The fast pace of technological change in the financial services and funds industry is well-recognised. But for Andreas Hoepner, professor of operational risk, banking and finance at UCD’s Smurfit Business School, one advance towers over all of them. “The most important development in terms of technology is the Legal Entity Identifier [LEI],” he says.
It is the upshot of an initiative launched in the immediate aftermath of the financial crash. It was created by the Financial Stability Board (FSB), an international body that monitors and makes recommendations about the global financial system.
The LEI is a 20-character, alpha numeric code that enables clear and unique identification of the legal entities participating in financial transactions.
Each LEI contains information about an entity’s ownership structures. It allows visibility of not just who is who but of who owns what. This publicly available LEI data pool is like a global directory whose job is to provide transparency in the global marketplace.
“When you think about hedge funds, it is not always entirely clear what it is. The LEI enables the exact tracking of identities,” says Hoepner. Its importance was added to last year when the US added its dataset to the project. Complete LEI data is available to any interested party for free.
The second most important tech development, according to Hoepner, is the rise of digital twinning. This refers to the use of virtual simulation technology to log and record transactions in a mirror image. By using historic and current data, it can be used to do everything from optimise operations to improve security and enhance customer service.
Supermarkets have always organised regular stock takes not just to know what is on their shelves but to also check that their systems work, he points out. Up until now, banks and funds haven’t even had inventory lists, let alone a copy of the master copy of all the securities they handle.
‘Very outdated technology’
“There is a lot of work required to upgrade the sector. This is not to do with blockchain, it’s about actually having very outdated technology,” he says.
To date, much of the focus of financial technology, fintech, and its subset, regulatory technology or regtech, has been about enhanced customer service benefits, such as speedier on-boarding, and better regulatory compliance, such as meeting Know Your Customer (KYC) obligations.
The same goes for LEI. As well as offering greater transparency, which can help cut down fraud, it provides additional customer relations opportunities such as allowing people to make more informed choices, such as choosing not to invest in companies they consider unethical.
Both fintech and regtech innovations have the power to offer benefits to the funds industry, across an array of operations. But the challenge for those working in the funds industry is assessing them, particularly as they come replete with a range of buzz words and acronyms of their own.
Follow the tech
The key is to follow the tech, not the marketing, Hoepner suggests. “A lot of new entities are way better at marketing than they are with technology. In fact, it can be a struggle to find companies that actually have strong tech credentials,” he says.
On top of that is what he terms, particularly in the business-to-business sector, the “tragedy of time mismatch”.
That is, very many of the fintech and regtech companies that are out pitching to the financial services sector are backed by venture capitalists, who typically pile the pressure on for the required ‘hockey stick’-shaped growth curve.
“That might be easy to get in the B2C [business-to-consumer] space, where consumers buy all the time and buy on feeling. But in B2B they buy once a year based on due diligence, not just because they like something. The VC forces you into speed at the expense of good technology,” he cautions.
In fact, Hoepner questions whether the standard VC (venture capital) model is the right one for this sector at all. “The [fintech and regtech] start-ups need more time. It is extremely important that they get enough time to make sure what they are doing is absolutely better.” After all, in B2B, technology needs to be 300 per cent better than what is already there, he points out.
The best rule of thumb when assessing new technology is to simply check that at least half of the vendor management team pitching it is made up of tech guys, “and not just business guys trying to make a buck”, he says.
Ignore buzzwords and be sceptical of the hard sell. “Don’t always talk to people who come to you, but go out and find them instead. The best tech is negatively correlated to marketing,” he says. Its natural environment is most likely in the lab, at third level.
Take independent advice when assessing any new technology. “It’s worth paying for,” he says.
In particular, if it is B2B, and VC is involved, be extra cautious. “It is risky because they are going to be under pressure. In a B2B start-up relationship where VC is involved, their main customer is the VC, not you.”
