Traditional banks are operating many trading platforms, with multiple interfaces. To cut costs and improve efficiencies, banks must consider platform consolidation.
Low interest rates, tighter regulations and the corona crisis have created a whole new level of competition for banks. The pressure on banking executives, especially the CIO, to cut costs is also greater than ever.
A major cost factor is a wide range of different trading platforms in a bank’s IT landscape and an excessive number of interfaces linked to connected marketplaces. Consolidating trading platforms will reduce costs while offering multiple other advantages:
1. Efficient and fast implementation of regulatory requirements. A consolidated IT infrastructure can be adapted faster when regulatory requirements demand change.
2. Data duplication is avoided. The same data is used across different systems, thus a consolidated platform will have no (or significantly less) duplicated data, reducing data management overhead costs.
3. Lower integration efforts, including trade affirmation interfaces. In their effort to keep up with the current demand for digitalization, banks compete through electronic trading, using trade affirmation providers. A consolidation in the trading platform will integrate the multiple interfaces of several providers into a single internal platform.
4. There is no need for multiple developer teams with specific skills. Once one trading platform for the entire trade lifecycle is in place, skills are subject to scaling effects which increase productivity, resulting in increased trading volumes.
5. Stronger relationship with the vendor. Having just one trading platform makes the bank a bigger customer of the platform provider. This can result in the scaling of license costs as well as a better bargaining position towards the vendor. Furthermore, scaling effects are achieved in terms of more deals closed, higher traded volume, a wider product range and a closer connection to market leaders.
6. Only one type of hardware is needed. Maintenance efforts are reduced through less hardware in place and the removal of old mappings in the old systems. This ‘clean-up’ thins out the IT landscape, making room for modernization.
In addition, the complex trade lifecycle will gain its full potential once it runs through a centralized system. Many trading tools are automated through interfaces to the main system of a bank’s trading department. The main system functions as a centralized hub for the front, middle and back office of the whole bank. The front office - the most visible part to the public in the trade lifecycle - takes orders from traders and algorithms, which are then processed into the daily P&L. The traders, the controlling department and the compliance office have full transparency on the risk exposure, while the middle office provides data on all possible risk control factors. This data from the front and middle office can now be processed, settled and reported efficiently in the back office part of the system. A holistic IT approach through the whole trade lifecycle can only be fully exploited once multiple trading platforms are consolidated into one centralized system.
Finally, a centralized system provides the foundation for digitalization as well as for new technologies and innovative strategies in trading. This is no longer a nice-to-have but a must-have to keep up with the competition.
While platform consolidation introduces many necessary advantages, it also brings two key challenges. Firstly, there is a strong dependency towards the vendor. As previously explained, with a consolidated platform, the bank becomes a bigger customer of the vendor, giving both parties an increased bargaining power. Consequently, negotiations and agreements need to be conducted accordingly, to benefit both sides. Secondly, the delivery of such a project presents a challenging business case. We will examine this highly complex topic in the subsequent blogs in this series.
Capco has deep expertise in helping clients with platform consolidation, facilitating the move from multiple legacy systems to a centralized, future-proof trading platform. Contact us to find out more about how Capco can support you on your path to centralized trading.
Andreas Pfeil, Partner
M +49 172 165 3932