Forum Institutional

Financial services are changing. Here's how

A woman looks at an electronic board showing the graph of the recent fluctuations of market indices on the floor of Brazil's B3 Stock Exchange in Sao Paulo, Brazil, April 3, 2019. REUTERS/Amanda Perobelli - RC12A2AB2490

The era of client-empowered finance is coming into full view. Image: REUTERS/Amanda Perobelli

Michael C. Bodson
President and Chief Executive Officer, The Depository Trust and Clearing Corporation (DTCC)
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Financial and Monetary Systems

This article is part of: World Economic Forum Annual Meeting
  • Disruptive technology is empowering financial services clients.
  • APIs enable the development of financial services applications that can be customized to an organization’s needs.
  • The industry needs to rally around efforts to develop effective governance in this new era.

Innovation has been a hallmark of financial services for decades, but with the emergence of transformative new technologies in recent years, the era of client-empowered finance is coming into full view. And while technologies like blockchain and cloud computing attract much of the attention, application programming interfaces, or APIs, truly represent the future of financial services across the retail, institutional and post-trade areas.

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Our industry has watched the growth of APIs primarily from a consumer viewpoint – if you’ve shopped online, made a restaurant reservation with your phone, or booked a vacation through a travel portal, you’ve used an API.

In layman’s terms, an API is a set of routines or procedures that enable applications or software to communicate with each other and allow data to flow seamlessly between them. And those key words, “data” and “systems”, mark the entry point for our industry. Already, we are seeing APIs spark change in financial markets and banking in the US, Europe, East Africa and Asia, but we can expect their use to continue accelerating, particularly in post-trade processing, in the years ahead in response to a number of drivers.

What we demand in the personalized service age of Netflix, Uber and Amazon is no different than what clients want from market infrastructures – flexible applications that can be customized to meet the unique needs of their organizations.

APIs offer this approach, enabling firms to create proprietary products and services that can be used the way they choose, whenever they want, with existing systems. Furthermore, users can add capabilities – in some cases for their own clients – without requiring tremendous investments in technology, making them a more cost-effective and efficient way to do business.

At DTCC, we’ve been actively following the evolution of client-empowered finance and are bringing this approach to post-trade processing. Last year, for instance, we created an internal API portal for our developers, and in 2020 we’re launching an external API Marketplace. Similar to the App store for your phone, our marketplace will act as a single, central location for firms to access APIs for our products and services. We’ll be rolling out APIs in waves, with the long-term goal of offering a broad set of services to the industry.

Reimagining the post-trade ecosystem as a digital platform of individual APIs will allow market infrastructures to respond to client needs more quickly, reduce the need to develop custom solutions, and resolve the constant swirl of validation and rechecking that is required under current processes. In the future, firms will be able to create and close accounts, match and settle transactions, and calculate and mark positions seamlessly, saving time, money and effort while also reducing risk.

While it’s still early days in this journey, firms will need to move fast in response to new regulatory mandates, including the Payment Services Directive 2 (PSD2) in Europe, which is designed to boost consumer protection and control of data; require secure data sharing between banks and third parties; and assist payment services and payment service providers.

PSD2, which took effect in September, includes an open API directive that would support an open banking model and has prompted initiatives to standardize API frameworks. The potential for third parties, including Amazon, to obtain information should prompt financial institutions to focus on improving their digital experiences and remain competitive.

APIs, along with cloud and distributed ledger technology (DLT), all are pieces of a higher-level toolbox of services that create tremendous agility while commoditizing post-trade infrastructure. Cloud services enable firms – which once would have had to order and wait for servers to be built, delivered and made operational – to use virtual servers to put data anywhere in the world.

DLT opens the door to creating distributed, decentralized data – in digital form – as a shared copy and workflow. Unlike some of the digital processes we use now, where trades, securities, assets or mortgages are acted upon separately, the digital transformation builds all rules, logic and activities into the asset itself.

With transformation occurring at warp speed, the industry will need to rally around efforts to develop an effective governance model to guide the development of these new ways of working.

In addition, market infrastructures will need to place an even greater emphasis on business resilience because, as clients embed post-trade services and capabilities into their own solutions, the platforms of both organizations become more deeply integrated, making it critical for the industry to have confidence that business operations will not be disrupted in the event of a market shock.

The advent of the digital platform and the use of APIs represent a dramatic shift in how the financial services industry will operate in the years ahead. While it’s impossible to predict what the future of post-trade will look like, one thing is certain – services must be available to clients when they want them, how they want them, and in a way that best meets their individual needs.

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Forum InstitutionalFinancial and Monetary SystemsStakeholder CapitalismEmerging Technologies
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