Dmitry Shtilerman: “IT departments in banks are not ready to respond quickly to changes”

One of the leaders of DataArt's financial practice, Dmitry Shtilerman, tells how modern IT technologies led to revolutionary changes in the global financial markets, and how the company helps customers adapt to these changes.

- What are the most powerful breakthrough technologies on the FinTech market?
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- Immediately I want to clarify. Strictly speaking, FinTech is not the only segment on which DataArt financial practice operates. The term FinTech usually refers to companies that make technological solutions for players who, in fact, are engaged in a diverse financial business.

Let's say we are doing a project for a BondWave company. This company wants to make the best product in the world for people who trade bonds or, more broadly, so-called fixed income instruments. Fixed income is the part of the capital markets in which there are the most various instruments, characterized by a large number of parameters important for a trader, for the analysis of which a rather complicated mathematics is needed. Therefore, with our help, clients are trying to find completely new ways to present information about this “universe of tools” to the user who is engaged in analytics or the development of a trading strategy - and this is a great job in the field of data visualization.

But DataArt does not only work with FinTech. So far, we have mainly worked with the segment of companies that provide financial services. This segment, in turn, is only part of the world of finance as a whole. Therefore, what I’m going to talk about next is broader than “fintek”, but already in the world of finance in general.

Quite a noticeable breakthrough that is happening now, happening right in the markets. I don’t know a good equivalent Russian term, but in English the phenomenon I’m talking about now is called “disintermediation”, “disintermediation” - the elimination of the intermediary. The whole world of capital markets has historically been built as a complex ecosystem consisting of highly specialized intermediaries, each of whom understood his own part of the chain very well, served it and lived on commissions charged to each operation passing through it. Now there are many different ways, almost without intermediaries, to reduce the suppliers of capital and its consumers. ´

In many ways, this strongly undermines traditional business models, and some shake-up is underway. I will give an example. Everyone knows the word "crowdfunding" when, for example, on a conditional Kickstarter they collect money for some fun project. From crowdfunding one step to crowdsourcing capital raising. The emerging trend in financing small startups is not to go to angel investors, but to try to gain an initial round of investment in the mass market, to let people from the street into their capital.

- That is, start with an IPO?

- This is not an IPO, these are early rounds of investments, i.e., a start-up attracting them does not become a public company, does not go to the exchange. Just instead of attracting a wealthy relative or one third-party investor, a startup can go for a specialized Kickstarter and raise capital in its project from a large number of retail investors, who in turn receive an easy opportunity to buy a stake in a non-public company.

The second example of disintermediation is from our practice and from another part of the market: the one where, on the contrary, there are already very large deals. For a couple of decades, the phenomenon of over-the-counter trading has been known. All the exchanges have been fairly effective intermediaries, removed many risks from bidders and took a reasonable commission for this. And until now, if we take the stock market, quite a lot of transactions go through the exchanges. However, the exchanges have their own natural limitations. If you are a super-big player, a fat investment bank or a pension fund, and if you urgently need to buy or sell large blocks of shares, you go to the exchange incorrectly - you will move the market a lot. Therefore, there has long been such a phenomenon as the dark pool. Simply put, this is such an over-the-counter marketplace, where people come to calmly agree to buy and sell something big and thick. These dark pools have become very fashionable in the last decade, and even regulators have begun to look closely at them.

One of our London clients, Squawker Trading, with our help, made from scratch a rather innovative platform for the dark pool, successfully developing it, and through it there is already a significant number of transactions in the European stock market. Now this platform, in one way or another, is used by almost all investment banks and major players in the asset management market in all of Norway and Northern Europe. Now Squawker is trying to create a new breakthrough, take another step forward: the traditional dark pools are usually sponsored by the dominant players, and Squawker is trying to make an independent platform with rather unique characteristics and extend this technology to other markets besides the stock market only.

- The fact that intermediaries disappear, each of which takes its own small percentile, means that money in the market in some sense becomes cheaper?

- Yes. There are people who have extra money, but there are people who need money for the development of companies. The sources of capital in the market are, in fact, ordinary people who create their savings. There are a lot of them, but none of them are an important player. Extra money of ordinary people is aggregated, for example, pension funds - and these funds, the so-called. institutional investors are becoming a very powerful force. And the whole huge, complex, very bizarre system of capital markets, in which you constantly discover new types of intermediaries for yourself - all of it is built in order to transfer money from a future retiree to the current startuper in the most efficient way. And yes, due to disintermediation in the current system, startups should get cheaper money, i.e. disintermediation reduces transaction costs and cost of capital, transaction costs and capital costs.

- Not so long ago, DataArt organized a round table in London on how traditional financial institutions are adapting to the new technological reality. And there was another good example about the disappearance of middlemen. One of our largest clients is experimenting with the block chain technology so that clearing and settlement of trades take place an order of magnitude faster than now — within 10 minutes, rather than one or three days. That is, collateral management, custodial services, centralized counterparty clearing and much more - all this may be unnecessary.

- Yes, this is a very important topic. Block chain is not even about security, it is about mutual trust. This is a way to convince people that events occurred in a certain way. From the beginning of this year, part of our clients and acquaintances in different countries from Moscow to New York began to think about how they would use the block chain in their tasks. The main problem here is that not everyone understands well what a block chain is.

As for clearing, it seems to me that traditional clearing houses will not completely leave the picture. Simply, they will transfer their registries to the block chain - and everything will be held not only on the trust of them personally, but also on the trust to the technology.

- The mentioned company was determined to be resolute!

- Well, we must understand that they are an advanced company. This is one of the first electronic trading systems in the world. And so far they continue to engage in innovation, and they are ahead of the rest. At the same time, many players in the US and Europe now have a feeling that there is a future behind the block chain, that you need not to be late to jump into this train, so all the guys in the clearing and other related areas - wherever there is information, in reliability and the credibility of which you want to convince everyone, is now invested in RnD, and moreover. The main goal of all these studies is to understand what can and should be done. This is one of the areas in which DataArt helps them.

Block chain is a vivid example of explosive technology that breaks the entire paradigm from the side of IT. There are many more trends that are coming from the business. Everything related to the situation in the global economy is not about technology, but about the fact that very significant changes are taking place in the external world, in the external business environment.

So another "explosion" is associated with events that occur in the world, in the economy, starting around 2008. Many rules of the game are changing. Some assumptions in the life of not only financial companies, but even quite ordinary companies, which were considered axioms of how business is done, become incorrect in the new conditions, they have to be discarded. For example, traditional macroeconomic economic management tools, which Milton Friedman bequeathed to central banks and which they actively used throughout the second half of the 20th century, are failing. In particular, an important feature of the modern world is that in English is called the negative interest rate environment, the policy of negative interest rate. We now live in a world where some European countries — above all, successful ones, such as Switzerland and other Denmark — are switching to a negative interest rate in order to prevent a sharp increase in the value of their currencies and, accordingly, depressive consequences for their economies. This is a very new thing for the world economy.

Having money becomes expensive. If you are a big company and you have several billion free money, you can’t just go into cash, if only because there are not enough storages and trucks in the world for such cash amounts. Usually you put extra cash on deposit in the bank and even had a small percentage from it. With a negative bet, you pay for this cache. it becomes a losing position. First, of course, the banks began to suffer, because they receive their liquidity from central banks and are forced to pay for balances on the accounts in the respective central bank. Until recently, they screened customers from these troubles, but large customers trying to keep large short-term cash positions in these banks are forced to pay for depositing their money.

It can turn all the principles used by the company on its head. For example, the rule of life was to pay the supplier later, and get the money from him quickly. In the new environment, business will start doing the opposite. This is just one example. There are other things that change due to where we all move for different macroeconomic reasons. In this regard, even traditional financial businesses, such as banks and insurers, have to adapt to this business - and there is a lot of work for IT, because you need to invent new models.

- And can you single out technological innovations?

- Another technological breakthrough, maybe not as new as the block chain, is big data and data science. It can be said that finances were ahead of the rest of the world - professional investors always in one way or another engaged in working with huge arrays of data and trying to get some interesting things out of them. Since the early 1980s, this has all been done on computers, just then it was not called big data. For example, all attempts to build trading strategies have always involved testing the developed strategy on a vast array of historical data, the so-called. backtesting

New ways to use large amounts of data in the field of finance are associated with end users - something that had previously begun to be used in retail, in supermarkets. Now it becomes fashionable and relevant in banks and in insurance. The name for this fashion trend is digitalization. The prerequisites of this trend are connected, firstly, with a sharp decrease in profitability due to the deterioration of old business models. Secondly, with the appearance on the market in the role of consumers of the Generation Y, “millennials”, which have completely different consumer habits unlike previous generations. Because of this, even such conservative industries as retail banks have to invent new things. Digitalization implies, firstly, special attention to web and mobile services, and secondly, to analysis using big data technologies of transaction history from all consumers. This analysis allows us to personalize the service, and to identify some tendencies and quickly respond to them, quickly check the product hypotheses - that Lean Startup, that is Agile-marketing, began to preach earlier.

The third important part of digitalization is BPM, business process management, business process management. You need, on the one hand, to ensure high quality of your business processes, and on the other hand to be able to change them very quickly. The business process here is not an abstract managerial word, but the technology with which you serve your consumer. That is, if you are a bank, your product is actually your business process. If you have invented a loan in some new way, then you need to optimally and effectively rebuild the entire system, the whole process, and conduct this whole economy.

Another area where we help our customers is interaction with regulators. If you take any major rating agency, it is important for them to easily pass audits related to the analytics and the ratings that they publish. BPM technologies make it easy to track how the rating preparation process took place in each specific case. If the SEC, the US Securities and Exchange Commission or another regulator are unhappy that the agency has published some information, the agency should be able to show that everything followed the stated methodology and all places were covered.

If you take all these things, it is clear that technology plays a key role there. Marc Andreessen said that software eats the world, “software is devouring the world,” that is, there are almost no processes remaining in the business of processes. Now there are more and more areas in which IT starts to play a business-forming role. Until recently, traditional retail banks did not perceive IT as a central unit. Now it is vital for you as a business to change very quickly and not to destroy what is already there. This greatly enhances the role of IT, but the relevant departments in banks are accustomed to work as before and, as a rule, are not ready to react so quickly. This is the place for DataArt - we actively get involved in large financial companies both as consultants and as performers: we are flexible, we have seen a lot, we can be quickly summoned, we quickly and without bureaucracy invent and make the finished product.

For us, major players such as banks are still a new direction, we almost never went there, because they did not need outsourcing. For decades, retail banks worked the same way, their business was covered with finished products and there was no custom development there. Now, due to the rapidly changing landscape, these customers are beginning to need the help of people like us.

- In connection with big data in finance, they still write a lot about robo advisory, about robotic investment consultants.

- I'm afraid that my colleagues involved in banking digitalization would not beat me, but it seems to me that for banks this is simply a way to earn extra money on an old customer base. And it has more to do with recommender systems - “they also buy with this product”. Mathematics is the same everywhere. In addition, it is an attempt to preserve that part of the turnover that came from commissions. If you are a traditional bank and try to pretend that you are doing for simple short people what private banks do for their customers richer, you do it with robots and more economically. In addition, the same short ones, most likely, their brokerage accounts will keep you and pay you a commission.

In conclusion, I note that all the described difficulties in the markets hit not only the banks, and attempts to eliminate the middleman - not only the middlemen. The players who serve them in this huge financial ecosystem also have to change. These service companies also have to radically re-equip, upgrade all their systems, all the infrastructure. An important type of such service companies is the so-called. data & analytics vendors, companies that sell information: market data providers, rating agencies such as Standard and Poor's and Moody's, niche players. And for DataArt, data & analytics vendors is now one of the key target segments.