Capital Markets trends: mid-year update

At first glance, little appears to have changed in the first half of 2017. However, while the subjects might look broadly the same, there is a growing change of emphasis in the industry with a greater sense of realism percolating to the surface. More specifically, there is an acknowledgement of the importance of, and the future benefits that can be derived from, adopting a more strategic approach to technology investments.

Capital Markets trends: mid-year update

And, while compliance, costs, competition, and capital are still the headline drivers for most new initiatives, there is some acceptance that big data and analytics are key for a successful adoption of innovations such as artificial intelligence (AI), machine learning (ML), platform-as-a-service (PaaS), fintech, regtech, and other areas. The unfortunate caveat is that many – if not most – exercises in this regard remain tactical and responsive rather than the strategic course that longer-term thinking would enable. But then so much of the pressures from above – and rewards –are still on short-term results. 

Banks themselves are more focused on their main priorities and what is needed to achieve them. These broadly fall into five categories:

  • financial results (profitability), 
  • collaboration (resource optimisation), 
  • expansion (growth), 
  • cost containment (efficiency), 
  • bad debts (balance sheet management). 

All of this is underpinned by a keener understanding of risk parameters and the ability to both better quantify the bank’s risk appetite and articulate it.

This transformation of cultures by more progressive banks is enabling an acceleration of both IT and business transformation that could deliver a sustainable and competitive edge. It includes the transformation of the workforce with more automation and a weighting of new hires towards data scientists and others who can make sense of the volumes of new information to empower better decision-making at both the highest levels and across the organisation.

We see the most exciting initiatives that are starting to make a difference at individual banks and across the industry in a few areas.

The banking IT ecosystem

Starting with the big picture, more bank executives are acknowledging that, in order to be able to harness and deliver true digital capabilities, a strategy is required that both reduces costs and enables agility. Cloud and platform-based infrastructure, which had been marginalised for many years due to security and reliability concerns, is now being openly considered and increasingly adopted.

Alongside this, the acceptance of software-as-a-service (SaaS) -based and subscription-structured relationships with vendors has grown considerably, confirming that the tipping point has now been reached where cost benefits now sufficiently outweigh previous risk concerns to build confidence. Many major investment banks are now openly embarking on cloud-based strategies. Their successes in being able to transfer costs from IT operations budgets to IT innovation are now convincing others.

A lot of this is being bundled under the fintech and regtech umbrellas. The latter certainly has significant resonance in the capital markets given their particular vulnerability to rafts of new regulations. Banks are starting to work out that the IT investments required to be compliant with the new rules can be both more strategically implemented and leveraged for wider business benefits.

AI and ML

The hype around AI has now displaced that of blockchain which had dominated the headlines and most events for the past couple of years. More importantly, there are already specific working use cases of AI and its ML cousin, delivering practical and tangible benefits across investment banks. Blockchain meanwhile remains mostly confined to pilot projects, albeit with some successes, but mostly held back by the fragmented nature of the development projects which are working in competition with each other for breakthroughs, rather than in coordination around consistent standards and objectives.

The biggest headway for AI and ML has so far been around areas requiring automation, in the back office, post-trade areas, and in regulatory compliance. These areas of the bank have seen significant increases in headcount in recent years and are where machines are now proving their worth in both complementing and displacing. There is no doubt this trend will accelerate and, in the not-too-distant-future, extend into the front office and pre-trade decision-making.

The workforce and cultures

As would be expected with an increased focus on strategic initiatives, more attention is being applied to the profile of employees and recruitment objectives. As is so often the case with banks, they are laggards rather than leaders in this regard. And they are therefore struggling to attract the top-end data scientists and algo specialists who see far more opportunities and more innovative environments for their talents at companies such as Alphabet, owner of Google, and Apple than in financial markets.

Nevertheless, banks can still be persuasive when they want to be. The bigger operators are now building a critical mass of these skills, which the rest of the industry will now have to follow. Likewise on the buy side where investment managers are following the trends set by the hedge funds and hiring more data and technical-savvy skills and deploying more analytics and automation.


Regulation comes into pretty much everything across capital markets today. There is no doubt that regulatory initiatives continue to dominate activity, both from a business model and cost perspective. In particular, with the deadline for compliance with the second markets in financial instruments directive (MiFID II) now only six months away, it is fair to say that outside the top tier banks few will be fully ready on time. Therefore the second half of this year is going to feature some aggressive catch-up initiatives in this space along with fingers tightly crossed that European regulators are not quick out of the traps in January with stiff fines and other penalties for non-compliance.

 All of this combined means the market for regtech initiatives will continue to accelerate, there will be more automation, and in particular smart automation. Banks should start embracing more strategic IT and business culture templates. This would guarantee them to be in a better place in a year or two’s time. A much better outcome for them rather than to continue on the piecemeal, reactive, and tactical approach that has been the norm for them for so long.