Utilities in capital markets: New frontier for operational transformation

Abstract

Cutting costs to boost suboptimal levels of return on equity (RoE) is becoming essential for capital market firms in the current climate of tepid revenue growth and regulatory changes. Fundamental restructuring of operations through adoption of shared service and industry utilities can enable longterm cost reduction. A few financial institutions have been using internal utilities for some time now. The next stage in this evolution is the external utility model, through which banks completely outsource their technology and processes to the utility provider. External utilities are a recent phenomenon seen largely in the last 18 to 24 months. Primarily, the functions that are non-core and non-differentiating for a financial institution are best suited for outsourcing to a utility. The areas that have seen utility-type solutions include mid-back office functions such as post-trade processing, collateral management, reference data management, regulatory reporting and transfer agency service, as well as some front-office activity such as know your customer (KYC) services. While the utility model can offer significant benefits to user institutions, lack of awareness and resistance to change, lack of customisability, difficulties in establishing common governance and frameworks, and regulatory and data security issues could present challenges that may impact adoption of these utilities.