Before joining KNEIP last year, I was Head of Business Development at Skype. Before Skype was established, the telecommunications industry was highly regulated. The core objective of Skype was to enable best quality communication between people.
The key word that Skype decided to focus on from the statement above was one core objective – quality. Instead of building an underlying telecoms infrastructure this was the focus, and partners were selected for the rest.
In order to reach every phone number on the planet and offer best in-class quality you need hundreds of partners. Rather than follow the common approach of hiring and increasing manual operations, Skype built automated flows based on data and business rules. Only the best quality services from underlying partners were selected and chosen by algorithm. While pricing, invoicing and reconciliation were managed automatically with the help of dedicated partners.
Outsourcing the non-core activities helped drive standardization of these functions in the industry, resulting in more efficiencies for the entire market.
Although the telecommunications industry is no longer heavily regulated, the financial services world always will be. However, there are two clear parallels from Skype’s story that the asset management industry is currently facing. Firstly, the regulation, and secondly an industry dealing with an ever-increasing drive for efficiency.
The main objective of any regulation should be to defend weaker market participants, including consumers. Regulation should also follow technological trends or, in an ideal scenario, create opportunities for trends to exist. In the case of voice services in the telecoms market, regulations were relaxed to enable competition to exist next to national services. This was with the objective to drive innovation and lower cost. In retrospect, objectives were partially met – competition was enabled, and prices have lowered. The real driver for change however was the adoption of technology by consumers. It’s fair to say that regulators are still battling with embracing new technologies, sometimes dismissing the benefits these have created for the customer.
Financial services, especially the investment industry, have seen increasing regulatory complexity. The two most recently applied examples, PRIIPS and MIFID II, were both introduced to help increase transparency for the end investor.
Conceptually, it’s the right step, as transparency will help investors to make better choices, theoretically leading to increased investor trust and investment volume. The implementation of said regulation has been complex task for the industry with a large number of regularly changing rules, that are still somewhat open to interpretation. I can only hope that the amount of effort that the industry is putting into changing investor disclosures and underlying calculations and reporting needs will be recognized and appreciated by the end investors.
The industry, jointly with the regulators, should focus on understanding and enabling technology trends. Markets tend to be self-regulating, driven by customer demand. Perhaps keeping the end customer (or investor) in the center of the process and make sure initial objectives were met post implementation.
There are other major positive impacts from driving change in the industry.
They uncover inefficient historical processes, and force companies to question which parts of the process are truly core to the business and which are supporting activities.
With competition forcing everyone to become more efficient, focus needs to be placed on the core, automate, seek to standardise, and leave supporting tasks with specialists.
Compliance and back-office tasks need to be managed in the most efficient way, but they are not necessarily competitive advantages.
Asset managers currently tend to build a lot of solutions internally. The industry should rather take a step back to determine which tasks are core, such as product manufacture and investment management, and which tasks can be considered as non-core. Doing so could ultimately lead to greater business efficiencies and could, given time, lead to a more standardized industry, as we all witnessed in the communications industry.
Reliance on manual workflows creates complexity, especially in the funds industry. However, it doesn’t need to be that way. Complexity can be reduced by using business rules and software; especially when it comes to fund registration and distribution.
At KNEIP we’ve transformed from being a regulatory reporting company into a data centric company by moving towards a digital platform and looking at data more holistically. Provided we have the data, we can automate the process and produce the relevant regulatory report and documentation, without requiring any major human intervention.
With PRIIPS and MiFID II deadlines passed, we are looking forward to see regulators turning their attention to new technologies, proactively working with the industry to unlock the potential of technology and let the market to decide on the most efficient path.
In the end, regardless of your industry, when you focus on what you are good at you are more efficient.