The dominant image of the financial services sector is of an arena of intense competition between private sector institutions. Yet the reality is that public sector and mutual institutions play critical roles in providing the infrastructure within which financial services are transacted. Financial services infrastructure comprises standards and regulatory bodies, service associations and utilities, whose main function is to enable and secure the execution of financial transactions between governments, commerce, industry and individuals. These organizations often have the capability to carry out financial transactions on their own behalf, but that is not their main purpose.
Financial services infrastructure is an area of rapid change. With the globalization and convergence of financial services, central banks and regulators strive to minimize opportunities for regulatory arbitrage not only between domestic, regional and international markets, but also between financial sectors such as banking and insurance. They need to accomplish this while adapting to new legislative policies such as Sarbanes-Oxley and enforcing evolving accounting standards.
Within financial institutions themselves, there is a realization that much of the back-office brings little or no comparative advantage and simply replicates what goes on in the back-office of every competitor. This over-capacity creates an opportunity to aggregate back-office activities into more efficient transaction specialists, releasing value that can be passed on to customers or retained by the institution.
Despite the high-level business case, the road map for building and sustaining these transaction processors is not clear and the path is fraught with danger. All industry associations and infrastructure partnerships face common dilemmas, including: politics arising from the uneasy balance between the needs of the association itself and those of its key users, who are often the major owners as well; labor issues resulting from the inevitable need to shut down duplicated operational facilities; crafting business cases and pricing structures that create win-win outcomes across the user base; and the technical and change management complexities of making the transition happen.
Pressures to increase efficiency are also driving dramatic changes among exchanges and clearing houses. Electronic exchange trading started in the United States on the NASDAQ, was institutionalized in Europe and is now changing the business models of even the most traditional specialist and open outcry exchanges in New York and Chicago. As a result it has reduced transaction costs and increased liquidity in individual markets.
The trend going forward will be exchange consolidation, creating pools of liquidity that are both broad and deep. In lock step with this change will be consolidation of central counterparties who will seek to realize the benefits of broad cross-product, cross-market netting to reduce the risk of capital market trading activities.
PA helps financial infrastructure companies and regulators in projects that range from strategy and business case development through to implementation management and delivery, including:
- outsourcing – process scoping, vendor evaluation, country selection and partner negotiation
- insourcing – development of insourcing propositions to utilize spare capacity
- co-operation – creation of industry consortia, if appropriate with technology partners
- shared utilities – delivery and launch of shared industry utilities.
