The capital markets industry understands how profoundly it is intertwined with technology. In 2018, the question is not whether companies involved in raising equity and debt will incorporate new technologies into their operations, but how much?
According to a 2018 outlook report from SIFMA, which cited data from the consultancy Ernst & Young's Global Capital Confidence Barometer, 27 percent of the global executives surveyed cited digital technology as the most disruptive force in their industries, edging out changing customer behaviors at 26 percent.
Capital markets firms use IT investments to update legacy systems, improve cybersecurity and the client experience and adopt new technologies, the SIFMA report notes.
Regulatory technology offerings "can help firms keep up with new reporting requirements in a more efficient manner," SIFMA notes. Distributed ledger technology such as blockchain can help automate bookkeeping processes. And artificial intelligence and Big Data tools "can be used to improve customer service and monitor portfolios," SIFMA adds.
In 2018, AI, blockchain, process automation and data security will be key trends to watch in the capital markets field. Here is a quick primer on them:
1. Artificial Intelligence Will Enhance Investing and Decision-Making
AI is set to take off in capital markets, largely because it enhances profitability. According to Goldman Sachs, machine learning and artificial intelligence (AI) will enable $34 billion to $43 billion in annual "cost savings and new revenue opportunities" within the financial sector by 2025, reports Banking.com.
Most investors look at a range of factors when assessing a private equity manager, such as the manager's investment track record and team experience, Paulo Salomao, the managing director of Accenture Asset Management, writes in an Accenture blog post. However, he says, "such assessments are often performed in isolation for each variable, with overall decisions made based on professional judgment."
To ensure the best outcomes, some investors are starting to use AI to "assess [private equity] offerings, drawing on a range of qualitative and quantitative variables to estimate the odds of achieving superior risk-adjusted returns," he writes in the blog post.
A handful of private equity investors are already using AI for security selection, mostly in the venture capital industry, Salomao writes. "Although it's unlikely that AI will have the same disruptive impact on [private equity] that it's had on quantitative hedge funds, there's no doubt that machine-assisted decision-making is on its way," he adds.
AI will also be used in other ways in capital markets. Capgemini Consulting says in a report on 2018 capital markets trends that firms in the industry are using machine learning to improve productivity across a range of functions, including risk management, trading and fraud detection. Firms are also using natural language processing and chatbots to transform how they interact with customers, the report says.
Machine learning can be used for anti-money laundering (AML) and know-your-customer (KYC) solutions, especially as regulations have forced banks and other financial institutions to improve their data management capabilities, Capgemini says.
2. AI Will Also Help Automate Processes
AI will also help capital markets firms become more efficient, especially for back-office tasks.
"Process automation can help the capital market firms to replace manual legacy systems, maintain the audit trail, make the system compliant with AML, KYC and other regulations, [reconcile] the various reports and also integrate middle- and back-office processes," Girish Patil, an associate consultant at IT consultancy Mindtree, writes on Finextra. "Robotic process automation will bring efficiency in terms of time and money, simplify the processes and can redefine the business models."
Robotic process automation automates high-volume, repeatable tasks previously completed by humans, according to TechTarget. RPA will help capital markets firms boost efficiencies. They are coupling it with AI to transform RPA into intelligent process automation, Capgemini says. Increasing data volumes and the difficulty of integrating legacy technologies and systems is pushing firms to automate middle- and back-office operations, the consultancy says.
RPA can help increase efficiency and reduce costs by 25 to 50 percent in some organizations, according to Capgemini. The consultancy says RPA can help with client onboarding, revenue recognition, expense validation, accounting processes, operational and financial reconciliation, and reporting.
3. Blockchain Will Make Capital Markets More Efficient
Blockchain, or distributed ledger technology, will also become more critical for capital markets firms this year.
"Blockchain can create the smart contracts enabled with the encryption for transactions, [creating] distributed records," Patil says. "This will help in using real-time transparent data and create efficient settlement and transaction processing."
Distributed ledger technology, or DLT, can be used for issuing and transferring securities and could eliminate the need for intermediaries that provide settlement and depository functions, Capgemini says. DLT is a "logical, efficient alternative to allow seamless and secure data transmission throughout the capital markets ecosystem" according to the firm's report.
Blockchain can "bring significant efficiency to current post-trade processes and can potentially shorten the settlement cycle," Capgemini argues.
4. Data Protection Will Grow in Importance
Another key factor many capital markets firms must consider this year is the European Union's General Data Protection Regulation (GDPR).
GDPR, which provides strict new controls on personal data, takes effect on May 25 and impacts any company that collects data on citizens in EU countries. For example, as CSO Online notes, "companies will need the same level of protection for things like an individual's IP address or cookie data as they do for name, address and Social Security number."
Capital markets firms will need to invest in data protection and management technology to comply with the regulations. "At the heart of GDPR is the requirement to understand the complete data structure and data workflow within an institution," Brian Collings, CEO of Torstone Technology, which provides post-trade securities and derivatives processing software, writes on Finextra.
"To do so, firms will have to demonstrate they can identify the data source — a natural person (data subject), the firm itself or a third party — and understand the requirements around the mandated level of consent for the attributes of data falling under the scope of the regulation," he adds.
When preparing their data infrastructure for the deadline, Collings writes that capital markets "firms should take into account the impact of any overriding regulations that mandate data storage for compliance purposes, such as [Financial Conduct Authority] record-keeping requirements."