Financial services firms were late to the commoditisation game. This presented two fundamental challenges at either end of the spectrum.
The cost of entry proved excessively high for all but a highly-resourced few, while incumbent behemoths were not punished for being slow to adapt their processes and infrastructure. The former ensured that the marketplace was sparsely populated, the latter meant that organisations took early profits at the expense of their own future viability. Compare this with other industries such as vehicle or electronics manufacture where the vast majority of the component production is outsourced. Manufacturers have been sourcing components externally and assembling them in specialised or nuanced ways to deliver the products that excite the marketplace for decades. Firms realised long ago that manufacturing your own widgets was hugely inefficient when a volume producer was far better placed to soak up the R&D costs and benefit from the economies of scale that mass production provides.
Evidence is emerging that financial services has reached the tipping point where firms are prepared to relinquish total ownership of a service in favour of a support agreement. For example a household name bank runs a re-badged online retail banking site provided by a far smaller startup because there was no benefit in them reinventing that particular wheel. Now that alternative service providers are in the marketplace to not only provide scalable systems but also the staffing and contractual security that a finance company demands, it is now possible to tessellate a collection of third party services to deliver the macro service that plugs a gap in the marketplace or displaces an incumbent.
Imagine you spot a gap in the marketplace where a particular social demographic, say young bearded men living in Shoreditch, are not well served by financial products. You identify a range of tailored products that appeal directly to them as add-ons to your product offering, perhaps offering discounted craft coffee, cheap fixed-wheel bicycle rental and artisanal facial hair maintenance products. Historically you would then need an army of analysts, consultants, project managers, software developers, lawyers, risk managers, operations staff, compliance officers, sales representatives and so on before you could even offer a basic service to your prospective clients. That is no longer the case. What you need now is an idea and a basic governance structure, the remainder can be bought as a service. There is no “alpha” in building a bespoke settlement service, trade lifecycle management department, or regulatory risk management reporting process. These are infrastructural requirements but not key market differentiators. They need to work, but they are a balance sheet cost not a revenue earner.
At Coremont we realised that the gap in the marketplace we could fill was the infrastructural support model. Hedge funds, asset managers, family offices and even banks lacked large scale service providers, particularly those that could offer a one-stop shop servicing model where a client can choose from a range of components from the specific to a full service stack. Many consultancies claim to offer services but generally lack provenance and a diversity of experience. Correspondingly plenty of software houses offer systems that can be implemented to fulfil one or more of the services that a finance firm requires, but the firm will still need to operate and maintain the systems and will therefore not benefit from mutualisation of costs.
Our background supporting one of the world’s largest hedge funds meant that the challenges of providing portfolio management services to cover everything from flow products to complex derivatives was one that had been tackled long ago. Similarly, since highly granular segregation of data had been built into the operating model from day one, no structural re-engineering was necessary to build out a multi-client security model. The challenge that remained was to be able to offer these services to a geographically diverse client base. To that end the firm embarked upon a build programme to offer a browser-based portal, called “Clarion”, with both front and back end hosted in cloud to deliver the geographical accessibility and scale necessary. This proved immediately beneficial since one of the first partner clients was based in Tokyo. While we have a Hong Kong office to support Asian time zones popping over to Tokyo to resolve an issue on-premise is simply not practical.
During our build to MVP select new clients were onboarded who would contribute to the design of the product as asset-class specific nuances emerged. We also partnered with a UX/UI design firm to ensure that the product wasn’t simply a reflection of someone’s favourite spreadsheet, along with all the concomitant limitations. Clarion provides pricing, compliance checks, OMS functionality, live risk management, market and reference data delivery, lifecycled portfolio views, and report delivery. Essentially it provides the content delivery mechanism for the firm’s suite of services.
Clarion enables Coremont to deliver its services to a global client base with scalable compute as a result of cloud hosting, and content delivery to a range of platforms from mobile phone or tablet through to desktop. Endpoints are secured by multi factor authentication but this is not invasive to the user experience – nowadays most people are familiar with this from their personal mobile banking applications. As a result clients are neither tied to their corporate network, nor are they constrained by their organisation’s inhouse compute capacity. Having decades of experience honing all the good processes necessary to support financial services is a base requirement; coupling this with a tailored content-delivery mechanism enables the offering to deliver the service as required by the client rather than as dictated by the vendor.
Although most clients take a full portfolio management service the portal can easily be scaled back via permissioning to provide a view on a restricted service set reflecting client requirements. For example, if a client just requires aspects of regulatory risk provision or treasury management services the use of the portal may be minimal, although additional functionality can be enabled in short order as required. In each case we focus on delivering services without the overhead of long lead times, sourcing staff, implementing systems, defining processes and building interfaces. All of these activities are slow to implement if you are doing them as a one off, but relatively straightforward if you have done them several times before. In the first case each issue is new and unexpected, in the latter most issues have been seen before in some fashion so they are quicker to comprehend and address. Furthermore, building your own stack means supporting it. Both inhouse and third-party systems need to change periodically and major version upgrades can introduce significant speed-bumps to a delivery schedule. DIY is slow, adopting a service-based approach is likely to be far faster.
Building your own service stack is something many firms have chosen to do over the years as a necessity rather than choice. The process is expensive to build, expensive to run, and the aforementioned periodic “speed-bump” is usually accompanied by a large financial cost. Consider also the lack of mutualisation that you guarantee by rolling your own, there are no other participants against whom costs can be defrayed. Consequently DIY is expensive; a service-oriented approach is most likely far cheaper.
Consider the familiar truism: “Good, fast or cheap? Pick two.” We would argue that with a service-oriented model for financial services provision all three are indeed possible.
Republished courtesy of the Financial Technologist. Issue 3 2020.