A day in the life of the gentleman banker was once described by the 3-6-3 rule – accept deposits at three percent, loan money at six percent and tee off at the golf course at 3 p.m. The financial services industry can rightfully state that it has come a long way since then. It has implemented technological innovation and managed risk in a constantly changing economic environment over several decades. The gentleman banker has since evolved into a sophisticated financial risk manager who works within a complex framework of rules and regulations with tens of trillions of dollars of assets under management.
Fintechs have moved at a much faster pace than banks in some areas. They have disrupted the financial services industry with user-centric solutions enabled by technology. These solutions emulate products and services offered by financial institutions. However, these remarkable examples of innovation have largely ignored the elephant in the room – regulation. Read more
New data driven FinTech business models built on Hadoop, Spark and Machine Learning are rapidly emerging and disrupting wealth management. Here is my recent posting from disruptivedigital.wordpress.com about one such use case… Robo-Advisors.
We are in the early stages of a generational shift in wealth management, especially “plain vanilla” investing for the mass affluent and millennial segment. Until recently, you had only two options when investing:
- Do-it-yourself (DIY)
- Hire a registered investment advisor (RIA)
Now there is a third option. Robo-advisors are new class of personal financial advisors that provides online, algorithm based portfolio management with minimal human intervention. Robo-Advisors going after the low-end of brokerage/RIA business with automated asset allocation using Modern Portfolio Theory.
The Robo-Advisors market leaders who are serving the mass affluent include are:
- Wealthfront (with over USD 2.6bn in assets under management (AuM) and 20,000 investors);
- Betterment (with over USD 1.4bn in AuM and 70,000 investors); and
- FutureAdvisor (With over $600 million in AUM).
The timing for this market shift coincides with three trends: consumerization, digital tools, and disillusionment with status-quo investment advisors. The gyrating stock market driven by program trading is increasingly bringing Robo-Advisors, algorithmic portfolio management to the forefront. Investors are getting disillusioned with traditional investment advisors who simply track the market indices (SPY, QQQ or Russell 2000) by purchasing ETFs at best.
Many banks and brokerage firms over the years have shifted their focus to serve ultra high net worth (UHNW) and high net worth (HNW) investors, leaving an opportunity for firms to target the “mass affluent” investors, or those with less than $1 million in investable assets. Younger investors are increasingly interested in online digital advice (trial-and-error bets), as opposed to hiring an adviser.
Over the past seven years, we’ve seen a massive regulatory overhaul and an industry-wide push to enhance trust and confidence and encourage investor participation in the financial system.
To roadmap Wall Street regtech priorities, we have been having ongoing meetings with MDs and leading architects in global banks and investment services firms. RegTech (e.g., regulation as a service) is a subset of FinTech. Companies include
- Fintellix offers a data analytics platform allowing banks to convert internal data into regulatory reporting formats
- Suade offers banks “regulation as a service” interpreting real time regulatory knowledge so that banks can better manage and respond to regulation
- Sybenetix combines machine learning with behavioral science to create a compliance and performance tool for traders
No longer business as usual. It is clear that banks are devoting more resources to Know Your Customers (KYC), Anti-Money Laundering (AML), fraud detection and prevention, Office of Foreign Assets Control (OFAC) compliance. FINRA is at the beginning stages of the process for building the Consolidated Audit Trail, or CAT for trading surveillance.
To enable compliance with variety of Risk/Regulatory initiatives, AML and KYC initiatives…the big RegTech related investments are:
- Strengthening the Golden Sources – Security Master, Account Master and Customer Master.
- Standardized, common global business processes, data, systems and quantitative solutions that can be leveraged and executed across geographies, products, and markets to manage delinquency exposures, and efficiently meet Regulatory requirements for Comprehensive Capital Analysis and Review (CCAR), FDIC Reporting, Basel, and Stress Loss Testing.
- Various enterprise data management initiatives – Data Quality, Data Lineage, Data Lifecycle Management, Data Maturity and Enterprise Architecture procedures.
Regulatory reporting improvements via next generation Enterprise Datawarehouses (EDW) (using Oracle, IBM, NoSQL or Hadoop)– Reporting on top of EDW addresses the core problems faced by Finance, Risk and Compliance when these functions extract their own feeds of data from the product systems through which the business is conducted and use differing platforms of associated reference data in support of their reporting processes.
Lot of current investments are in the areas of Finance EDW which delivers common pool of contracts, positions and balances, organized on an enterprise wide basis and completed by anointed “gold” sources of reference data which ensure consistency and integration of information.
Crawl, walk, Run seems to be the execution game-plan as the data complexity is pretty horrendous. Take for instance, Citi alone….has approximately 200 million accounts and business in 160+ countries and jurisdictions. All risk management is made incredibly complex by the numerous banking mergers that took place over the past 3-4 decades.
The type of data challenges global banks like Citigroup, Goldman, Wells Fargo, Bank of America and JP MorganChase are wrestling with include: Read more