Dmitry Shtillerman: “IT departments in banks are not ready to quickly respond to changes”

    One of the leaders of financial practice at DataArt, Dmitry Shtilerman, tells how modern IT technologies have led to revolutionary changes in the global financial markets, and how the company helps customers adapt to these changes.

    - What are the most powerful breakthrough technologies on the FinTech market now?

    - I want to clarify right away. Strictly speaking, FinTech is not the only segment on which DataArt financial practice operates. The term FinTech usually refers to companies that make technological solutions for players who, in fact, are engaged in a diverse financial business.

    Let's say we are doing a project for BondWave. This company wants to make the best product in the world for people who trade bonds or, more broadly, the so-called fixed income instruments. Fixed income is a part of capital markets in which there are most of all various instruments characterized by a large number of parameters important for a trader, the analysis of which requires quite complex mathematics. Therefore, clients with our help are trying to find completely new ways to present information about this "universe of tools" to a user who is engaged in the analysis or development of a trading strategy - and this is a lot of work in the field of data visualization.

    But DataArt does not only work with FinTech. So far, we have mainly worked with a segment of companies that provide financial services. This segment, in turn, is only part of the finance world as a whole. Therefore, what I will continue to talk about is wider than fintek, but already from the world of finance in general.

    The quite noticeable breakthrough that is taking place right now is happening right in the markets. I do not know a good equivalent Russian term, but in English the phenomenon that I am talking about is called "disintermediation", "disintermediation" - the elimination of the intermediary. The whole world of capital markets has historically been built as a complex ecosystem, consisting of highly specialized intermediaries, each of which very well understood its own part of the chain, served it and lived on commissions withdrawn from each operation passing through it. Now there are many different ways to reduce capital suppliers and its consumers almost without intermediaries. ´

    This in many ways greatly undermines traditional business models, and now there is some shaking. I will give an example. Everyone knows the word “crowdfunding” when, for example, they collect money for some fun project on the conditional Kickstarter. From crowdfunding is one step to crowdsourcing raising capital. The emerging trend in the field of financing small startups is not to go to angel investors, but to try to gain an initial round of investment in the mass market, to let people from the street into their capital.

    - That is, start with an IPO?

    - This is not an IPO, these are early rounds of investment, that is, a startup that attracts them does not become a public company, it does not go to the stock exchange. Just instead of attracting a wealthy relative or one outside investor, a startup can go to a specialized Kickstarter and attract capital to its project from a large number of retail investors, who, in turn, get an easy opportunity to buy a stake in a non-public company.

    The second example of disintermediation is from our practice and from another part of the market: one where, on the contrary, very large deals are already taking place. For a couple of decades, the phenomenon of over-the-counter trading has been known. All exchanges have been quite effective intermediaries all their lives; they took a lot of risks from bidders and took a reasonable commission for this. And still, if we take the stock market, quite a few transactions go through exchanges. However, exchanges have their own natural limitations. If you are a super-big player, a thick-willed investment bank or a pension fund, and if you urgently need to buy or sell significant blocks of shares, you are wrong to go to the exchange - you will greatly shift the market. Therefore, a phenomenon such as dark pool has long existed. In simple terms, this is such an over-the-counter platform, where people come to calmly agree on the purchase and sale of something big and thick. These dark pools have become very fashionable in the last decade, and regulators have even begun to look closely at them.

    One of our London clients, Squawker Trading, with our help, made from scratch a rather innovative platform for dark pool, successfully developing it, and through it there is already a significant number of transactions in the European stock market. Now, this platform, one way or another, is used by almost all investment banks and major players in the asset management market in all of Norway and Northern Europe. Now Squawker is trying to create a new breakthrough, to take it one step further: traditional dark pools are usually sponsored by dominant players, and Squawker is trying to make it an independent platform with rather unique characteristics and spread this technology to other markets besides only the stock market.

    - The fact that intermediaries are disappearing, each of which takes its own small percent, means that money in the market, in a sense, is getting cheaper?

    - Yes. There are people who have extra money, and there are people who need money to develop companies. The sources of capital in the market are, in fact, ordinary people who create their own savings. There are a lot of them, but not one of them is an important player. Excessive money of ordinary people aggregates, for example, pension funds - and these funds, the so-called institutional investors are already becoming a very powerful force. And the whole huge, complex, very bizarre system of capital markets in which you always discover some new types of intermediaries - all of it is built in order to transfer money from a future pensioner to a current startup in the most efficient way. And yes, due to disintermediation in the current system, money should be cheaper for a startup, i.e. disintermediation reduces transaction costs and cost of capital,

    - Not so long ago, DataArt held a round table in London on how traditional financial institutions are adapting to a new technological reality. And there was another good example about the disappearance of intermediaries. One of our largest customers is experimenting with block chain technology so that clearing and settlement of transactions takes place an order of magnitude faster than now - within 10 minutes, and not one to three days. That is, collateral management, custodial services, centralized clearing of counterparties and much more - all this may be unnecessary.

    - Yes, this is a very important topic. Block chain is not even about security, it is about mutual trust. This is a way to convince people that events happened in a certain way. Literally from the beginning of this year, some of our clients and acquaintances in different countries from Moscow to New York began to think about how they would use the block chain in their tasks. The main problem here is that not everyone understands what block chain is.

    As for clearing, it seems to me that traditional clearing houses are not that completely out of the picture. Simply, they will transfer their registries to the block chain - and everything will be based not only on trusting them personally, but also on trust in technology.

    - The mentioned company was determined!

    - Well, you need to understand that they are an advanced company. This is one of the first electronic trading systems in the world. And still they continue to be engaged in innovations, and they are ahead of the rest. At the same time, many players in the USA and Europe now have the feeling that the block chain has a future, that you should not be too late to jump onto this train, so all the guys in clearing and other related fields are everywhere where there is information, in reliability and the reliability of which you want to convince everyone, is now invested in RnD, and yourself. The main goal of all these studies is to understand what can and should be done. This is one area in which DataArt helps them.

    Block chain is a vivid example of explosive technology that breaks the whole paradigm from the IT side. There are many more trends that come from the side of business. Everything related to the situation in the global economy is not about technology, but about the fact that very significant changes are taking place in the outside world, in the external business environment.

    So another “explosion” is connected with events that take place in the world, in the economy, starting around 2008. Many rules of the game are changing. Some assumptions in the life of not only financial companies, but even quite ordinary companies, which were considered axioms of how the business is done, in the new conditions become incorrect, they have to be discarded. For example, traditional macroeconomic instruments for managing economies, which Milton Friedman bequeathed to central banks and which they actively used throughout the second half of the 20th century, fail. In particular, an important feature of the modern world is that in English is called negative interest rate environment, a policy of negative interest rate. Now we live in a world where some European countries are primarily prosperous, such as Switzerland and other Denmark - in order to prevent a sharp increase in the value of their currencies and, consequently, depressing consequences for their economy, they are switching to a negative interest rate. This is a very new thing for the global economy.

    Having money becomes expensive. If you are a big company and you have several billion free money, you can’t just go to the cache, if only because in the world there are not enough storage facilities and trucks for such volumes of cash. Usually you put an extra cache on a deposit at the bank and even had a small percentage from that. At a negative rate, you pay for this cache. this becomes a losing position. The first, of course, the banks began to suffer, because they receive their liquidity from central banks and are forced to pay for account balances in the corresponding central bank. Until recently, they shielded customers from these troubles, but large customers trying to keep large short-term cache positions in these banks are forced to pay that their money is deposited.

    This can turn upside down all the principles that companies use. For example, the rule of life was to pay the supplier later, and get money from him quickly. In the new environment, the business will begin to do the opposite. This is just one example. There are other things that are changing due to where we are all moving for various macroeconomic reasons. In this regard, even traditional financial businesses, such as banks and insurers, are forced to adapt to this business - and there is a lot of work just for IT, because you need to come up with new models.

    - And can you highlight technological innovations?

    - Another technological breakthrough, maybe not as new as block chain, is big data and data science. We can say that finance was ahead of the rest here - professional investors always somehow worked with giant data sets and trying to take out some interesting things from them. Since the beginning of the 1980s, this has all been done on computers, just then it was not called big data. Say, all attempts to build trading strategies always involved testing the developed strategy on a huge array of historical data, the so-called backtesting.

    New ways to use large amounts of data in the field of finance are connected with end users - something that before this began to be applied in retail trade, in supermarkets. Now it becomes fashionable and relevant in banks and in insurance. The name for this fashion trend is digitalization. The prerequisites for this trend are, firstly, with a sharp decrease in profitability due to the deterioration of old business models. Secondly, with the appearance on the market as Generation Y consumers, “millennials”, who have completely different consumer habits unlike previous generations. Because of this, even conservative industries such as retail banks have to invent new things. Digitalization implies, firstly, a special attention to web and mobile services, and secondly, to analyze transaction history from all consumers using big data technologies. This analysis allows you to personalize the service and identify any trends and quickly respond to them, quickly check product hypotheses - something that Lean Startup adherents, i.e., a kind of Agile marketing, began to preach.

    The third important part of digitalization is BPM, business process management, business process management. You need, on the one hand, to ensure the high quality of your business processes, and on the other hand to be able to change them very quickly. The business process here is not an abstract managerial word, but the technology with which you serve your customer. That is, if you are a bank, your product is actually your business process. If you came up with a loan in some new way, then you need to optimally and efficiently rebuild the whole system, the whole process, conduct all this economy.

    Another area where we help our clients is interaction with regulators. If you take any major rating agency, it is important for them to easily pass audits related to the analytics and the ratings that they publish. BPM technologies make it easy to track how the rating preparation process went on in each case. If the SEC, the US Securities and Exchange Commission or another regulator is unhappy that the agency has published any information, the agency needs to be able to show that everything followed the stated methodology and all places were covered.

    If you take all these things, you can see that technology plays a key role there. Mark Andrissen said that software eats the world, “software devours the world,” that is, there are practically no processes outside the technology business. Now there are more and more areas in which IT begins to play a business-forming role. In traditional retail banks, until recently, IT was not perceived as a central unit. Now, as a business, it is vital for you to change very quickly and not to destroy what you already have. This greatly enhances the role of IT, but the relevant departments in banks are used to working in the old way and, as a rule, are not ready to react so quickly. This is the place for DataArt - we actively engage in large financial companies both as consultants and as performers: we are flexible, we have seen a lot, we can be called quickly,

    For us, major players such as banks are still a new direction, we almost never went there because they did not need outsourcing. For decades, retail banks worked the same way, their business was covered with finished products and no custom development took place there. Now, due to the rapidly changing landscape, these customers are beginning to need the help of people like us.

    - In connection with big data in finance, a lot is written about robo advisory, about robotic investment consultants.

    - I’m afraid that I would not be beaten by colleagues involved in banking digitalization, but it seems to me that for banks this is just a way to earn extra money on an old client base. And this has more to do with recommendation systems - “they also buy with this product”. The math is the same everywhere. In addition, this is an attempt to maintain the part of the turnover that came from the commissions. If you are a traditional bank and try to pretend that you are doing for simple shorties what private banks do for their customers richer, you do it with robots and more economically. In addition, the same little ones, most likely, they will keep their brokerage accounts with you and pay you a commission.

    In conclusion, I note that all the described difficulties in the markets hit not only banks, but attempts to exclude an intermediary - not only intermediaries. The players who serve them in this huge financial ecosystem also have to change. These service companies also have to radically rearm, upgrade all their systems, their entire infrastructure. An important type of such service companies is the so-called. data & analytics vendors, companies that sell information: market data providers, rating agencies such as Standard and Poor's and Moody's, niche players. And for DataArt, now data & analytics vendors is one of the key target segments.

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