Is a robot going to take over your job? With the advent of AI, ML and other innovative technologies, the current capital markets workforce is on the brink of change, but how exactly will roles within financial institutions change? In a Q&A, Axel Pierron, Managing Director, Opimas, shares the highlights of his recent research report, “Workforce of the Future: Transplanting Technology Skill Sets to the Capital Markets.”
Q. Why is digital transformation accelerating now? What are the specific drivers behind this acceleration for the capital markets industry?
We are seeing the acceleration of digital transformation in the financial industry now with the shift away from regulatory change to more strategic optimising of operational efficiency. The industry made strides towards digital transformation in the years ahead of the financial crisis with wider adoption of algorithmic trading, high-frequency trading and increased electronic trading across a broader range of asset classes; however, with the financial crisis, the resources at all financial institutions shifted towards focusing on complying with new regulations, so this trend slowed.
This focus on regulation has shifted now as the regulatory agenda is slowing. Instead, firms are addressing the resulting greater cost pressures and tighter margins by improving operational efficiency. All types of market participants are feeling the cost pressure and many are looking to technology, which has also matured in the last several years, to help execute their strategic plans to address the challenges from increasing cost pressures.
Also, the technologies to support efficiency strategies are more mature now compared to a few years ago. Artificial Intelligence (AI) is more commonplace now, and firms are thinking more about big data and the use of cloud technologies, which were more difficult sells just a few years ago. With cloud computing, for instance, firms are no longer focused on how they should be using this technology, but how far they should go with that approach.
Q. In your report, you note an expected decrease in headcount of 2.4% annually. Where will most of these jobs be cut from? What are the departments/roles that will be most impacted?
Firstly, talking about reductions in headcount publicly can be a sensitive topic. That conversation mostly focuses on how technological investment will enable firms to do more with less. It is logical for firms to expect a Return on Investment (ROI), but this return may be in the form of an improved ability to create new products and thus generate more revenue, as well as reducing operational costs.
There are, however, two specific areas that will be highly impacted by digital transformation in terms of changes to headcount – asset management generally as well as the middle/back offices of all types of financial institutions, with the latter being a prime target for cost reduction strategies due to the nature of middle/back offices as cost centres.
Within many existing middle and back offices, there are multiple legacy systems in use, which are not only costly to operate but also reduce the time to market for new products. The emergence of blockchain technology has demonstrated the need to address post-trade complexities and increase automation, because there are too many processes involved that are unnecessary, repeated and don’t add any value.
The back office is the ‘low-hanging fruit’ in terms of possible headcount reduction resulting from digital transformation. It is important to note however, that investment in technology is not solely focused on the adoption of ‘newer technologies’ such as AI, but also the move away from legacy technology to other mature or well established technologies that can address some of the operational efficiencies and unnecessary complexities resulting from the use of multiple systems in some back offices. Firms recognise that there is still too much manual work in post-trade processes, which contributes to both increased operational costs and inefficiencies. By addressing this, firms could develop new services with a reduced time to market in addition to cost savings.
The other area that will be targeted for digital transformation is asset management. We have already been seeing this trend among the asset management community, which is looking to outsource more to custodians and broker dealers to further reduce operational costs and focus on what they do best. Asset managers continue to feel the pressure on margins as the active asset managers face greater competition from passive asset management vehicles. This is especially true for the European market, which has a large number of tier 2 asset managers (between €1-20bn in assets under management). These tier 2 firms have the challenge that they are often generalists like a tier 1, but lack the distribution network or brand awareness of a tier 1 firm.
By contrast, I don’t expect to see such significant headcount reduction on the traditional investment banking side, which is already a more high-touch business. Also, the sell side has already seen rapid change in previous years, where single desks reduced their teams significantly. A typical trading desk in the early 2000s might have had 700 traders at a single desk, whereas now there are only five or six people working there.
Q. Looking at hiring and recruitment trends for both new entrants to the market and existing financial professionals, what are you seeing in this space? Do existing professionals need to look at training up?
I don’t think there is a one-size-fits-all answer to this question. The importance of relationships or relationships skills will remain, and especially in the high-touch business. Professionals with strong connections in the industry will still have a major role in the future.
The question is what happens to people that are doing very low-value activities that can be addressed through automation – that is where the tension is. There are opportunities for those people to acquire skills to complement the current understanding of technological processes (e.g. understanding how data should be mastered and leveraged).
In terms of skills-building, it is also important to acknowledge that with the application of newer technologies such as AI or Machine Learning (ML), there is a need for professionals who have the capital markets knowledge and expertise to train new solutions. People who have a good track record in doing their job and understanding client wants – how to handle exceptions etc – those people are needed to train the systems and will be working to improve them.
Firms are not going to end up with operations being run by tech people; they will still need professionals with financial experience and a good understanding of the markets and real practical experience is required for this. There will still be a need for professionals with excellent track records – the industry just won’t need as many of them.
“Firms are not going to end up with operations being run by tech people; they will still need professionals with financial experience and a good understanding of the markets and real practical experience is required for this. There will still be a need for professionals with excellent track records – the industry just won’t need as many of them. “
Q. How are financial institutions recruiting younger talent to support digital transformation goals?
We already see financial institutions in partnership with universities, various internships and apprenticeship programmes. Some firms have created innovation centres to provide job opportunities and to attract young and talented people to work at the firm.
However, financial institutions are competing with technology companies when it comes to recruiting talented graduates. And obviously, that level of competition creates challenges for firms, because the level of revenue that is allocated to innovation at a large financial institution is lower than at a tech company. A new graduate with data skills will want to participate in innovative projects and these opportunities are more readily available at technology companies. This isn’t to say there isn’t innovation happening at financial firms, but the opportunities are fewer and this is also partly due to the regulatory framework, which creates impediments to technological innovation within the financial industry.
Blockchain is a good example of how financial institutions have been able to attract new talent. A key benefit of blockchain is improving post-trade operations, but it also provides an opportunity for financial institutions or fintech companies to attract talented engineers – by saying we are building the infrastructure that is going to revolutionise the market. This is an ambitious and stimulating project and thus attractive for many. Providing those types of opportunities is attractive to talented people, who want to be involved in an ambitious plan rather than just re-engineering an existing back-office process – something that might not be attractive to a young graduate.
Q. With regards to digital transformation, do you have any predictions for the future?
When I think of the financial institution of the future, I think of a firm that has much more open IT infrastructure and is open to collaboration with fintech companies and competitors. I think financial institutions working in a segregated environment actually created more complexity and cost rather than generating a competitive advantage. So, we are going to see financial firms operating in a leaner environment, leveraging soft solutions from other participants, such as cloud services.