A New IT Revolution Offers Real Benefits for Financial Services Firms
Smart-enterprise technology can help financial companies master their data and make better decisions.
Enterprise technology has not kept up with consumer technology. Consider the gains in the latter area: Amazon.com has figured out how to make intelligent recommendations and influence your buying habits; an iPad instantly offers access to a vast and organized world of multimedia entertainment; new applications come out every day on your smartphone to entertain you or enrich your life.
By contrast, financial firms’ back offices often require weeks of manual work to produce what are too often opaque and error-ridden reports, none of which are integrated with one another. A new system update? That can take months or years to roll out.
Why is the financial world’s enterprise technology still so archaic? If a 22-year-old programmer can put together a great iPhone app in a few nights, how can firms spending hundreds of millions of dollars on technology fail to produce a workable enterprise solution after months of hard work?
One might argue that the financial world is an inherently more difficult operating environment because it demands tighter security, greater reliability and more flexibility from its software. These factors are real, but the core problem is actually quite simple: Finance is dominated by closed platforms and outdated infrastructure designed 20 to 30 years ago.
Imagine that if you wished to build a better application, you first had to design a new smartphone and its operating system. This is the challenge faced by programmers working in the institutional finance industry. It explains why the California Public Employees’ Retirement System just spent more than $500 million on its information technology systems and why many banks and institutions spend billions of dollars a year patching things together — often resulting in very expensive failures. Royal Bank of Scotland Group paid £125 million ($200 million) in fines in 2012 after faulty software locked customers out of their accounts for a week. Fortunately, this is all about to change.
Many of us in Silicon Valley believe we’re entering an era of a new type of company we call smart enterprise. Earlier there was an enterprise IT wave, followed by a telecommunications wave, followed by an explosion of consumer IT. New York and Los Angeles are still dominated by the consumer IT wave and may even be seeing a bubble of these types of companies, but a new wave is emerging in Silicon Valley.
Whereas enterprise IT companies solve linear problems like payroll, accounting and storage, smart-enterprise companies integrate massive sets of heterogeneous data and expose information within platforms in ways that enable people to solve nonlinear, conceptual problems in a collaborative environment. Smart-enterprise technology allows users to avoid hundreds of hours of data entry and spreadsheet manipulation and instead dive straight into the high-value tasks of asking important questions and finding needed answers.
These new companies are revisiting the fundamental IT infrastructure in big industries such as finance, health care, government, energy and logistics, and replacing it with modern platforms. Their technologies close decades-long gaps between what exists in many of these industries and what we all know should be possible today.
What does this mean for finance? Within the coming decade you’ll have much better information awareness via systems that get you what you want when you want it and do so in an intuitive way that doesn’t involve calling the back office or waiting weeks for others to collect data in a usable format. Errors will decrease. Middlemen in the industry will lose some rent as these new systems commoditize many parts of the financial back office. And with more information available, new standards and models will emerge to reflect what really works in today’s world, guiding manager selection and risk planning.
And when you do want to integrate some new information or get a new type of report, it’s going to be as easy as asking that 22-year-old to write you a quick iPhone app. In the meantime, tens of billions of dollars are still going to be wasted by IT departments at giant institutions trying to keep their antiquated platforms functioning for another year.
Silicon Valley is starting to launch new open platforms and work with various global financial institutions to bring the systems to fruition, with amazing early results. Lending Club, Mint and Square are just a few venture-backed companies that are disrupting the financial technology space. We believe these new platforms will support meritocracy, reduce fraud and facilitate the creation of better standards for decision making and intelligent risk-taking. Yes, there’s an app for that.
Joe Lonsdale is a technology pioneer and co-founder and chairman of Addepar, a Mountain View, California–based provider of software for the wealth management industry.