Can a Good Back Office Software be a Competitive Advantage for Brokerages? – Interview of Samir Jayaswal, SVP & Head of Operations, Prism Cybersoftadmin
Can a Good Back Office Software be a Competitive Advantage for Brokerages?- Interview of Samir Jayaswal, SVP & Head of Operations, Prism Cybersoft Private Limited
Software for managing back office has advanced in the past two decades. They have become intelligent, highly integrated and much more sophisticated. So much so, that our guest, Samir Jayaswal argues that a good back offices can really be a competitive advantage for brokerages. Here are some excerpts from our interview –
How has the role of back office software evolved?
Back office software applications have passed through many distinct phases. Two decades ago, it started by routing traders to correct counters in a trading ring and recording transactions on the trading floor. One and a half decade ago, the role of back-office software used to be limited to book keeping and automating manual jobs like in-warding physical shares, checking against fake and forged database, handling objections, managing and reconciling bank entries, receiving delivering shares and funds towards settlements etc.
Then NSDL and CDSL started operations and coupled with some smart changes by stock exchanges and clearing entities, the market was able to take some very rapid and bold moves towards becoming efficient. For example move to dematerialization itself was a huge success story and the Indian capital market experience has become a showcase to the world. Over time, back offices became intelligent and shortened settlement cycles and a whole new way of managing risk by handshaking of trading application and back office emerged. Now technology offering in a stage where Back-offices are enabling brokerages to manage multiple lines of businesses like Mutual Funds, IPO, Securities Lending and Borrowing etc and the level of automation is very high, enabling brokerages to free up their key resources to manage other value added assignments.
How do you see this role evolving further?
The day is not far that back offices will be so evolved that there will be very little back office at broker’s end! Brokerages are realizing that the processes they are running on huge applications at their premises with hundreds of people managing them are becoming redundant. These people could be engaged in much better areas internally. Processes themselves are improving by collective efforts of regulators, buy side/ sell side institutions and technology solution providers. Electronic Data Interchange in the form of Straight Through Processing has been enabled by process standardization and interoperability. Real handshake between these participants is happening at an unprecedented level. Banking payments have been eased by introduction of RTGS and NEFT. Our culture of being risk takers and early adopters has also paid off. The day is not far where brokerages will just dictate Service Level Agreements and outsource their entire Back-office operations to third party service providers subject to SEBI guidelines. I envisage that in future the government itself will encourage such outsourcing, given the fact that the government itself out sources some of its critical services like Passport issuance to third party agencies. I also envisage the exchanges, clearing corporations and depositories taking away some critical compliance and control roles away from the brokerages and intermediaries onto themselves. For example, exchanges could start sending the contract notes directly to end clients and depositories could start sending statement of holding and transactions to the DPs end clients. This will serve their interests better.
Brokerages will in future, become lean and thin and will only focus on core activities like Client Acquisition, Marketing & Brand Building and providing more sophisticated trading products, strategies and services to their clients.
So you are saying it is not only software vendors but the market as a whole that is advancing?
Absolutely yes and this is where opportunities are arising from. The Capital Market has seen a phase of rapid advancement and will continue to see this in future as well. Fifteen years ago, clearing houses took 7 days to process 600 Crores of settlements. Now they don’t blink at 70,000 Crores a day. Massive capacity addition has taken place and the investment is continuously on. Apart from these sell side institutions advancement mentioned earlier, government steps like maintaining details of debarred entities, validating PAN details, KRA, uniquely identifying customers first through PAN, UCC and now through aadhaar etc provides impetus to market development. This, coupled with advancement in technology like mobile applications provide for exciting times ahead. Imagine being able to meet your margin and settlement obligations by clicking few buttons on your mobile phone. It will be a paradigm shift.
How much is the role of technology vendors in the success of their clients?
I would say substantial. The client is virtually blind without adequate technology. My belief is that if the application vendor and the client are in harmony, a good back office application becomes a substantial and sustained competitive advantage. Because market moves in cycles, if a brokerage rides on a good vendor, in a market that supports, it can really shape up the brokerages’ fortune. This is subject to brokerage choosing a technology partner that is agile, adaptable to new technologies, listens to the client and understands market changes. If you specifically ask about us, we have been real partners of some of our clients who have trusted us and expanded their reach and offerings on the basis of software and services we have provide to them. The industry must believe in the adage that if your clients like you, they will talk to you but if they trust you, they will do business with you.
What advancement do you see happening on the Back office application front in future?
Back-office software will become much smarter and leaner. Its functions will also be hived off selectively to third party service providers. The role of back office software will also increasingly transform from book keeping to assisting brokerages in more value added areas like client servicing, dealing with intermediaries and helping open new lines of businesses. Also, the role of front office trading application and back offices will merge and become much fuzzier than what it is today. A lot of functions like reporting, book keeping and accounting will either be outsourced or will be shifted to cloud.
Do technology vendors compete with In-house IT teams of large brokerages? Some brokerages are known to have teams of 100+ developers developing applications for them.
The build vs buy debate is perhaps as old as the technology industry itself. No, technology vendors do not compete with brokerages in-house teams. Technology companies, especially product companies invest substantially in Intellectual Property creation. For example, our products could typically reflect 200 man years of investment in development. A typical brokerage house can also do this kind of investment but there is no long term value proposition in it. Hence, they must concentrate on broking. Product companies invest a lot on skill up-gradation, and generally are very well aware of new technologies and how and where they can be leveraged. They also score better than in-house teams in other areas like better employee engagement, better retention, better software development processes, better domain knowledge by virtue of working with multiple global institutions and overall lower costs. Brokerages will increasingly realize that it is best to buy from product vendors rather than develop in house. It is in their interest even if the initial cost is higher. Typically in such investments, The ROI initially sounds better in their favor when they go ahead and develop. But if they take a larger time frame of say three to five years, the total cost of ownership is also much higher than what they would have otherwise paid by buying from a product vendor. A typical vendor like us will also have partnerships with other technology companies like Microsoft, Oracle, VMWare, Segate, Intel, AMD, Redhat, Symantec etc which in turn enables them to understand latest technologies better.
How do you see investment of brokerages in technology going forward?
Indian brokerages need to explore and exploit technology more than what they are doing currently. This is because software application is still considered as a day to day work tool rather than a business enabler. Of late with the advent of automated trading and co-location etc, brokerages are actively seeking better technology and are starting to see technology as a competitive advantage. Some brokerages embark on a customized development strategy. Their contention is that if the entire market is using the same application, how could it be a strategic advantage for them? Such decision proves to be tough in the long run when continuous application maintenance is required. In the case of technology product vendors, these costs get shared amongst multiple clients.
What are the other areas where substantial technology investment is expected in brokerages?
Rather than newer areas, brokerages will invest much more in existing areas. Same clients are being pursued by several brokerages and only the most intelligent of them will manage to retain the client and their attention. This means a lot of investment in intelligent CRMs and client analytics.
Automated trading will see a fresh round of investment to increase trading sophistication and so will newer trading initiatives like High Frequency Trading. Regulators will themselves become more sophisticated and will continue to demand more compliance, leading to escalated investment in better compliance products and anti money laundering applications. Finally, in these uncertain times, much more investment will be diverted to business continuity planning and disaster recovery.