For us, quality of calls helped to drive our user base and revenues and had to be considered as a core service. But we never copied conventional telecom operators to build infrastructure, implement a complex billing system, neither did we hire tonnes of people to manage it all. Rather, we focused on innovation, building real-time controls over customer experience and outsourced services.

In turn, we were able to further expand our user base and achieve another of our core goals. If we had looked to invest in parallel technology to what was on the market, there is a chance we would have been successful. But by doing that, we would have expended large amounts of resources to achieve something that was at best a by-product of our main objective. Instead, by focusing on core, we were able to set a new industry standard and ultimately translate our new users into a higher company valuation.

This type of outsourcing is vital if we are going to be successful. It is a simple way of streaming our processes, assessing what we want to achieve and dedicating our resources to that area.

Those left behind?
So, what do we do with the people or resources left behind? In the financial services industry, we need to define what our core is. If that is getting to market quickly, then we need to get to market quicker. If our core is designing products, then we need to focus on improving our product. That means that we develop streamlined businesses that are able to perform better. If that means our accounting is elsewhere, then I think we can all handle that.

Over the next few years, I think further progression towards automated or machine learning and AI-based systems is likely. We need to embrace that. The first step is standardisation but in the long term, integrated platforms are inevitable. Younger investors will want to understand every part of the journey and therefore we will need to adapt to allow our businesses to succeed.

Lauri Paal is the chief product officer at KNEIP

©2018 funds europe



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