As process efficiencies are fully squeezed out, financial institutions increasingly want to innovate to create a unique product for their clients, begins Bala Srinivasa, Managing Director-Strategy and Business Development, Amba Research (I) P Ltd, Bangalore (http://bit.ly/F4TBalaS).
“For example, one investment bank wanted to simulate interest rate movements to help their corporate clients understand the risks to their balance sheets. The existing model was overly complicated – it was in the form of an Excel sheet, which had economic data streaming at a rate of 1,000 new data points and also required a significant amount of data cleansing,” narrates Bala, during a recent interaction with Business Line.
The innovation difference that his firm could bring in was to develop a new simulation program that addressed inherent complexities of data cleansing, automation, and high-speed processing, Bala explains. “By combining deep domain expertise with technology, a new product was born, thus providing the client with a new revenue stream.” Our conversation continues over the email.
Excerpts from the interview.
What are the newer areas of work that financial institutions bring to the technology table?
Global financial institutions are some of the smartest and largest users of technology. As global financial institutions aim to become more intelligent rather than simply process-efficient, the front offices at these institutions become the next frontier.
We have seen a dramatic increase in the use of technology to support investment research, sales, and marketing processes. For example, a global top 5 investment bank leveraged Amba’s technology expertise to build a highly proprietary capital structure modelling platform. This allowed the investment bank to differentiate against competitors and win corporate finance mandates. A global asset manager with over USD350bn under management uses our quantitative team to validate investment strategies. This involves using multiple technologies to assemble financial data streams, data cleansing, back-testing, and statistical analysis.
We have also seen an increased use of automation to improve the speed and efficiency of the investment management process itself. This includes automation in areas such as building earnings or screening databases for large teams of analysts, thus enabling faster and more accurate reporting of individual, cross-company, and cross-sector performance.
The capital markets have always been early adopters of technology in pursuit of alpha, increase in velocity of information, and lower cost of transaction processing. The volume of quantitative (numerical) and qualitative (text) data continues to overwhelm the investment community. Technology to gather and analyse these data streams to drive investment decisions is of significant interest to both asset managers and investment banks. Analysts are, therefore, involved in assisting clients with unstructured text search, Web scraping, and data mining in addition to helping clients build related tools and databases.
The industry is evolving towards common standards for reporting financial numbers, and this is being made possible through the use of eXtensible Business Reporting Language (XBRL), which is a freely available, market-driven, open global standard for exchanging business information. This standardisation will revolutionise the way analysts, portfolio managers, and bankers generate ideas and price securities. Compared with unstructured Excel sheets, which require a significant amount of manual intervention to adjust numbers to make them comparable, firms like Amba will be able to help investment banks and asset managers evolve towards building sophistication into models, in which the focus will be on intelligence and not on data cleansing.
Finally, next-generation communication platforms such as Twitter, LinkedIn, and Facebook are also being examined for their impact on markets and news dissemination. Although these communication platforms are still evolving, this is an area of significant interest.
Where do you see a role for technology experts in being relevant to global financial institutions? And what are the skills these experts need to sharpen for the purpose?
I will pick up on the front office angle again. Front office technology opportunities have one major difference from the middle and back office – capital markets domain knowledge. Assisting with trading systems, performance reporting, strategy/benchmark indices, or back-test alpha generation strategies (just to name a few areas) requires a combination of capital markets knowledge, programming, and mathematics or statistics. Not all of these skills are relevant for every process; however, clients find that a lack of relevant domain and hands-on process knowledge is a major stumbling block in executing higher-end technology projects.
For technology experts who have an interest in the capital markets it is imperative that they invest in understanding domain and user workflows. (At Amba, for instance, we have a capital markets technology solutions team that consists of smart programmers who have had exposure to applied mathematics, finance, statistics, and economics. Within programming, specific areas of demand include VBA, SQL, MATLAB, SAS, and SPSS. It is this integrated skill set that is attractive to the clients. We have large global investment banks and asset managers that are customers of an Infosys, TCS, or HCL and that turn to us for domain-intensive capital markets technology support.)
As a growing KPO player partnering with major global institutions, how do you see India’s potential in the exciting world of future finance?
Indian talent is already playing a major role in enabling new business models that are emerging in the global capital markets space. Major investment banks have developed a hybrid model that involves use of offshore research and analytical support. Today there are over 3,000 analysts in India alone supporting these banks, and there is additional support from centres in Latin America and South Asia.
While investment banks were pioneers, broad sections of the capital markets ecosystem including asset managers, pension funds, index providers, and exchanges have bought in to this model. Following the financial crisis and ensuing global market volatility, most global financial institutions are looking to lower fixed costs and leverage global talent.
By definition, capital markets KPO work involves a high level of judgment, analytical skills technology capabilities, and specialised knowledge. While the early usage was primarily for basic tasks such as historical model updates and news and data gathering, the past few years have seen a broad expansion into significantly higher-end tasks. These include supporting index creation and maintenance, building sophisticated screening and valuation databases, near-final form coverage of securities for private banks, RFP and fact sheet creation support for marketing teams of asset managers, and compliance task assistance for anti-money laundering.
Growth in demand from asset management firms has been rapid since the 2008 crisis. We are now seeing client leadership teams position third-party support from companies such as Amba as an integral part of their strategy and growth plans. There is significant potential for graduates in mathematics, statistics, finance, and accounting to benefit from this trend. The growing number of CFA charter-holders in India is another plus that makes India an attractive source of talent.
Capital markets skills are rapidly improving in India. Earlier, the number of high-quality analysts in India numbered a few hundred at most. With highly experienced Wall Street professionals returning to India, and captives and third party firms hiring and training analysts in large numbers, the talent pool has expanded both in numbers and quality. In the next three to five years the gap between onshore and offshore capital markets talent will shrink dramatically, opening up even more avenues for career progression.
Economic crises seem to defy timelines, with worrying news always being around the corner. What, in your view, are the lessons for the Indian IT industry from the crisis?
The two questions that Indian outsourcing firms should ask of themselves are: (i) Do my clients perceive what I do for them as critical? And (ii) What is my “Intellectual” contribution to the client’s business? Vendors who are seen as a me-too and believe in following client instructions as against adding value are going to take a large hit in every economic crisis. Vendors who can help the client differentiate, win market share, and think strategically will become a part of the client’s core plans. Vendors who can bring intellectual capital to the table rather than simply replicate a client-process will be invited to become long-term partners.
Your views on the innovation potential when delivering technology support to financial institutions.
I would break down innovation potential into two broad buckets. One in which innovation improves process efficiencies, and the second in which the knowledge and capability of the vendor is used to assist the client in taking innovative new products and services to the market.
For example, we have assisted clients in transforming what was initially a very manual process of monitoring various Web-based sources to identify price triggers into a fully-automated workflow. Our technology solutions team wrote intelligent algorithms to dynamically understand multiple data sources, understand linkages, and prompt users with the most likely points of interest. This reduced by over 80 per cent the time taken to execute the process. This would not, however, have been possible without having a capital markets specialist team that had a detailed understanding of what the client sought to accomplish.