HPR Founder and CEO Tony Amicangioli was named to Fintech ‘Founders’ 50’ by Harrington Starr in their Q2 The Financial Technologist Magazine. Inside the magazine, Tony shares his predictions for the capital markets, which include the adoption of cloud technologies and scalable architectures.
No incumbent in any industry is truly safe these days. From Uber threatening taxis to Casper waking up the mattress business and Amazon replacing all kinds of brick and mortar retailers, technologically savvy newcomers up-ending the status quo is now commonplace. The logical next question should be: Why should the capital markets be any different?
Cloud technology is not just about moving applications to a central provider’s data center; rather, it is a collection of systems and development approaches that provide a singular and universal computing environment. All technology frameworks and applications are destined for this environment as it usually represents the most efficient and often final stage for both.
Currently, trying to decipher a problem in a large bank’s capital markets infrastructure is like an archaeological dig. Over time, what happens with banks in their technology stacks is a terrible drive to complexity on three axes—time, geography and asset class.
As you cut through the crust of technological layers you might find that in the early 2000s whoever was head of IT thought C++ was the solution to everything. Then they were replaced by a Java devotee and the most recent layers were built by a true believer in Python and their team. Multiply this across different regions—Europe, AsiaPac and the Americas—and again by asset class, with some solutions developed in-house, others by vendors, it becomes unmanageable. Fixing it seems impossible. How are you going to take all these mission-critical systems off-line and rebuild from scratch?
The cloud natives don’t have this problem. Their foundational technology is built to scale. At their essence, they are very simple. Take Google, which is fundamentally a distributed, de facto operating system. Ten Google apps may do ten very different things, but the underlying technology is highly unified.
This efficiency and unification have enabled the rapid ascent of these companies. When you look at the price to sales ratio
(PSR) of the top public companies by capitalization, a very clear picture emerges. Using the data for fiscal year of 2017 (the most recent complete set), the first four—Apple, Alphabet, Microsoft and Amazon—had an average PSR of 4.5. In comparison, the entire cohort of the top 19 global financial companies—which includes the likes of Citigroup, Morgan Stanley, HSBC, Nomura and UBS—runs at 20.9. Put simply, tech giants use capital more efficiently.
As a financial technology provider with experience in network technology, cloud computing and advanced trading systems who’s created a risk management device that checks on average 10% of the US equities flow every day, I recognize risk. But the risk I’m seeing these days isn’t at the trade or portfolio level, it’s even beyond enterprise risk—it’s that the entire trading ecosystem is heading toward a singularity. I’ve been in business long enough to watch the likes of Sun Microsystems and Digital Equipment, once giants in the technology industry, vanish. At times, I get the same uneasy feeling when looking at some of today’s biggest banks. There will be winners and losers.
Today’s complexity is unsustainable. Computer languages are like the tower of Babel. There are over 700 listed on Wikipedia. If you include mark-up languages that are readable by humans as well as machines, like XML and HTML, that number swells to over 1000. By comparison, there are only 420 significant spoken languages used today. All those computer languages are relatively similar. The core of a computer, the CPU, can only take several actions—add, multiply or move data from one place to another. As is evidenced by the market capitalization of the aforementioned technology leaders and their earnings, efficiency is already driving the long-term trend to simplicity.
Time and again they’ve proven they understand how to enter new markets. With their payment systems in place and troves
of customer data now at their disposal, it’s not hard to see how Amazon and Apple can expand in the retail financial space. What’s not sufficiently appreciated is the vulnerability of institutional finance, too.
Amazon Web Services (AWS), Amazon’s cloud services division launched in 2006, provides the bulk of the behemoth’s operating profit despite only constituting around one eighth of its sales. AWS has seen its revenue grow at breakneck speed: 255% in the past three years. (The other major players in the cloud space, Microsoft Azure and Google Cloud and are also seeing astronomic growth.) It’s impossible to read the mind of Jeff Bezos, but could an online bookseller who has acquired the Washington Post on the way to becoming the world’s richest person—along with investments in food, pharmaceuticals, entertainment, aerospace and just about everything else—be interested in banking? Should Amazon decide to become a provider of financial services it could attract Wall Street talent the way it and Netflix have vacuumed up Hollywood.
Being a highly regulated industry is no protection. Oscar, the health insurance startup, which recently attracted investment from Alphabet, has proven it’s possible to enter a complex market and gain competitive advantages by building their technology stack from the ground up. New technologies such as blockchain are also chipping away at the foundations of institutional finance. Several crypto firms are working to build custodial businesses as well as enter the prime brokerage and agency trading markets.
But the cloud can drift over Wall Street without smothering it. AWS and other Infrastructure as a Service (IaaS) providers are already partnering with numerous financial firms to develop technology solutions. Given that IaaS is such a driving force of growth and profitability for Silicon Valley, would they really want to cannibalize their own business by up-ending their clients?
Wall Street has not been oblivious to the threat from Silicon Valley, either. Jamie Dimon, for one, has been scrutinizing the technology landscape for years and reacting accordingly, spending around $10B per year on remaining competitive. Increasingly, financial services is dividing into two camps when it comes to technology; the haves and the have-nots. With the stakes so high, CTOs’ fear of making mistakes can induce a form of paralysis and sadly this has meant many companies have fallen into the have-not category. As cloud adoption becomes the key driver of success, we will see these two camps transform into winners and losers.
It’s tempting to see the devolution of large financial services institutions as inevitable. Right now, they appear to be vulnerable, in danger of following the tracks of companies like Toys”R”Us, Blockbuster and Eastman Kodak. But really, it’s not too late—yet. It’s a question of altering their mindset. Deciding now is the time to take action is key. The bank that locks on to this reality, finding efficiencies through technology, is going to do very well.
The path to simplification is already clearly mapped out: adopting cloud technologies and adapting operations to scalable architectures. While for many years’ security issues were seen as a barrier to implementation, that’s no longer a justification. A new generation of silicon-based hardware is marrying networking and cloud and allowing the kind of capital markets infrastructure performance that incumbents need to effectively compete with this new breed of market entrants.
And there’s a huge incentive to get there quickly. If the success of the Cloud providers has made one thing clear, it’s that getting the approach right early reaps giant rewards. The first bank to solve its legacy issues will without question grab market share and a leadership position.
We are witnessing a period of profound transformation. Investment banks must fearlessly address whether or not cloud-scale, service-oriented technology has become an inherent component of a sustainable business. If the question is answered in the affirmative, they must pivot to meet the coming challenge head-on and convert adversity to opportunity. Their future just might depend on it.READ FULL ARTICLE