A look at the market forces at work, the route to outsourcing, and the business case for Gluon Consulting in fintech.
From the onset of the Great Recession in December 2007, the financial services industry has faced a series of unprecedented challenges in the way the markets are structured and function, which have affected its ability to sustain the profitability of their traditional value offering and business models.
From large investment banks to small asset managers, financial organisations have born the proverbial hit on both flanks. On one, regulatory changes in terms of governance, risk compliance and reporting, brought forward in response to heightened systemic risk and global economic uncertainty, left them with a broader and heavier array of compliance activities to execute, which translated into higher operational costs. This, while increased capital buffer requirements and mounting competition in harder to decipher markets, restricted their capacity to invest in the necessary tools to steer through change.
On the other, innovation in certain segments of the financial ecosystem – market discovery and brokerage, electronic banking, crowdfunding and peer and micro-lending to mention a few – have created valid alternatives to the traditional retail banking and investment management models – fintech.
Established players, once abundantly profitable by established methods, are now compelled to adapt not only as a means to thrive in scarcity, but as a way to discover and leverage new and hidden opportunities and drive them to their benefit. As an example, innovation in the way financial organisations reach out and relate to customers – with online banking platforms first, more recently via mobile apps and social networks – has already brought about the expected benefits, and will continue to do so in the future.
It is now widely believed that the next wave of innovation in financial organisations is an inward-looking one, focused on minimising costs and maximising efficiency by re-engineering key internal processes and systems.
In the pre-crisis years, rolling profits and a misplaced “mind your own garden” approach would often justify keeping core functions – risk, trade capture and execution, order management, reporting, etc. – segregated by desk, asset class, reporting line or all of the above, which would invariably lead to duplicate and often out of tune machinery. Risk aversion and the availability of large pools of internal IT resources led these organisations to see integration of third-party vendors as a necessary evil and only allow a pantheon of big-tag vendors into their core processes and systems.
Fast forward to today and the dramatic changes in the profitability-cost balances are pushing much of the industry towards a “do more with less” paradigm, where out-of-the-box thinking is no longer a luxury, but a necessity, and cutting-edge software technology can reclaim centre stage as a key enabler.
In what is a classical expression of the crisis-opportunity dualism, even the most conservative IT teams are now open to the notion that externalised processes and IT can be a source of real competitive advantage, and that radical operational improvements and cost savings are just as likely – if not more likely – to come from smaller, specialised technology houses, as they are from the larger names.
From crisis of the current banking and capital management models, to opportunity: for almost a decade, many of the world’s financial centres – chiefly London, New York and San Francisco – have been teeming with new businesses ready to bring their voice in the financial technologies space, often as antagonists to the recognised players, but just as often as game-changing solution providers to the same organisations.
Compared to traditional start-ups, many of these businesses, aptly named fintech’s, are driven by the experience, ingenuity and reputation of former senior investment banking professionals. Relatively mature from the onset, both in form and substance, they are generally well placed to understand their target markets, the problem space they sit in and what blend of vision, creativity and solid technology can best deliver value in that space.
If financial institutions are now more open to entrust smaller, profoundly innovative businesses with their core processes and IT systems, an obvious question is: once the well-deserved success knocks at the door, projects are signed off and requirements crystallise, are fintech’s capable of scaling their development operations fast enough to meet their Clients’ demands?
Equally, for product-based fintech’s working with complex technology and an aggressive time to market: are they able to fulfil their goals in terms of product quality and functionality within the expected schedules and without hurting their financial position by over-hiring or using expensive consultancy services?
Besides the fintech arena, hundreds of existing small and medium-sized software houses that participate in the digital finance ecosystem face a similar dilemma: fast changing markets and intensifying competition demand continuous improvements of their value offering, which requires high-quality software engineering, yet this needs to be done faster and on tightening budgets.
A fourth category is that of smaller-scale financial institutions: non-institutional hedge funds, independent portfolio managers and trading houses are probably the organisations worst hit by the dramatic changes in market dynamics: unable to commit to a long-term IT strategy unlike larger firms and investment banks, they are often forced to stop or delay investment in mission-critical systems that have the potential to improve their ability to navigate the markets, analyse their trading opportunities and risk, or manage their customers more effectively. While it is debatable whether the problem lies with lack of technology, smarter operations via smarter technology certainly are part of the solution.
The scenarios above all share a common element: the need to produce more and improve the organisation’s bottom line or success prospects, and do so with less resources, the resources being time, money, and people. This is clearly not a new equation and has been solved successfully in numerous sectors by outsourcing certain IT tasks to locations where cost of development is significantly lower and delivery can be maintained at an acceptable quality.
In reality, for most development teams involved in delivering software solutions for the financial services, outsourcing to third-party consulting firms based in low-cost destinations has long been a disregarded option. This is not surprising when one considers that the products and services on hand typically require:
- strong industry-specific knowledge on themes such as parallel and distributed computing, low latency and high scalability, computational efficiency, transactional integrity in process and data flows, to name a few;
- uncompromising attention to quality and detail, which requires all team members – local and remote – to align well in terms of engineering processes and standards;
- an ability to rapidly understand and navigate large, complex software architectures, often consisting of dozens of interacting systems and components;
- a majority of members to have at least some domain knowledge on the type of financial processes and products the system is addressing.
While software engineering talent exists in every industry and location, the requirements above cannot be easily found outside the financial services industry and certain sectors where mission-critical systems (automation, digital communications) or advanced performance optimisation (videogames) are commonplace. The current trend towards commoditised software architectures, such as cloud service hosting or accelerated web and mobile development tools, is also making the new generation of software professionals less familiar with the low-level programming techniques used to craft the bespoke, high-performance applications financial organisations and large enterprises require.
If not everybody is born a financial technology professional, it is also true that, where there is sufficient talent and skills, training and mentoring by financial technology experts can effectively bridge the knowledge gap and help create a platform where fresh as well as seasoned professionals are capable of delivering solutions to the financial technologies industry, to a quality very similar to that found in the City, Wall Street or San Francisco, while holding on to the cost benefits of outsourcing.
Gluon was born with a mission to acquire, train and enable a selected number of talented local developers to provide high-quality software engineering and consulting services to the world’s most demanding and sophisticated clientele – financial technologies companies, small-to-medium financial institutions and large enterprises located in the world’s primary business hubs (London, New York, Singapore, Tokyo, Sydney, etc.) – and do so while embracing every client’s budget and time-to-market constraints.
The choice of the Philippines for Gluon’s main development offices is far from casual. The Philippines today are one of the world’s fastest growing economies and one of the most resilient in the face of the current global crisis. Having cemented their status as a top destination for Business Process Outsourcing functions, they remain host to a vast pool of technology talent who is thirsty for bigger and better things. This has, in recent years, driven foreign multinationals and investors to using Filipino talent to grow the higher-value Knowledge Process Outsourcing (KPO) industry areas, with services ranging from software development, data analytics, creative media and animation, and more.
Last but not least, Davao City is one of the best success stories in the Philippines and the South East Asia: a large, progressive, safe and inexpensive socio-economic hub that is the perfect backdrop for Gluon’s first team of home-grown financial technology experts.
Vanni Torelli is the CEO of Gluon Consulting and a software practitioner with 20 years of experience building enterprise applications. He spent the past 10 years specialising in high-performance, distributed, scalable platforms that deliver business value to the financial services industry.