Technology Accelerating Realignment in Capital Markets
2020–2021 was a target year for market participants and a milestone for completing and revamping technology strategies and looking to the coming decade. Financial institutions are moving to implement the next leg of the roadmap on their transformation journey, with a view to the next 10 years. Mounting uncertainty makes forecasting for the future more challenging than ever, but two things are certain. First, market players will continue to operate in an increasingly complex and opaque market, regulatory environment, and business environment as they strive to generate transactions and revenue steadily. The second certainty is that in capital markets, as in other industries, technology will become even more central as new technologies proliferate, enticing new market players into the arena and dramatically transforming the market landscape.
Already, many market players have begun to explore new models as they plan for the unknown—a new market of which only the vaguest outlines are apparent. This is a reflection of the strong interest and various perspectives that cutting-edge financial institutions have regarding open platforms. In short, the shift to next-generation models could happen quite suddenly. At the same time, financial institutions are typically risk-averse and generally slow to lead but fast to follow when it comes to adopting new models that have proven effective. Technological flexibility, however, will in part impact how this "follow the market leader" dynamic plays out. From the perspective of avoiding risk, more progressive market players will adopt cloud and API solutions, heightening IT agility and accelerating the speed of this "chase." Presumably, in the heightened uncertain of today's world, this will become the "new normal."
Success with open platforms will hinge on business models. Open platforms may be the solution that can transform the industry while simultaneously bringing the participants closer together. Market participants should seek to further heighten the degree of modularity.
Following the publication of the work of Baldwin, C. and K. Clark (2000), the relationship between "vertically integrated business structure for integral industry and specialized business structure for modular industry" became more widely recognized, and innovation research based on this understanding proliferated. In particular, Kusunoki and Chesbrough (2001) pointed out, based on a case study analysis of the hard disk drive (HDD) industry, that changes in product architecture can result in “traps” that can lead to corporate organization failure. When product architecture and corporate organization are aligned, as mentioned above, if the product architecture suddenly changes, the architecture of the corporate organization (business process or IT; for the sake of convenience, referred to here as corporate architecture) cannot change rapidly. As a result, delays in corporate architecture change can adversely affect a company's competitiveness and innovation.
When an entire industry or a company's products and services, as well as its organizational architecture, pursue modularity, vertically integrated companies that incorporate multiple components (processes and IT for producing products and services) can gain new competitive advantages by specializing in specific business activities while losing their competitive edge to the original integral architecture.
At the same time, if a company pursues an integral approach, it will not be able to take advantage of the benefits of coordinating and integrating the activities of individual external specialized firms. In other words, the vertically integrated model provides a competitive advantage for firms that excel in coordinating multiple specialized activities internally.
In their work on this subject, Kusunoki and Chesbrough (2001) called these phenomena "integrity traps" and "modularity traps." Currently, the securities industry is undergoing a shift from an integral-type industry to a modular-type industry, and modularity is regarded as an important factor that can sway the competitiveness of corporations.[1]
Modularity and standardization increase the possibility of sharing its processes within an industry or community. Increased flexibility makes it possible to integrate and share internal processes and IT with other companies, allowing them to reassess their position in the capital market value chain.
Some forward-looking players have already moved beyond the traditional sell-side and buy side relationship to become capital market platformers in their rights.
Expectations for open platforms voiced by respondents greatly outpaced questions and concerns. Only time will tell exactly how the use of technology will play out in the new frontier of capital markets just over the horizon.
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For now, here we will conclude with some participants’ responses to important survey question items.
In capital markets, we are acutely aware of but not currently using open platforms. This is because it is too new a concept. I am very bullish on open platforms and am talking internally to stakeholders to push in that direction. (CTO, Asian AM firm) ?
We have started exploring, and want to use it soon, but it also depends on what’s available and the use case. I think it will take some time to permeate the market but that the market will continue to move in that direction. (Head of digital, Asian AM firm)
I believe we are going to see open platforms shortly, maybe even within the next two years if it has the right use cases. (Director of capital markets technology, Tier 1 professional services provider)
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[1] Carliss Y. Baldwin, Kim B. Clark (2000) “Design Rules: The Power of Modularity” MIT, Ken Kusunoki, Henry Chesbrough (2001) “The Product Architecture Dynamic Shift: Pitfalls of Virtual Organizations,” edited by Takahiro Fujimoto, Akira Takeishi, and Yaichi Aoshima “Business Architecture, Product and Organizational Process Strategy Design” Yuhikaku (publisher)