Disruptive technologies are reforming, if not
revolutionizing, the retail side of financial services. New
innovations, such as payment services Zopa and Venmo, are
reshaping the long-standing relationship between banks and
their clients and forcing incumbents to rethink operating
models and engagement strategies to remain competitive.
Although this dynamic is playing out in the public eye,
there is a more far-reaching technology trend occurring behind
the scenes that could have a much greater impact on the global
capital markets. Fintech providers have begun to focus on
transforming the industrys back office. There is
tremendous potential to replace decades-old mainframes and the
patchwork of computer systems responsible for processing
financial transactions that represent hundreds of billions of
dollars each day in the U.S. alone.
Yet these potential disruptions create a unique set of
issues and considerations. The primary responsibility of market
infrastructure is to protect the stability and integrity of the
financial system. Therefore, any change must be viewed in the
context of its impact on the global economy and the ability of
the industry and regulators to manage and mitigate risk.
Two of the more compelling technologies making headway with
financial firms are cloud computing and distributed ledger
technology. Both technologies provide ways to modernize key
functions and processes, though they must first demonstrate
they can ensure seamless execution of transaction processing
while also meeting the scalability, integrity and resiliency
the existing infrastructure already provides.
Despite the hype surrounding distributed ledgers, or
blockchain, the smart money is betting on cloud computing
to make inroads among firms in the short term. Although
security concerns and regulatory compliance have left many
financial institutions hesitant to use the cloud in the past,
they have begun to embrace the technology as digital security
on the platform has improved. A recent survey by the Cloud
Security Alliance reinforces this point, finding that 61
percent of institutions are now developing a cloud strategy.
The expectation is that adoption will continue to rise as the
industry and regulators grow more knowledgeable and comfortable
with the technology. In fact, over the next five years, cloud
computing could have the biggest positive impact on the
application by and cost base for banks globally.
Cloud computing offers many advantages. Perhaps the most
significant is that it allows firms to innovate, test and
succeed (or fail) faster and at a lower overall cost.
Theres no need to buy, build and maintain expensive
servers, storage and security structures when the work can be
done in the cloud at a fraction of the cost. In addition,
because cloud computing shifts expenses from capital budgets to
operational ones, firms can quickly switch gears without having
to justify a significant financial investment in hardware and
infrastructure. This trend is one worth watching.
Whereas the impact of
cloud computing will be more immediate, distributed ledger
technology will almost certainly disrupt the back offices of
banks. The time frame, however, is less certain. As Microsoft
co-founder Bill Gates has remarked, were probably
overestimating the impact that blockchain will have on the
industry in the next two years and underestimating its impact
Although todays market infrastructure is reliable and
cost effective, there is room for improvement. Distributed
ledgers, although not a solution to every problem, offer a
once-in-a-generation opportunity to reimagine and modernize the
posttrade ecosystem. Wide-scale adoption is a goal for the
future, though there are many opportunities in the short term,
specifically in targeted areas in which automation is limited
The U.S. repurchase agreement, or repo, market is a good
example. A distributed ledger can reduce the risk that exists
throughout the day in this market by eliminating the multiple
steps and reconciliations that are now required to clear and
settle these transactions, while also giving all parties to the
transaction access to the same information simultaneously.
Implementing the technology in large, mature markets will
require compelling evidence that it represents a significant
improvement over existing systems and processes. In some cases,
such as calls to replace the clearance and settlement system in
the U.S. with a blockchain-based product, the technology would
need to advance significantly before this goal can be achieved.
The system already settles some trades in real time and can
support same-day settlement across the entire U.S. equity
marketplace without the need to upgrade or enhance the existing
The most immediate challenge for the industry, however, is
forging consensus around a core set of standards and priorities
for future distributed ledger solutions. Today most firms are
exploring how to leverage this consensus technology
individually. An undertaking as significant as redefining the
global posttrade ecosystem demands an unprecedented degree of
collaboration across stakeholders. It would be a missed
opportunity if the many players in this effort are unable to
coalesce and, as a result, create a new and disconnected maze
of distributed ledger silos based on different standards and
with significant reconciliation challenges essentially,
the same issues we have with todays infrastructure.
The Hyperledger Project, a consortium of
financial institutions, technology providers and other
stakeholders, is helping to bring all parties to the table to
drive adoption of standards. Although herding so many interests
is a challenge, it is essential to ensuring that the basic
building blocks of future implementations are open source.
Gaining consensus on standards and fostering collaboration
among all the different players are the most immediate and
critical challenge we face.
Theres no doubt that cloud computing and distributed
ledgers will transform and modernize the capital markets.
Whereas the greatest impact will likely occur behind the scenes
in the back offices of financial firms around the world, the
results have the potential to be profound and ultimately create
a more efficient, safer and cost-effective marketplace for
Michael Bodson is president and CEO of the Depository Trust
& Clearing Corp., as well as of the Depository Trust
Co., the Fixed Income Clearing Corp. and the National
Securities Clearing Corp., the DTCCs principal operating
subsidiaries. He is also
No. 14 on Institutional Investors 2016 Tech 50