A Conversation with FIS on Reimagining the Playbook

It is abundantly clear that COVID-19 will have lasting impacts.

In this podcast, SIFMA president and CEO Kenneth E. Bentsen, Jr. sits down with Nasser Khodri, President of FIS Capital Markets, to discuss the evolution of operational readiness and how to rebuild for resilience as we chart a path forward.

Transcript

Edited for clarity

Ken Bentsen: I’m Ken Bentsen, President and CEO of SIFMA and I want to welcome you to The SIFMA Podcast. Today, we have the benefit of speaking with our friends and colleagues from FIS. In particular, Nasser Khodri, who is the president of capital market solutions at FIS. We’re going to be discussing findings from a recent report, the 2021 FIS Readiness Report, which we’ll talk about more.

It’s abundantly clear that COVID-19 will have lasting impacts. Markets and market operations proved quite resilient in the face of COVID-19. But as with all things, there are opportunities to learn from the experience and enhance resiliency going forward before the next crisis. While systems worked well under tremendous stress, COVID’s far-reaching impact expose vulnerabilities in existing operations and technology, and also created important opportunities for transformation. On today’s podcast, we’ll ask what matters now for operational resiliency?

As I mentioned, FIS has recently completed their latest Readiness Report, which suggests that solutions to today’s challenges have been available for some time. The only thing that has changed is the pace at which we need to get there. Firms that invest in managed services and advanced technology are in a stronger position to adapt to change, but only if they act now. It is simply not an option to wait any longer. So, with that, we’re going to get into a discussion about it today. And again, Nasser I want to welcome you for being with us today.

Let’s go right at it. We’ll start with operational threats and trends. Maybe we can level set on today’s landscape. What are the operational threats that are present today?

Nasser Khodri: Thank you, Ken. And thanks for having me here. Today, I’d say that the most pressing operational challenges are the new risks arising from remote working as you can imagine, the challenges are both logistical as well as security including the rising cyber and fraud risk.

Interestingly, in the survey that we conducted, in which you kindly mentioned, Ken, about half of the broker-dealers that responded and about a third of the buy-side firms said so. The side sell-side firms are also concerned by the impact of productivity as well as talent management. While the buy-side firms are more concerned with the technology challenges that confront them for the next 12 months. Interestingly, these challenges will resonate very well with FIS given the fact that we do run a broker-dealer business called Fox River.

In addition to that, given that working from home is likely to last longer than some might expect, with the various different models emerging, regulators are likely to ramp up scrutiny around cybersecurity and surveillance.

Also, firms are facing the challenges to keep up with the ever-evolving client expectation for digital experience and the need for more customer financial advisory services in those coming, especially in the emerging market. And this is across the board, Ken, whether it’s with the buy-side, the investment banks, as well as the broker-dealers. Obviously, the market uncertainty and volatility continue to be a challenge.

And finally, Business Continuity Planning remains a top priority for every firm. In a nutshell, in that space, any business continuity planning needs to be stronger. That’s what the pandemic taught us.

Ken: It’s interesting, and it’s great to have the survey because it backs up sort of anecdotally what I’ve learned in talking to executives among our membership, across the board, institutional, retail, sell-side, buy-side. I would note as well, something that SIFMA has been very engaged in, talking to our regulators as well our industry regulators about how will they operate, how will they supervise, how will they conduct examinations in what could be, which likely will be a hybrid world a part remote world going forward. So, these things are right on point. Shifting gears a little bit, how do you see these threats changing or evolving?

Nasser: Well, because of the operational challenges I just mentioned, firms are considering more outsourcing. The global spend is projected, according to some survey from Deloitte, to increase by $50 billion from last year and to reach close to $130 billion by the end of the year. Interestingly, a third of the brokerage respondents in our 2021 FIS Readiness Report plan to shift to more cost-effective operating model, such as managed services as well as BPaaS, which is Business Processes as a Service, to maintain or improve their competitiveness.

The private cloud is the preference for risk management and compliance. Whereas, actually, public cloud is of great demand in full trading as well as post-trade processing functions. Outside of outsourcing, there are other market trends, Ken. Let’s talk about the rise of retail trading. 20% of the equity market in 2020 was retail and 15% of the current retail investor enter the stock market in 2020. And they are younger, right. Finally, we couldn’t possibly have a conversation without mentioning ESG. And the investment that continued to thrive in this space. Investor interest for funds that read rate high on ESG factors continue to grow. That’s point number one. The size of the global ESG might hit $50 trillion by 2025. Some are mentioning $100 trillion by 2030. And that is, that will be by 2025, just to put it into context, a third of the global AUM according to some research from Bloomberg intelligence.

Ken: Those last two points are really interesting because… Well, firstly, obviously a lot of focus on retail trading around the meme stock issue. But at the same time, is it a half glass full or glass half empty. I would argue a half glass full in the sense that more people coming into the market is a good thing, particularly among younger investors. And on the ESG, while there’s certainly a lot of work to do there, work that we’re involved in, work that you are involved in, whether it’s data metrics and the like, the fact is there is clearly market demand, and it’s going to take a lot of private capital to accomplish the goals of advocates and policymakers in this area. So, I think that I would argue those are not just important trends, but in many ways, very positive trends.

What are some of the current growth inhibitors that are impacting the operational landscape in the markets?

Nasser: Ken, I mention a few that relates to the need for modern, open and cloud-enabled operating models. Firms’ number one growth priority is to increase their client base in emerging markets. Having said that, you can, you can only make inroads in new markets if you have the agility and the ability to move as the market changes. That’s point number one. And therefore, only the firms that have made investment into an open and modernized operating model are well-positioned to adapt to local needs and deliver them with speed.

Nasser: It’s also important to address the residual friction in digital ecosystem, in order to meet new growth and risk demand. Customers expect more data, in real-time and at their fingertips. Interestingly, only a third of the firms we spoke to think that their data integration capability are well equipped for the challenges ahead. So, what’s needed? What I would summarize is to this, Ken, a comprehensive data management strategy and open APIs. That’s how you make the data transferable, digestible, and therefore create an end-to-end ecosystem and eliminate the friction.

Ken: It’s interesting. A few years ago, we were looking at issues around data aggregation and did work on what clients should expect, what rights they should have. APIs were sort of a new phenomenon, but to use it you point out obviously, very much embraced across the industry now.

Nasser: Absolutely.

Ken: So, let’s move to our next topic of industry-wide initiatives for readiness and resiliency, or resilience. In some cases, maybe we can throw out the old playbooks and start from scratch. Where are the places where you think we can think big?

Nasser: A few things come to mind, Ken. I mean this point is probably close to your heart as well: modernizing the financial communication and focusing on e-delivery. In other words, paper should be an option and maybe not even an option anymore. Really the pandemic proved that e-delivery of financial communication should be the default for investors. And it’s an e-delivery screen as we speak about ESG.

We heard this expression before: data, data, data. And, data is the new oil. It is so true. The firms that are putting data management, to your point earlier on, with advanced technology at the center of their digital journey will thrive and succeed simply because with historical and predictive analytics, data gives a sense of where you are, what pitfalls to avoid, what your clients want and what the market want. Those are the main two I would think of, Ken.

Ken: Let’s talk about managed services and cloud. You mentioned this before. We’ll be talking about managed modernizing platforms, really since before the pandemic. And as you pointed out, today, it’s an imperative. Managed services and outsourcing in the cloud have really come to the forefront as part of that. And then prioritizing modernization of client-facing systems. Maybe you could talk a little bit about all those things.

Nasser: Yeah, I couldn’t agree more about this statement. I’ll start first with the why.

So, the low interest rates and the low, even zero-fee, trading models are intensifying margin pressures, Ken. In response, firms need to focus on operational efficiencies via multiple strategies, from deepening their reliance on cloud-based managed services, shifting commoditized functions to BPaaS models, as well as consolidating their IT vendor relationships, right.

For instance, we see the sell-side firms deepening their reliance on cloud-based managed services model for risk management and trading. Interestingly, almost all the sell-side firms we saw that nearly 99% of them said that they will increase their reliance on cloud over the next 12 months. Also, the sell-side firms are following through on their 2020 intention to shift to business processes as a service model. As I mentioned it for compliance management as well as middle office activities. However, we see very, if not a little appetite to shift more regulatory reporting activity to BPaaS, which is not surprising.

Speaking about modern and prioritizing and implementing advanced technologies, such as machine learning, RPA and artificial intelligence, it is imperative for any firm to embrace, like I said, open platform to compete for new clients. In order to capitalize on fast-moving investor trends such as the rising interest in digital asset trading, the growing retail investor pool as we spoke about it in emerging markets, but as well the ETF innovation. It’s equally imperative to enable digitally-driven experience that provides clients with real-time market data, streamlined trading processes, and more mobile access in order to compete. Embracing open API – by doing that, Ken, firms can meet these demands and differentiate themselves by offering their clients new tools. And finally, I’ll close with that the main reason we see firms investing in AI are to strengthen risk and compliance management. Also, AI gives firms the visibility they need to meet new risk and compliance demand while controlling their costs. Finally, firms also mentioned AI is the ability to analyze large sets of data, build new data-driven products and services for clients, as well as providing more meaningful information to their clients. At the end of the day, it’s all about actually how you improve the services and the customer, the customer experience at the end of it.

Ken: That sounds like quite a transformation. What are the regulatory considerations that we need to have front of mind?

Nasser: I love the question, Ken. We all know too well that the securities industry can never take its eyes off regulatory requirements, right. There always new ones coming up in response to market developments on top of the multitude of existing requirements broker-dealers and the buy-side firms have to comply with.

For example, there is the new proposal from FINRA to enhance its short sale reporting. This proposal has multiple components from requiring more data points and increasing the frequency of short interest reporting from the current twice a week. Also under consideration is a new rule to require members to submit to FINRA a report on a daily allocation of failed to deliver position to correspondent firms. So, many activities there.

Now, the bottom line, the way we see it, Ken, and the firms are actually responding the same way: it is critical to leverage technology, as well as embrace regtech to continue to address the regulatory requirements that are underway and coming. But most importantly, use regtech as a competitive advantage. But let’s remember, and I’m sure you will agree with that, Ken, it’s critical that the regulators, SIFMA, broker-dealers and the FinTech providers, such as FIS work together as one to address these ever-evolving regulatory requirements.

Ken: I couldn’t agree more. I’m not seeking to fault the regulators at all, because they clearly have their mandate, but as part of that mandate, they require a lot, but then, do they have the abilities themselves to take the data and utilize it the way they are, you know, the way they’re requesting it. So, I agree, I think that the whole holistic ecosystem and interdependencies are really important.

Let’s talk about the future of work. You know, perhaps this is the biggest area of transformation going on, and it will be in the human element, as you’ve talked about at the outset. The current return to office situation is quite fluid, extraordinarily fluid at the moment, although we’re starting to see people coming in, but obviously, there’s not necessarily a uniform approach. How do you see the future of work?

Nasser: With a vaccine becoming more available across the world, usually, the executives want to bring people back into the offices. However, many recognize the need for remote capabilities with different models. We heard about the hybrid, the rotating model, the two to three days in the office.

Really, what’s top of mind for most executives, is how do firms foster a strong company culture with a workforce that is completely remote or in a hybrid model? Where some are working from home? And some are working in the office? That’s one. The second one is how do firms onboard successfully new graduates and have them immerse into the company culture? And finally, how do they attract the best talent by having actually the best return from work setup?

That is why I strongly believe, Ken, that technology is only going to play a more important role in the future of work and will help address these challenges. Technology will keep us connected, engaged without having to be physically in the same meeting room. To me, that is the future of work.

Ken: I couldn’t agree more. What I hear, again, from executives, really hits on all those points. How do, what are your employees going to demand going forward? How do you train, how do you onboard and train new and younger talent and also create the ability for that talent to matriculate? How do you compete for talent? And then, you know, the other point, which you mentioned before, is how do you deal with the regulatory and compliance aspects of a hybrid and rotating workforce?

All of what we’ve been through over the last 15 or so months has been quite extraordinary and in particular, a real test to industry business continuity, something that SIFMA plays a role critical role with our members and with the industry at large, including firms like FIS. It’s constantly evolving processes, Nasser as you pointed out, we’re always trying to learn from the last event to be prepared for the next event, and making sure we have backups to our backups.

With that. I want to encourage our listeners to look at the FIS survey. To find it, please visit www.fisglobal.com. We’ll be discussing these issues and more at the annual SIFMA Operations Conference and Exhibition, taking place on October 4-7 in Miami, in person. To learn more and register please visit www.sifma.org/ops.

Nasser, again, I want to thank you for joining us and thank you for giving us a readout of the FIS survey. And again, I encourage all our listeners to go to fisglobal.com and take a look at the survey.

Nasser: Thanks for having me on, Ken.

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Kenneth E. Bentsen, Jr. is president and CEO of SIFMA, the voice of the nation’s securities industry. He is also chief executive officer of the Global Financial Markets Association (GFMA).

Nasser Khodri is President of the Capital Markets businesses at FIS. In this role, Khodri is responsible for developing and delivering the technology and services that facilitate the movement, management and growth of money and global securities – enabling investors, traders, insurers, corporations and treasury and risk managers around the world.

Related Resources

• Survey

  FIS Readiness Report

  The capital markets are facing a new level of uncertainty. There are clear paths to growth – but they'll be hard-fought. Explore this year’s findings to validate your strategy.

• Featured Event

  SIFMA Operations Conference & Exhibition

  Join us on October 4-7 in Miami to envision the future.