The new roles of big and small technology vendors in the enterprise model of securities finance

As part of Finadium’s recent survey on securities finance technology we devoted a significant portion of the report to firms’ attitudes towards vendors. The survey revealed some important directions for both banks and brokers, and their technology vendors, especially as the sell-side moves increasingly towards the enterprise model in securities finance operations and technology.

Our respondents agreed almost universally that “many vendors provide solutions to the same problems”. This sounds like a generally good state of play for banks and other technology buyers. There are more choices available than perhaps ever before, which should lead to a healthy competitive environment in which service quality and service value are driven upwards.
However, when we took the question down to a more specific level, we found much less agreement that “vendors have solutions to most of my problems.” Firms were ambivalent and even slightly negative towards this statement. This was consistent with respondents’ contention that there is no longer a one-size-fits-all set of problems and solutions.
The upshot is that the devil is very much in the details when it comes to selecting securities finance vendor solutions. While many vendors are solving the same problems (in very different ways), the problem set has grown more complex and diverse over time. This means there are specific problems at individual firms where vendors aren’t meeting firms’ expectations. There is a very real dilemma out there for banks trying to select the appropriate vendors for their particular needs and for vendors trying to build commercially viable solutions that can be marketed to multiple customers. Vendors prefer to “build once, sell many times”, while banks are increasingly looking for very targeted point solutions.
Banks are increasing moving towards an enterprise model of operations and technology in securities finance. This is described in a number of different ways: The Cloud, SaaS, ASP, Hosted Services – pick the buzzword of the week. But the fundamental characteristic of the enterprise model is a well-integrated technical infrastructure that reduces redundancy, abstracts and centralizes core functions, and which favors smaller point solutions over large scale systems.
This leads us to how different vendors approach customer problem sets in the marketplace, which can best be described in terms of their adoption of the enterprise model themselves. Most longstanding systems and vendors – sometimes called legacy systems – exist towards the traditional end of the curve. Their systems are big, hearty, deep, full-featured and are designed in many respects to operate very much on their own. They tend to be controlling primary systems and upstream of other bank platforms. These systems tend not to play well with others and are often difficult to both implement and to enhance (and to get rid of).
The other end of the curve are systems designed to be enterprise ready. These tend to be smaller, very specific to a particular problem, and are quite happy being secondary and downstream of core systems. These systems cannot operate independently and are reliant on other bank systems to perform functions peripheral to the problem they are designed to solve. These systems tend to be more nimble and often are easier to both implement and enhance.
Unfortunately, there is no Goldilocks Zone for the bank contemplating a technology change, or trying to select the vendor system best for them. The technology buyer is faced with a number of difficult compromises: They must either implement a big, full-featured system that may be quite over-featured (and over priced) for what they need – and then invest in adapting other systems to live with and not compete with the big system. Or, they must settle for an under-featured system that solves important parts of the problem but needs to be substantially augmented by yet other systems or through internal workarounds.
At the Finadium 2016 Conference, our technology vendor panel – moderated by PWC with representatives from EquiLend, Murex, Trading Apps and Transcend Street Solutions – revealed the very different approaches to market solutions that vendors are taking to customer problems. We find no right answer for the sell-side in navigating through big and small vendors in securities finance technology, but an understanding of both internal challenges and vendor positioning is a good place to start.

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