Research Reports » Temenos Sep 2019

Future direction

In this final section of the survey, we asked survey constituents to predict which types of technology will be most important to their business in three years’ time (fig 14). This generated a wide variety of responses, with no single technology element clearly dominant.

Data analytics will play a key role – crucial, for example, in supporting performance measurement and attribution, for assisting the development of new investment products, for benchmarking the performance of sales teams or evaluating the performance of distributors within an asset manager’s distribution network. This may also be important in analysing operational efficiency and operational risk, thereby enhancing the safety and efficiency of post-trade processes.

Technology_impact_chartAnother important technology development will be the greater use of APIs. These provide client access to data and resources from a service provider’s server network, enabling the client to send ‘requests’ and receive ‘responses’ in a standardised format required by the interface. This provides a secure mechanism through which a service provider can extend selective access to its database and the applications that it supports.

Northern Trust Global Fund Services, for example, has invested in a transformation of data infrastructure and its channels for delivering fund services to asset management clients. This has included the creation of a ‘data fabric’ or ‘data matrix’ that masks differences in data requirements and interface design across its core technology packages. By providing access via API, this enables clients to access Northern Trust’s suite of fund services, while enforcing data quality and ensuring that data flow to and from the user adheres to consistent standards.

Other important technology applications over a three-year time horizon will include distributed ledger technology and artificial intelligence. The survey also highlighted the importance of cloud technology to support data management and potentially to support service  delivery through software-as-a-service (SaaS), infrastructure-as-a-service (IaaS) or platform-as-a-service (PaaS) type delivery models.

The advance of artificial intelligence
Taking a longer time horizon, the survey asked: “Which technology changes will be most important in the next ten years?” Respondents tell us that artificial intelligence is likely to become increasingly important over the next decade (fig 15). Some basic applications of AI may be employed, for example, to support robotic process automation (RPA). This involves the use of robotics to process transactions, manage data and to interface with other digital systems. Typically, RPA involves using software tools for repetitive processing and for handling standardised, low-complexity tasks while removing human input.

Technology impact 10years chartAnother application of AI, natural language processing (NLP), applies algorithmic models to analyse human dialogue, whether written or spoken, and to identify key ‘markers’ or ‘tags’ from unstructured text. This is finding growing application in compliance software, for example, where this may be applied to identify keywords from unstructured text input and to populate these into structured data fields to enable audit, reconciliation and reporting functions.

Some fund companies are applying AI to customer segmentation analysis, classifying customers into groups with similar characteristics that may be targeted with fund products that align with their investment objectives and risk appetite. Others may be applying AI more directly to their investment strategies, using algorithms to identify patterns in investment data and applying this to support their investment decision-making.

Distributed ledger technology is also expected to gain currency over this period. DLT, applying secure permissioned blockchain, enables stakeholders to a transaction to access a real-time view of the transaction and agree the terms of transaction settlement working from a single, accurate set of records. On finalising settlement, transfer of ownership is adjusted automatically on the record, delivering a common book of record across trade participants that is updated in real time. Because settlement parties have a common view of the settlement terms on blockchain, this simplifies settlement requirements across participants and can also facilitate regulatory reporting obligations.

Concluding thoughts
In our introduction, this report highlights the importance of digital transformation for financial services companies. Companies need to rethink their technology strategies to ensure they remain relevant to customers and able to deliver high-quality products and services in a digital era.

The survey results indicate that participating firms – a blend of asset management companies, asset servicing firms and a range of other specialisms (see methodology, page 27) – recognise the importance of this message. Many of these firms are focusing on their digital innovation strategies as a matter of priority.

Over the coming three years, the survey tells us that improvements in data analytics will be the most important advance that will be delivered to the funds industry through investment in digital innovation. Over a ten-year timeframe, developments in artificial intelligence will become increasingly important – continuing to feed advances in data analytics that may be applied across manufacturing, distribution and operational components of the investment value chain. Alongside this, distributed ledger technology will play an important role in delivering greater efficiency and transparency to fund transaction processing in the decade ahead.

Respondents tell us that asset management companies must continue to invest in their operational systems to remove inefficiencies, to eliminate operational risks and to reduce costs. This investment is essential to optimise the efficiency of processing that the asset manager currently does in-house, as well as sharpening its interface with asset servicing firms and other third-party providers to which it may outsource services.

According to the survey results, fund administrators (and other asset servicing specialists) can add value by extending their support across an expanding array of asset classes and product types (digital assets, private markets and so on).

Also important is the ability of asset servicing firms to help clients to unlock new insights through data analytics. To support this, a number of asset servicers are investing in changes to their data infrastructure, establishing a ‘data layer’ or ‘data lake’ that provides a golden source of investor-level and fund-level data. Typically, this will enable the user to deliver and access data via a series of APIs, ensuring that data is delivered into, and received from, the asset servicer in a standardised form.

The survey provides insights on how firms will structure their vendor relationships in times ahead. The dominant view is that firms will either retain their existing number of third-party service providers or they will look to widen their vendor relationships by adding new names to their vendor list.

This may reflect the creative development that is being done by financial software firms, fintech houses and by asset servicing firms (often working in partnership) and a desire to tap into this innovation by appointing new providers. In this time of rapid technological change, it can also be hard to pick a ‘winner’ and clients are extending their vendor relationships to allow performance comparison and to ensure they are working, in the long term, with their preferred solution.

These points notwithstanding, respondents believe that it is important to have a single strategic service provider that can support all of a client’s outsourcing requirements. Over time, therefore, we may expect firms in the asset management industry to consolidate their vendor networks and to reduce the number of third-party service providers they employ.

Two important points stand out as we conclude this survey. The investment funds industry continues to be constrained by legacy technology, a problem that respondents tell us urgently needs to be solved as firms move forward with their digital innovation strategies. However, the survey reveals that the industry is getting better at managing technology change. That is an encouraging conclusion as we advance further into a digital age of financial services.

With these considerations in mind, it is vital for their future business performance that asset servicing companies – and other firms in the financial services industry – manage this digital transformation effectively. To do so will open a broad set of creative opportunities. Failure will present the danger of becoming irrelevant.

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