The digital shift: Securities processing prepares for a rapid revolution

The securities processing industry has experienced growing pressure in recent years from increased regulation, heightened investor expectations, higher processing volumes and market volatility. While next-generation fintech has the potential to address these challenges, the industry's ageing legacy systems add a layer of complication to their adoption.

Recently, IHS Markit hosted a webinar in which a panel of industry experts and practitioners from DnB Markets, Firebrand Research, Multrees Investor Services and Erste Group discussed some of the key drivers and challenges facing the post-trade world as it collectively steps up efforts to transform operations and leave the legacy struggle behind.

Below are some key themes that emerged during the discussion.

<span/>Factors accelerating technology adoption

Early fintech delivered strong automation with straight-through processing, alignment to market standards and exception-based workflow. Panellists noted that during the pandemic, remote working pushed legacy processes and systems to breaking point, underscoring the fragility of their ageing technology. Legacy environments were tested even further by spikes in processing volumes six or seven-fold during the initial phase of the pandemic.

The group also cited regulatory pressures as an adoption driver, as regulators worldwide focus on standardization, settlement discipline and business resilience.

While changing demographics were also seen as a factor, with panellists noting that younger and more digitally aware people are entering the market as clients, employees and professionals, which is shifting business norms and expectations rapidly towards digital channels.

"The extreme volume growth that we've seen puts the current systems and processes very much at the breaking point."

But digital transformation was seen not only as a way to address the industry's challenges but to capitalize on revenue opportunities. Banks are seeing opportunities to differentiate against competitors by offering a wider range of digital services and self-serve models that will not only reduce some of the pressure on operations but also provide a rationale for premium pricing where customers prefer full service. Similarly, product innovations can connect banks with new customer bases, while improved interoperability with counterparties and custodians also has the potential to expand these relationships over time.

<span/>Lessons learned by early adopters

As the economy reopens and firms begin to consider what business-as-usual will look like in the months and years ahead, our panellists explain how disentangling their processes from the constraints of legacy systems and embracing digital transformation is a complex undertaking.

Here are some of the early lessons learned as they continue to chart the way forward.

<span/>1. Lay the technical groundwork

For banks with legacy systems that have been in place for decades, digitalizing operations requires careful planning and consideration of multiple factors. APIs and other integration points have played a vital role in enabling banks to incrementally layer modern functionality onto their legacy platforms. However, when new and complex functionality is introduced into a legacy environment, the additional strain creates an exponential burden not only on the underlying technology but the people who have to manage the processes when systems fail

Panellists also mentioned high-quality digital and application design skills are relatively scarce, and without them, a transformation initiative is unlikely to see success. Something as simple and fundamental as ensuring that organizational data is made available electronically and in real-time is a challenge that needs to be addressed.

<span/>2. Have a strategy for transformation

Panellists recommended focusing on industrialization first, automating non-revenue generating functions. The general sentiment was that banks needed to be realistic and pragmatic, with digital transformation being planned against the backdrop of regulatory requirements.

The group stressed the importance of communicating strategy to the broader business using the right goals and metrics. Keep the goals short-term to align with executive time horizons, and tie benefits back to not only improved efficiency but also value-adds such as client stickiness and the ability to pursue new opportunities such as capturing and using more client behavioural data or empowering clients with information portals.

"It's crucial that you're able to analyze which functionalities will stay with the current systems, which will require interfaces and what will be replaced."

<span/>3. Factor in change management

Panellists were in broad agreement about the critical need to prioritize change management as part of any transformation agenda. Changing the business processes and organizational culture and bringing individuals on-side is critical to the success of the initiative.

A digital transformation initiative must encompass the underlying business processes and the people who perform them and there is often resistance from teams with siloed data or processes. Communicating the vision and the role each team and individual plays is one part of the process: investing time and money in training employees and clients is another.

"If you want to retain your talent, you want to make sure that they understand and appreciate the problems they're trying to solve and feel like they're making a difference."

<span/>4. Choose partners carefully

Leveraging third-party solutions and vendors can significantly reduce time to market. However, the vetting process needs to be conducted carefully, including an investment in an RFP process along with business process mapping. Panellists also pointed out that vendor selection needed to be made based on an evaluation of not only technological capabilities but also the vendor's ability to sustain a comprehensive partnership approach over the longer term. The level of trust between the financial institution and its solution vendors was seen as having a direct impact on the ability of the bank to maintain relationships of trust with its customers.

"Selecting the right partner in this journey is a key to the success of such digital transformations."

<span/>5. Support ongoing innovation

Webinar participants agreed that innovation was not a "one and done" activity. The securities processing industry is evolving rapidly, creating a need for securities processing operations to continuously monitor developments in the market, among competitors and even in adjacent industries.

For more insights into the challenges and opportunities that digital transformation poses for securities processing, please watch the full webinar on-demand. We also invite you to speak to one of our Securities Processing team and visit our website for more information.

S&P Global provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.