As the 2021 FIS Readiness Report revealed, capital markets firms are refocusing on growth. As we all take a deep breath and look towards the end of 2021, Alvin Huang from Amazon Web Services and I joined FIS' Financial Futures podcast to consider where firms can find new growth opportunities - and how they can capitalize on them.
Listen to the third episode of season 6 for our thoughts on:
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ERIN DANGLER: Like many industries over the last two years, the capital markets have been more preoccupied with surviving than thriving, but with light at the end of the tunnel, attentions are once again, turning to growth.
TARA WINTERS: Capital markets firms coming out of the pandemic, They're looking at where can they grow? How do they best deliver service for their own clients? And they're considering BPaaS as an alternative to take over some of the lower level activities. you know, something that has to be done, but there isn't a competitive advantage to doing it yourself
ERIN DANGLER: And alongside breaking into emerging markets, technology is proving to be a key factor in financial institutions post pandemic plans for success.
ALVIN HUANG: Nasdaq processes anywhere between 30 to 60 billion records each night for a number of different workloads and really it's by leveraging the scale and compute capabilities of the cloud Nasdaq was able to reduce the time it took to run their billing process down from 40 minutes to four minutes. So, the impact of using a cloud is that not only can you process more data, but you can do it more quickly
ERIN DANGLER: This is financial futures, the podcast that charts, the frontiers of FinTech innovation. In this series, we'll be exploring the opportunities and challenges facing the capital markets and diving into the trends that are reshaping the way institutions operate in this rapidly evolving industry. I'm your host Erin Dangler, and today we're exploring the avenues to growth with capital markets specialist for worldwide financial services, business development, and Amazon web services, Alvin Huang, and head of global managed services for FIS capital markets, Tara Winters. We'll ask which growth opportunities financial institutions within the capital markets are looking to as the world starts to move past the pandemic. We'll discuss how technologies and services such as cloud computing and BPaaS are helping institutions to streamline their processes and overcome the inefficiencies of legacy systems. And we'll ask what considerations firms need to take into account before migrating processes from on premises to the cloud, or BPaaS partners.
But to start us off Tara and Alvin detail, how the priorities for institutions in the capital markets are changing in the wake of COVID.
TARA WINTERS: Coming out of the pandemic, capital markets firms are looking to achieve sustainable growth we're seeing a lot of focus on expanding into emerging market. Looking to expand into new segments and their existing markets and sell side firms are telling us they're also focusing on support for digital assets, which is not surprising at all. And looking to launch new products. Another area of growth is that we've seen a significant increase in M&A activity. So a number of capital markets firms looking to acquire or merge with other companies to help to have a presence in an emerging market, to have additional products to take to market and potentially also to address some of the gaps that they may have found during the pandemic, around the need for scale, the need to improve resiliency and also to expand their digital presence. One thing in common across all of our clients that they all agree on is that agility is absolutely required with a constant level of change that we're seeing and the need to adjust to new trends that's going to be very important to capital markets firms.
ALVIN HUANG: I think you hit on it precisely with that last point Tara, is agility. If you look at the progression of events prior to the pandemic, most companies have a digital strategy plan, and they were executing on that plan, whether it was over the next year, two years, three years, four years or beyond. Now, one of the impacts of the pandemic was that it really shifted this conversation from, what is our digital strategy to what are our digital capabilities? So, things like, how do we enable our employees to work from home, right? Call centers are a good example. How do you continue to keep that call center up and running when your employees can't go to work? So it's really this accelerated shift to digital. As we come out of this pandemic, the conversation now shifts once again to what does true digital transformation look like? And really what we see here are financial institutions, leveraging digital transformation taking all of the different digital channels, whether it's, web, mobile voice to number one meet customers where they're at, but then layering analytics on top. So going back to the call center example, right? In addition to using something like Amazon connect, which is a call center service, which allows call center agents to effectively perform their functions from home. What we're seeing now is that customers are leveraging machine learning capabilities, like, transcribing voice data into texts, and they're running natural language processing on top of that text to extract real time insights, from all that data.
ERIN DANGLER: And so what are the technologies that will allow for this.
TARA WINTERS: We're definitely seeing more usage of AI and ML. I think a couple of years ago it was more experimental, but they're certainly seeing that embedded in processes and actually in applications now. And cloud technologies are going to continue to be absolutely critical, to support digital strategies to provide agility, to support global expansion. Many clients are looking to expand into emerging markets and, many countries, have data sovereignty and data regulations in place that require their client data to be stored in the local country or region. And so it's important to have a cloud partner that can support the need for data centers all over the world. Additionally, some of the technologies like AI and ML require massive amounts of data, and you've got to have the scale of the cloud to be able to support those.
ALVIN HUANG: That's a hundred percent correct. Scale is a big part of it. To run some of the machine learning workloads, these big data analytics workloads, you really need to have the scale of the cloud. And that's really important for many of these analytics workloads, as well as in risk management functions.
ERIN DANGLER: And what are some financial institutions using now? If they're not using the cloud?
TARA WINTERS: They may be running on premise. They may have a number of legacy applications that are running in their own data centers or in private cloud. And so as we talk more about the advantages of the cloud, I think it you'll see some of there's still application for those types of environments. But there's also a need to leverage public cloud for some of the flexibility and scalability that Alvin was just talking about.
ERIN DANGLER: So it's modernizing your operation. It's not these onsite on premise applications, it's stuff that you can access in real time. So what are the cloud adoption trends in capital markets?
ALVIN HUANG: So if you think about what the cloud is good for, it's good for, scale. And one of the earliest workloads that customers have adopted is horizontal scalability of the cloud. So if you think of some of the risk management workloads, like, Monte Carlo simulations, back testing of investment strategies. One example here's AQR. So AQR, what they needed to do was test trading strategies across thousands of securities going back 10, 20, 30 years. And to do that, they need to spin up environments of tens of thousands, if not hundreds of thousands of cores to be able to run these back testing workloads. Finra is another good example, right? From kind of a post-trade, analytics perspective Finra collects data from 3000 broker dealers across 22 exchanges and runs market surveillance on these transactions to look for things like insider trading, front running, spoofing and layering, and many others. And they have to process these using a big data capabilities like Spark, on EMR, to really be able to scale out these calculations.
ERIN DANGLER: and Tara,any other trends you want to weigh in on?
TARA WINTERS: Yes, absolutely. Those were great examples Alvin and I'd like to expand a little bit around risk management. So, we run a number of risk management solutions and it's a great solution to run in the cloud because of that horizontal scaling requirement. So in those solutions, generally throughout the year, there's a business as usual level of capacity that's required on a daily basis. But at period end, usually month, year, quarter end, there's the need to run those very complex calculations and they're massive amounts of data coming into this, massive amounts of data going out of the applications. So, clients need the ability to scale to additional cores. Just for a period of time, maybe a week or two at the end of the period, and then scale back down to their original BAU capacity and the cloud enables them to scale and also to only pay for that additional capacity while they're using it. So we have a client in risk management, they scale up to 40,000 or more cores a month to run their month end processing. And, that would be pretty difficult to do in a traditional data center. So risk management, I think is a great example of a way to use scaling in the cloud.
ERIN DANGLER: So I can see though where the word cloud would cause a lot of angst, in both financial institutions and the clients they serve. Can you talk a little bit about the different types of clouds? There's public there's private, I mean, there's not just one cloud.
TARA WINTERS: You're exactly right. There's not just one kind of cloud. And I think we find that most of our clients have a hybrid environment. So they want to use public cloud when they need flexibility, scalability. They're looking to lower costs, they're looking to improve resiliency, but many clients are still concerned about security because it's a shared environment. And also because they lose control because they're not running that environment themselves. So then on the private cloud space, they're looking maybe to, host their applications that have more data sensitivity. They've got a need for maybe customization and they want to have more control over the environment. And then there's hybrid cloud is just a combination of having some public cloud, private cloud on premise that's being used. And so you can kind of get the best of all worlds in that situation, the flexibility and scalability of public cloud, the ability to address data sovereignty challenges, in the private cloud, the ability to leverage existing, infrastructure and continuing to have control and security around those applications. But the challenge around hybrid is that it becomes much more complex to manage and you need resources that have knowledge around all the different environments. And it's also important for, for firms to take a look at their security strategies, their business continuity planning, all of that to incorporate, all these different environments and their different needs. The cloud is changing all the time and it changes very rapidly. So that's different than an on-premise environment where the changes can be very carefully managed and planned.
ALVIN HAUNG: I like generally, when we talk about this topic is to, bring in kind of two, customers that come to mind. I mentioned Finra before, and they're kind of a really good case study because they started their cloud journey back in 2013. And one of the things that they looked at very closely was their on-prem environment versus the public cloud. And based on that assessment, they realized that the public cloud, the AWS environment was no less secure than what they had on premises. And based on that determination, they made the, decision to move all in on the cloud. They moved their core assets, their market surveillance platform onto AWS. Now the interesting thing here is about a year later in 2016, they took another look and they actually realized that, the AWS environment is actually more secure than what they had on premises. So I'll give you a couple examples, some things that they could do on AWS, that they couldn't do in their on-prem environment was things like encrypting the data, both at rest and in transit, that was something that they couldn't do. Another one is micro segmentation, right? Limiting the blast radius if something went wrong it was just cost prohibitive within their on-prem environment.
ERIN DANGLER: With working with a public, private or hybrid model, the cloud offers institutions, the speed and computing power to take on the most intensive tasks. It also provides practically limitless scaling power to grow alongside firms. And it gives both institutions and clients peace of mind, thanks to the sophisticated security measures it allows for. These alone would be enough reason for organizations to start moving on premises legacy solutions to the cloud.] So how do firms start that migration and which functions are best suited to the cloud?
ALVIN HAUNG: A cloud migration is not an overnight process. even, customers that are all in, on the cloud, like Finra, like Capital One, It's a multi-year process for them to do that full migration. There's a number of different considerations when you're migrating to cloud, you consider things like lift and shift, which is simply taking the application that you have on-prem and it just running that application as is in the cloud. Now you do gain some benefits from doing that, but there are additional benefits that you can gain from potentially refactoring or modernizing that application using cloud native services. So that's certainly one fact that you want to consider when you're moving applications to the cloud.
Other considerations are things like resiliency, right? Looking at the RTO RPO characteristics. Right? How do you want to architect your applications on the cloud? And again, within the AWS, we do have programs, things like using the well-architected review to help with making sure that your applications are resilient and they're operationally efficient and they're secure.
TARA WINTERS: I'll jump in and add a little bit there. So, the legacy, applications, were not designed with the cloud in mind because they were coming out before there was a cloud capability, like we know today. And so as you look to move those legacy applications to the cloud, they may not perform very well. It may cost more than expected. And so working with a partner like AWS or FIS can help to identify better ways to run in the cloud and to streamline, even a lift and shift. But to Alvin's point there really to take advantage of everything the cloud has to offer, it's important to look at a modernization strategy and it's something we're certainly on a journey around a number of our solutions that we provide to the capital markets to really be able to leverage some of the cloud native technologies that ultimately will drive down costs and give greater functionality, flexibility, resiliency to our clients in the long term. And the cloud providers have a number of tools that are built in that might require a lot of work to add into another environment or to take advantage of, but because they're pre-built into the cloud, they're readily available to be used. And so there are just so many positives around leveraging the cloud and all the capabilities, but having a modernized technology is really important to take full advantage of cloud.
ERIN DANGLER: Can you tell me which functions can be migrated fairly easily.
TARA WINTERS: I mentioned the risk management before. It really was the first application that we took to cloud, and we did that about eight years ago or so, and it was absolutely a lift and shift. But because of the horizontal scaling requirements, it was necessary. It wasn't cost-effective to run in a traditional data center or a traditional, private cloud environment. It really needed all that scalability. So it wasn't difficult to move it to the cloud, but we're modernizing now to be able to take better advantage of everything the cloud has to offer.
ALVIN HUANG: And I was going to say, Erin, I think, the way that customers have generally looked at it is what are the problems that the cloud can solve really well. If you're developing a mobile application, and you're expecting a lot of traffic to that mobile app, that's a good one to move to the cloud, right? The risk management workloads that Tara talked about, those are great to move to the cloud. I'm working with a customer right now that wants to move kind of their quantitative analytics, dev environment to the cloud, right? Because they're taking a lot of data and running a lot of the high compute, large-scale analytics, machine learning, that type workloads, those are a great to move to the cloud. So really the way to approach it is look at, areas where the cloud can help you solve problems, where they can help you, become more, more agile, more elastic, more scalable, And those would be prime candidates to move to the cloud.
ERIN DANGLER: Well, and in talking about, moving to the cloud, I want to circle back a little bit to talking about the emerging markets are some of these markets finding success because they can start from scratch with some of these cloud native solutions?
ALVIN HUANG: Absolutely. If you look at some of the emerging markets, I think you'll see some of the most innovative approaches that some of these customers are taking. So I'm going to venture a little bit outside of capital markets. But if you look in the state of lending space the use of computer vision to streamline customer onboarding, right? Using computer vision, using OCR, using a number of these AI ML capabilities to streamline the customer onboarding and KYC process. We're seeing firms like Weland and CreditVidya leveraging those capabilities to improve customer experiences. Also the use of alternative data sets, right? If you look at, customers like Affirm, right? Being able to leverage alternative data sets as well as machine learning to better predict and better assess the credit worthiness of their customers.
TARA WINTERS: Yeah, add that, in the emerging markets with new entrance coming online, they can get to market much more rapidly because they can leverage the cloud and applications in the cloud versus setting up a data center or setting up all of the teams that are required to support applications. And then as I was mentioning before with the data sovereignty and data privacy regulations, it's so important to have local data center support. One thing I didn't mention that is another advantage is the latency. You know If you're connecting, from, somewhere in Sub-Saharan Africa into US, then, that might have some latency challenges. But if there is a local data center, then, you can eliminate those. So there are a lot of advantages that emerging markets and startups in those markets can take advantage of.
ERIN DANGLER: So let's shift a little bit from cloud into another, acronym. This industry loves acronyms. I've learned so many so many ASAP. Let's talk a little bit about another, technology that will allow for this modernization is the BPaaS.
TARA WINTERS: BPaaS. stands for business process as a service, and it's really where a trusted partner would take over, running an operation on a client behalf for either all or part of a business function in a department or division. And so the, BPaaS provider takes over using the applications, the tools, the processes, and delivers the client an outcome, a set of reports or a business solution, depending on the type of application that's underpinning it. And as capital markets firms coming out of the pandemic, they're really looking to focus on their core businesses. They're looking at where can they grow? How do they best deliver service for their own clients? And they're considering BPaaS as an alternative to take over some of the lower-level activities. You know, something that has to be done, like regulatory reporting, for example, but there isn't a competitive advantage to doing it yourself. The service is governed by service level agreements. So there's a guarantee around turnaround time, availability and quality. And generally, these are multi-year arrangements and they're generally paid for like the cloud on an OPEX basis. Another challenge we've seen coming out of the pandemic is there's a lot of pressure on CapEx budgets. So it's really attractive to a lot of firms to move to more of an OPEX model and the cloud, and BPaaS both provide that capability.
ALVIN HUANG: One of the biggest benefits of this BPaaS model is that it provides a number of the benefits, that you see with cloud. Whether it's the scale, the flexibility, and also the consumption-based pricing. So, look offloading some of these processes is really, you want to remove kind of that undifferentiated heavy lifting that we call within this industry. So take something like even like KYC. If you're able to, again, leverage the technology behind it, leverage the scale of the cloud, and really kind of provide a service where your consumer can just hit an API. And like Tara said, get that response back, so you're not doing any of the heavy lifting. So you can focus on your core business drivers, that's really the value of the cloud and of BPaaS.
TARA WINTERS: Yeah, I think another benefit is really the agility and as capital market firms are looking to expand geographies or bring new products to market, a BPaaS provider will provide scale. And they'll have readily available teams, applications, processes, tools that can enable them to get a client up and running with a new product or into a new geography relatively quickly and easily. Also BPaaS firms are very focused around continuous process improvement. So they look to leverage automation tools and AI and ML to continue to drive down costs. Certainly one of the things that a client will be looking for is a way to lower operational costs in addition to the agility that they're looking to attain. So that lower operational costs gives more capability for firms to invest in other parts of their business or look at, innovative ways to deliver new services to their own clients. So there are many advantages to looking at BPaaS. And then I think one of the other things we're seeing is, regulators and, capital markets firms themselves continue to be concerned about cyber-attacks. And the continued work from home is concerning from that perspective. A lot of firms didn't have, full, business continuity planning and security strategies that would incorporate a work from home strategy. So leveraging a BPaaS partner, can take away some of that risk because the BPaaS provider will have already sorted through their own continuity plans and their ability to work remotely and have security and process already set up around those.
ERIN DANGLER: It sounds like it just streamlines everything and makes everything really efficient. So as you said, you can focus on your core operations or you can focus on being the visionary instead of kind of getting down in the weeds.
TARA WINTERS: Absolutely. I was just going to, highlight a couple of other things that, that BPaaS can help with. It might not be, quite as apparent as the operational, savings and the ability to focus on core businesses. But there's also an elimination of the need to manage the underlying application and ecosystem. And so a lot of energy is put into acquiring software applications, building out the ecosystem, running it, scanning, patching, upgrading all of those things, the care and feeding of multiple applications that underpin a BPaaS service. And so moving to BPaaS eliminates the need to do all of those things. And enables firms to focus on higher value activities. Another area is that, you've got a built in knowledge base with teams of people that have expertise and track record around delivering these services. And so it can help to eliminate key person. That's been a huge concern from firms over the time period around the pandemic. What, if someone's ill or they're not available or they leave. And you've got maybe a handful of people that know some of the specific processes, leveraging a BPaaS firm can really help to alleviate that because you're no longer dependent on a small group of people. You've got a broader base to work with.
ERIN DANGLER: So it definitely increases the flexibility. And I guess you would say the agility of the company.
And as we know in this industry, change is hard. People tend to be afraid of change and risk. So for institutions that might be apprehensive about utilizing BPaaS, what are some of those concerns?
TARA WINTERS: As you pointed out, change is one of the biggest. Moving to a BPaaS, type of a service, it's really a strategic decision for a firm to make about outsourcing part of their business to a trusted partner. There's going to be, cultural shift. There's going to be concerned from the employees, there's also concern around a risk of a data breach. The loss of control, you have a third party that's running part of your operation, you definitely are giving up control to that third party. And so there are concerns there. And then I think a final concern might be around the fact that BPaaS firms work at scale. And so there's less opportunity to customize processes as a result.
ERIN DANGLER: Utilizing BPaaS partners can help firms to improve their agility and flexibility as it allows them to quickly offer new services by outsourcing processes to third parties. BPaaS also gives institutions a level of security as key procedures are managed by an outside organization rather than a small group on premises, eliminating dependence on key individuals for certain deliverables. But the idea of outsourcing any task, even with all these benefits can be a daunting one. So what words of advice does Tara have for firms considering BPaaS?
TARA WINTERS: I think the most important thing is to select the right partner. You really do need a trusted partner, that's got a proven track record of delivering these kinds of services. You need to ensure that they have, the adequate security measures, the business continuity plans that are required, and they need to be really knowledgeable about the underlying application as well as the specific domain that they're servicing. And if you've got a good partnership and you have a firm that are BPaaS provider that is able to support, that function for you, it can alleviate a lot of the concerns. So that's really the single most important, factor in having a successful BPaaS capability.
ERIN DANGLER: And what about, let's say, I'm a firm, I decided to use this service. What are some benefits for both the buy side and the sell side?
TARA WINTERS: Certainly they're going to be looking to lower cost. There's an advantage in the agility that we were talking about before, so that there's a ready team that's already in place with the technology that's required and the processes that are needed so that they can launch new services, launch new products, go into a new market very easily. So that agility and speed to market is really important. Some of the other things we talked about before were around eliminating key personnel. And, and eliminating the need to maintain all of these underpinings of this service. And so they don't have to run all those applications themselves. So there are many benefits to moving to BPaaS. And as I said before, it's really most popular with, the non-competitive types of activities. And a buy-side firms tell us that they want to outsource, middle and back-office activities and sell side firms are looking to outsource middle office as well as compliance management. Those are the key areas.
ERIN DANGLER: And how does the cloud tie in with all of this? How does the cloud help deliver BPaaS operations?
TARA WINTERS: One of the,key areas of delivering BPaaS is to have the appropriate technology and being able to leverage flexibility, scalability, and lower cost of ownership, to be able to deliver services at a competitive price. Clients are absolutely going to be looking for a price value for BPaaS services. So an underpinning for BPaaS would be a more modern technology running in the cloud to provide those types of advantages.
ALVIN HUANG: I think the one area I'll add is, from the machine learning side, we've gotten, fairly advanced where we have, services that are, built, trained they're optimized by Amazon. So from an end user perspective, or from a developer perspective, you don't need to have any machine learning knowledge or expertise. You can just view some of these AI services as API calls, and they really built that and stream, into your existing workflows. So streamlined that process. And I think that allows people to move much more quickly, Instead of having to spend 6, 9, 12 months of development time, they can just leverage some of these services and be able to, get to market much more quickly, and provide a value-add to the industry.
ERIN DANGLER: So what's next for cloud and BPaaS. Tell me the future, please.
TARA WINTERS: Well, I believe that we're going to just continue to see movement to the cloud. I think that everything's going to move to the cloud, we talked about the specific types of applications that can take best advantage. but really we're seeing demand globally for cloud across the board. And I'm just a huge proponent of, looking at cloud services, especially for our global clients and our clients that have operations in other areas of the world. And on the BPaaS side, I think that, we're going to see more and more movement to BPaaS. I think that the pandemic and the focus that's required on core businesses and the search for growth and moving to more digital capabilities is going to become more important than running some of the must have back office types of activities. So I just think we're going to continue to see both of these areas grow, in a big way.
ALVIN HUANG: Yeah and Erin, we talked a little bit before about some of the trends within the capital market space, right? We see already a risk analytics workloads running in the cloud. We see, post-trade reg reporting, market surveillance running in the cloud. We see machine learning workloads running. I think the two other areas to point out here, as far as the future is more and more now, we're also seeing real-time market data running in the cloud. You see Bloomberg and Nasdaq and many others, offering real time, market data in the cloud. And one example here is, when you think about the connectivity, so from an end consumer perspective, if you look at, a bank like BBVA. So BBVA consumes real-time Bloomberg B-PIPE market data today, using something called AWS private link that you can think of as a cloud to cloud cross-connect. And they bring this data in real time for managing equity risk. So I think more and more, you're going to see the movement to people consuming market data directly over to cloud, to power a lot of the analytics workloads that we talked about earlier. And then lastly, kind of a natural progression is the movement of trading systems into the cloud, right? Again, if you're bringing real-time market data in and powering all of your analytics, kind of, a natural progression, that you're going to see it's going to be the movement of trading systems to the cloud.
TARA WINTERS: You just reminded me while you were talking Alvin, the other area that's just going to continue to happen is the cyber attacks. Yeah, they're not going away. The cyber criminals are becoming much more sophisticated. So it goes back to security and making sure that you've got the right partner to deliver a secure environment.
ERIN DANGLER: Tara, you already hit on something that I asked in your predicting, where this is going. And you had said you, you see a day when there will be all cloud services, everything will be digital. I'm just curious. Do you have a timeline in mind?
TARA WINTERS: I did a session at our client conference. The EmeraldX conference that we had earlier in the year and said everything will be in the cloud by 2030. So I'm sticking with that.
ERIN DANGLER: Alvin Huang is capital markets specialist for worldwide financial services business development at Amazon Web Services. And Tara winters is head of global managed services for FIS capital markets.
That's it for today's show. Thanks for joining us. We'll see you next time. As we take a look at artificial intelligence and some of the other innovations that are evolving, the capital markets