It’s nearly impossible to tune into any financial news outlet these days without coming across coverage of increased financial transparency and regulations occurring worldwide. One high-profile example is MiFID II (Markets in Financial Instruments Directive), which will take effect in January 2018, which extends the codes of conduct for financial firms beyond shares to other types of assets, including contract based assets and structured finance products.
With the current sea change of increased regulatory pressures, security requirements, and pressure on financial margins, financial institutions need to depend more than ever on new advances in technology in order to maintain margins and provide world-class service.
The Changing Landscape
Over the past 15 years, banks independently created a mixed technology approach for new issuance in the primary capital markets. Banks independently developed their own software to solve the same problem – reducing manual processes through the creation of electronic workflows – with limited electronic communication among the banks, which also limits the financial transparency required by MiFID II.
As technology improves, the landscape is constantly shifting, and businesses will need to shift along with it. In today’s interconnected world, software can no longer live independently and is expected to be able to communicate with other systems that live in the network ecosystem via APIs.
For banks, this means updating the software they developed in-house that has very little, or even zero, interconnectivity to other systems. It also means that banks cannot rely anymore on using telephones to communicate important information, broadcasting information via chat messages, using Excel files as data sources, and using old bookbuilding applications that don’t communicate in the broader primary capital markets ecosystem.
The improvement of technology will make things more efficient, and will help resolve one of the major challenges – the lack of transparency. This is perhaps the biggest issue, as transparency is at the core of new regulations like MiFID II.
The technological challenges faced by financial institutions are by no means trivial, as banks have significant amounts of technical debt in current applications that were built decades ago in an outdated application architecture. And although these applications are old, over the years, trillions of dollars have flowed through them, so they have the advantage of being time-tested, hardened, and reliable. As a result, financial institutions are reluctant to make major investments in updating these legacy applications because they still get the job done every day.
We all know the old saying, “if it’s not broke, don’t fix it.” Banks are abiding by this because legacy applications are deeply embedded into the organization, and any changes to a user’s workflow requires training and change management. Sure, these applications may not technically be “broken”, but at the same time, dealing with them is a lot like living in a house from the ’70s, with popcorn ceilings and shag carpet on the walls: functional, yet painful when you think of the work required in a gut renovation.
How FinTech Can Give Banks The Tech Makeover They Require
Today, the FinTech space is ripe with opportunities to offer banks the technological renovation they need and make a positive impact in the capital markets. With their legacy applications bursting at the seams, banks are increasingly welcoming FinTech companies as trusted technology partners. This allows banks to focus more on their core competencies, which are financial instruments and the transactions they broker among their customers, while offloading portions of the technology burden to FinTech companies that specialize in those spaces.
For many financial institutions, Ipreo is that trusted technology partner that focuses on connecting capital to ideas in the primary capital markets. We are the global platform for the primary capital markets. In partnering with us, banks no longer need to build, maintain, and support different software applications for multiple asset classes like equities, fixed income, loans, and more. Even within a single asset class, it can get quite complex with multiple workflows based on various deal types.
Bottom line: building, maintaining, and supporting this type of software is extremely complex and costly for banks. Ipreo’s sweet spot is providing a bookbuilding platform that supports multiple asset classes and multiple deal types. This platform provides issuers, banks, and investors with electronic access to the primary capital markets in a trusted, secure, and auditable way while being MiFID II compliant.
Most banks realize they need to upgrade their legacy technology in order to be competitive, as well as to abide by new regulations and transparency requirements. As with most change, though, this is much easier said than done. By partnering with trusted FinTech companies like Ipreo, banks can worry less about outdated technology systems and focus more on growing their business.
Finally, FinTech is offering banks the technological makeover they have needed for a long time.