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The Trading Mesh

Financial innovation 101

Fri, 11 May 2018 04:35:00 GMT           

By Colin Slight, Managing Director, The Realization Group

Large financial institutions need impetus from both senior management and individual businesses to successfully embed a culture of innovation

To an outsider, the capital markets sector might look to be blazing a trail of innovation in 2018. With thousands of plucky, energetic FinTechs threatening to uproot the very foundations of the financial system with artificial intelligence, distributed ledgers and other advanced technologies, this is clearly a sector where the appetite for disruption is thriving.

Yet paradoxically, many of the largest organisations – be they banks, custodians, investment firms or market infrastructures – still struggle to embed a culture of innovation into their businesses. There may be no shortage of opportunities to disrupt, but bringing about change in functions that cling to legacy infrastructure and processes doesn’t happen overnight.

One of two distinct approaches is often pursued. In the first, the impetus comes from on-high – senior managers look to create structures and incentives to engender innovation across the business, often with the creation of a dedicated officer or department to push the cause. In the second approach, pockets of innovation may develop in particular areas that have the necessary budget, personnel and resources to support that progress.

The second approach, which might be labelled ‘bottom-up’ rather than ‘top-down’, tends to be more common, because certain areas are inevitably more ripe for innovation than others. Front-office functions such as trading and portfolio management, for example, are fast-moving, high-value businesses that can easily benefit from greater automation and efficiency. In contrast, middle- and back-office functions may be hampered by legacy infrastructure and tighter budgets, making it much harder to innovate.

A culture of innovation can only be properly and consistently implemented across large organisations through a combination of the top-down and bottom-up approaches. The impetus to review traditional processes and test new technologies has to come from the business level, but it must also be enabled and encouraged from on high.

Once this balance has been correctly struck, innovation should gradually become more entrenched within large organisations. But transforming a culture of innovation into a framework where new ideas can be duly considered, tested and implemented is fraught with further changes in culture and mindset.

One difficulty is that financial institutions typically rely on a wealth of metrics to benchmark the success of any new initiative, be it measuring return-on-investment (ROI) at the outset, or setting and monitoring key performance indicators (KPI).

But standard ROI and KPI measures may not transfer well to ambitious new technologies, so alternative metrics may be needed to assess factors other than pure financial return. Improvements to risk, controls and client experience, for example, are all valid metrics that could be used to benchmark the success of any new system.

Internal issues within large organisations may also hamper progress towards financial innovation. Without a clean and reliable data set that can be relied upon, an institution will struggle to install new systems as it will be unable to draw easily on the data it needs. Digitised and efficient processes must also be in place as a pre-requisite for successful innovation.

Ultimately it is still early days in this cycle of innovation, and just because large financial institutions have not so far led the field does not mean they cannot in time benefit from the latest advances in technology. The priority must be to ensure that the pressure to innovate comes from both the management and business level.

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