Bank FX technology spend on the rise
Investment in FX technology is expected to mirror growth in wider financial services IT expenditure over the next few years.
Total bank IT expenditure across North America, Europe and Asia-Pacific will reach $188 billion in 2014, an increase of 4.4% compared with 2013, estimates research and advisory firm Celent.
The firm’s senior analyst Jacob Jegher expects budgets to increase even further over the next two years, growing by 4.6% in 2015 and 4.7% in 2016.
One of the areas that has attracted substantial technology investment in the FX space is the single-dealer platform (SDP), says Marko Kozarevic, a consultant in Capco’s capital markets practice.
“The larger houses have invested heavily in FX single-dealer platforms – they are building successful FX franchises, bringing about client-centric innovation which will ensure that their business models succeed,” he says.
“For such banks, there is plenty of scope for further investment as the sell side is looking more closely at its target users and is developing and expanding upon existing offerings across the chain from pre-trade to post-trade. The objective here is to maintain the current customer base, while also looking to attract new business.”
Al Saeed, product manager Citi Velocity, agrees that while investment in SDPs across the industry has increased over recent years, this expenditure has not been evenly distributed.
The significant cost of investment in the right technology and people will be far outweighed by the benefits
“Early movers in this space stagnated between 2010 and 2013, although since late 2013 we have seen them reinvest and a number of smaller players also increasing their investment,” he says.
“The nature of the investment is also changing, with many players finding it difficult to find the budget to truly innovate. Smaller firms are resorting to vendor solutions that come off the shelf, but offer more limited scope for differentiation.”
Business intelligence systems, customer-centric algorithms, advanced financial-information-exchange connectivity and internal pricing systems have also been recipients of heavy investment in the past few years, continues Capco’s Kozarevic.
“Clients are no longer satisfied with the basic packages that some banks offer through electronic communication networks and are looking for platforms that suit their particular needs,” he says.
“At the same time, banks are realizing that they can benefit from the plethora of data that individual clients produce. As a result, they are investing heavily in technology to ensure that this data is captured, analysed and incorporated into their systems.”
Unification of trade entry
Sean De Souza, principal consultant in the capital markets practice of Capco, says another area to highlight is expenditure relating to unification of trade entry, which simplifies trade entry by abstracting it from the underlying risk-management systems.
“A number of FX businesses have also invested in infrastructure to better service regulators’ demands, such as simplified reporting and more real time monitoring,” he says.
“As a result of the recent FX scandal, we have seen one client requesting information relating to surveillance and natural language processing techniques, in order to process written and verbal communiques for suspicious discussion.”
Citi Velocity’s Saeed believes regulatory developments will exert a growing influence on SDPs.
“The regulatory requirements banks must meet will evolve – as will our client requirements – and we already see some single-dealer platforms reacting to this, for example offering access to SEFs [swap execution facilities],” he says.
“In addition, there is significant investment going into larger databases and big data solutions that is at least in part driven by regulatory reporting requirements.”
Applications are receiving a considerable amount of expenditure, says CGI’s head of strategy Jerry Norton, referring to Deutsche Bank’s Autobahn electronic service offering as an example.
“The customer-facing side of the FX business is moving towards a situation where the dealer platform becomes a downloadable application,” he says. “Technology solutions for corporate buyers of FX have been in place for some time, so offering this service as an app is a logical progression.”
On the question of how future technology investment will impact platforms, such as banking front-end portals, Kozarevic reckons banks are facing difficult decisions over which technology to choose.
“Silverlight has been the technology of choice for many firms, but its support and development will cease in the near future,” he says. “One of the technologies touted as its replacement is HTML5, which supports delivery of far richer front-ends.”
Delivering simple and usable front-ends that are also rich in features requires heavy investment in new technologies, as well as staff with the right skills, says Kozarevic, concluding: “However, the significant cost of investment in the right technology and people will be far outweighed by the benefits they bring to the bank through increased flow through its platform.”