Driving Efficiency in Brokerage Operations & Technology – Interview of Mr. Jayesh Shah, MD & CEO, Prism Cybersoft
What is a key challenge area today for brokerages and technology partners?
Capital markets have experienced a revolution driven by changes and improvement in technology and increased competition. Clients now have a variety of choice. Electronic trading, including the advent of algorithmic trading has dramatically increased trading volumes and liquidity. But the cost of access and intermediation has come down drastically, forcing brokerages to cut costs. Those that have caught the technology wave have become bigger and those who have not are struggling for survival. Whole financial industry is also facing the burden of increased cost of regulatory reporting and oversight which is only going to increase given the increasing spate of terrorism and money laundering activities that are happening. Buy side consolidation is forcing sell side to look beyond execution service and provide more value added services which again comes at a cost. Since costs are continuously increasing, brokerages are looking for ways to reduce cost and many a times technology spends becomes a casualty.
Is there any option other than cutting cost?
For brokerage business, no other market is as fragmented as India. In India, there are around 3000 brokers. This fragmentation leads to low business volumes and brokerages end up chasing the same customers. This in turn places the bargaining and pricing power in the hands of customers. Lower brokerage rates, low business volumes and falling market create an environment of low brokerage earning. In such a scenario, brokerages resort to cost cutting to remain afloat. Current level of expenditure is only measured against revenues generated. However, brokerages have realized that the percentage of income is not going to increase with increase in turnover. There has to be new strategies to increase profitability. However, brokerages must also realize that there is only a limit to which costs can be cut. After that, it becomes very difficult to manage operations and customers start feeling the pinch by receiving poor service. Brokerages must look very hard on the way they are running their operation and must look for means to increase their efficiency to run their operations better and provide better service to their customers rather than cutting on levels of service.
Lot more investment is needed in innovative ideas, both from brokerages and from their technology vendors to improve this situation. Innovation will push the fixed costs down and that will help brokerages make money and this will not come at the cost of efficiency and processes.
How do you think brokerage technology will evolve in future?
There will be more efficient applications that will improve the brokerages’ operations on the back of better client insight.
If cars can be driven unattended, why can’t brokerage operations be run unattended? In any case, this (brokerage operations) area used to be very person intensive. Now the need of people is lot lesser. I foresee further automation and innovation to make this area person less. Brokerages must be presented with ‘out of the box’ solution and not a ‘black box’ solution. Solution must be such that brokerages must configure it once and then the solution should be in a position to take over the entire operations. This can only happen when solutions are intelligent, there is less customization requirement and there is increased standardization in processes.
To draw a parallel example, I would like to cite the example of firewall technology in companies. Earlier this technology by delivered by different devices and expertise put together. For example, to deliver enterprise security devices like switch, firewall, routers, modems and network were various components that were involved. Now, there is just one appliance needed which is simply plug and play.
Similarly in brokerage, one application must cater from CRM to post trade compliance. I call it ‘brokerage in a box’. It is not that innovation is not happening but it is happening in bits and pieces.
We have for example created a simple solution for brokerages that run several branches and have problems in account opening. Traditionally, these branches send the filled form along with all the documents to the head office or processing centre where the account opening team entered the data and checked all the documents. If everything was found to be in order then the account was opened. However, this approach has several problems. First, there was a lot of load with the account opening team. There was operational risk of error because of this load. Many a time accounts opening got delayed because there was lot of to and fro happening between the respective branch and account opening team. We created a solution using which branches and franchisees themselves do the data entry that get uploaded in the application used by the account opening team. All validations are built at source which means the concerned branch or franchisee sending the account knows about any data deficiency upfront and now directly takes ownership of it. This reduces the work of account opening team considerably. Very different approach is needed from here onwards and a lot of onus for this is on technology vendors.
Microsoft is setting up a data centre under the sea in a project named Natick. Their argument is that when data centres consume so much of electricity for air conditioning, can something disruptive be done to save on this cost. They also argue that since world’s 50% population lives near the shores, there will be less latency by deploying data centres off the coast than deep inside land. That time will also not be far when these data centres will be completely powered by renewable energy generated from sea itself, maybe from wind, wave, tide or currents. The project began with one person seeding the idea at Microsoft. This is classic example of disruptive innovation and this kind of approach is needed even in financial markets.
What do you think of current pace of innovation in the back office space?
Back offices have remained more or less similar in the last fifteen odd years. The only thing that changed is features. There is no quantum jump. The last major shift that happened was perhaps these applications being developed on Windows platform from a DOS based platform. Subsequent to this, nothing much has changed in back offices.
Today brokerage start ups with lesser clients are doing better than traditional brokerages because they are utilizing technology better and managing to provide better satisfaction levels to their clients. Quality is scoring better than quantity. They are also looking at profitability closely and are not just focussing on revenues.
What do you think of vendor client relationship especially in the brokerage industry?
This relationship is very symbiotic and there are several examples where both, the client and the vendors have grown together. However, some brokerages try to squeeze their vendors on price and margin front. Brokerages must realize that this partnership is like a marriage. The marriage will survive only if both the partners survive. There is not point in just one of the partners surviving. Domain expertise for technology vendors comes from brokerages and they must both innovate together.
What are the risks in dealing with multiple vendors?
There are several technical risks like failure of interfacing, non compatible technologies etc. However, the biggest risks are non technical which we don’t even factor in. Like delay due to handshaking, extensive coordination and delays in project schedule because of multiple points of dependencies.
How do you think brokerages can increase their customer base and retail participation in India?
Retail participation is currently a very big problem. In the last one and a half decades, retail customers have burnt their fingers very badly. The issue is complex and involves analysis from various fronts. For example, returns have been inconsistent, volatility has been very high, 20-30% of small listed companies have vanished, IPOs have been priced very aggressively and have provided negative returns. All this has disappointed retail investors and have driven them away from equity markets. A very concerted effort is needed to bring them back. Their trust levels in the whole system will need to be increase. It is not a brokerage problem; it is a financial services industry problem. Luckily the regulators and exchanges are doing a very good job of investor protection.
What role can technology vendors like you play in this process?
As I mentioned it is an industry problem. Technology vendors are just one cog in the whole wheel although their role is important. Vendors can certainly create applications that are closer to clients needs and map their requirements better so that financial services firms can deliver better experience to these clients.
What is the future of intermediation especially for small players like sub brokers and franchisees?
Sub brokers and franchisees are again facing the heat. About 30% of sub brokers have closed shops in the last three years primarily because their risk reward ratio is much skewed. Their earnings are far lesser as compared to the risk they are bearing. One large client default pushes them out of business. Again technology and better risk management systems have a huge role to play so that these sub brokers can survive and remain in business.
What is the future of technology vendors catering to financial markets?
Just as financial services firms have seen disruptive times; it is now time for technology vendors to see disruptive times. Ubiquitous internet and 4G services are going to create a digital revolution in India. There will be unprecedented convergence of business, media, social media, internet and devices. Businesses will see a sea change. Those technology companies who ride this wave well and help their clients in this revolution will survive and even grow bigger while those that don’t evolve will perish. The changes coming up will be as disruptive as advent of internet itself.