Digital Disruption and the Future of Capital Markets

By Kenneth Lee, Head of Primary Bond Markets, Natixis Asia Pacific

Kenneth Lee, Head of Primary Bond Markets, Natixis Asia Pacific

Advances in technology and innovation have long been shaping the way in which we work. Today, in an ever-evolving marketplace and business environment, embracing theses forces is imperative to remaining not only competitive, but relevant to clients’ needs.

Due to the nature of capital markets–the regulations in place and the ever-tightening risk management culture–it can appear that ‘ground breaking’ or industry shaping developments are slower to take place than in other industries. This may be true to some extent, but it’s fair to say that we are seeing significant disruptions coming from the adoption of new technologies.

Disruption – the new ‘normal’?
In recent years, we’ve seen technology leading to a more open and transparent mode of operation. One such example in the debt capital markets is for banks to use a shared application when building the order book for a new bond issuance. Fewer than 5 years ago, the syndicate manager of each book-running bank would have kept their respective order book on their own excel file, which would then need to be reconciled line-by-line manually over the phone between all the banks involved. This process was not only laborious and time consuming but was prey to human errors. Today, we have access to a shared book through an app, which cut down many valuable hours and reduces the market risks the transaction is exposed to during the primary process.

In the latter half of last year, we saw the introduction of ‘bond-i’ by the World Bank-the world’s first public bond issuance to be created, allocated, transferred and managed through its life cycle using blockchain technology. This further demonstrated to the market how technology can be used to streamline processes for capital raising and securities trading. While this is not likely going to become the ‘norm’ quite yet, it’s an exciting development for the industry, and it certainly raises the possibility that blockchain or other technologies could be disruptive for the larger financial markets.

Looking forward, we believe technological development can also enhance regulatory oversight on capital markets globally. There are increasing opportunities for banks to use artificial intelligence (AI) to reduce costs, mitigate risks and optimize decision-making or targeting capabilities. On the front end, we’re seeing AI being used to secure customer identities, mimic bank employees, deepen digital interactions, and engage customers across different channels.

On the back end, it’s being used to aid employees, automate processes, and pre-empt problems. From a regulatory perspective, it’s likely that the supervisory arms of regulators will begin to use AI technology to monitor and process data from market participants, allowing greater oversight and assessment of market trends and risks.This has the potential to allow regulators to react more quickly to market developments.

Powerful levers
From these brief examples, it’s clear that technology and digitalization are the most powerful levers that a bank has to address on challenges driven by the operating environment, such as increasing regulatory requirements, evolving client needs and expectations, intensifying competition for talents, on-going pressure on returns, and the emergence of new offerings. Despite this, a survey by ASIFMA and PwC in March 2019 demonstrated that just 26% of financial institutions felt that the current investment in technology was enough.

At Natixis, our strategy is centered around serving our clients’ needs, and so internal agility and an ability to adapt and evolve are key to being able to respond to their needs. In this respect, our New Dimension plan (2018- 2020) was established to deepen the transformation of our business model, and our investment in digitalization is a key component of this. We are determined to differentiate ourselves by drawing on our teams’ widely recognized expertise to become a leading player and our clients' first point of reference. We aim to provide the best possible experience, and ultimately the best possible financial solutions to our clients.

E-Maps is one such example of technology that came to fruition as a result of collective knowledge pooled together to create a customer-centric solution. The product itself is a real-time pricing tool that shows the price of some 20 financial products using over 350 international equity and index underlyings. By applying this tool, clients can price different payoffs within the structured product range, in just a few clicks. It also offers a range of investment ideas in relation to current financial market news and allows clients to compare the performance of the different products presented.

Culture and mindset
The ability to provide solutions that meet customer needs ultimately requires a customer-centric mindset. Our end goal is to improve our clients’ experience by making our services simpler, more immediate and more personalized. While focusing on the development of the technology is all well and good, the new opportunities that they bring can only be realized if we have a corporate culture and mindset that supports the vision. Technology is not the solution in itself, but rather one of the means.

A recent poll conducted by the CFA Institute shows that half of the finance professionals in Asia Pacific expect their jobs to either disappear or change substantially over the next decade, with some of their works taken over by AI and other technologies. Research analysts, sales, traders are being quoted as some of the jobs that are most likely to become extinct. Yet, the number of finance professionals are anticipated to grow during this same period. India is expected to see the highest growth at 33%, followed by China at over 25%. Even the US and Hong Kong are forecasted to expand 9% and 4% respectively. Digital disruption is not a threat but it offers new opportunities for all of us. We would need to prepare and train our staff differently – and it’s not just about teaching them new skill-sets to manage more complicated tasks which AI cannot perform, but also focusing more on honing their “soft” skills rather than their “hard” skills.

Technology and digitalization look set to be one of the biggest drivers of change to come – whether that be the way we work together, or how we work with our clients. The successful banks of the future will be those that are more flexible and agile to change and innovation.

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