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How Data Services Sourcing Options are Changing for Financial Institutions

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By Mark Hepsworth, CEO at Asset Control.

Financial institutions are facing a perfect storm of pressure on revenues and increasing costs driven by regulatory mandates and the need for overdue investment in infrastructure. At the same time, they are funding projects to improve their competitive differentiation and support revenue growth. Against this backdrop, many firms are adopting managed services to reduce costs, facilitate faster change and enable them to do more with less. Typically, many financial institutions’ IT teams have been either frozen or reduced.

Managed services shift the operational onus to vendors and allow internal IT to complete projects faster. As well as using vendor resources for day-to-day operations, or change projects, a vendor typically works through less complexity and bureaucracy when rolling out new projects as it doesn’t have to complete multiple sign offs with many stakeholders that are required in-house. The other benefit often stated about working with managed services is that it allows management to spend more time thinking about strategic projects as they are not caught in the minutiae of running day-to-day operations and must simply manage the relationship with the vendor.

Other managed services drivers include addressing business requirements for broader and richer data, cost-effectively addressing regulatory change, and enhancing data management infrastructure that is often overdue new investment.

Increasing data volumes alone are a major reason for financial institutions to move to the cloud and managed services. Typically, business users are demanding more data sources and greater volumes of real-time and historical data. Add to this the trend for increased usage of algorithms and machine learning applications, and data volumes are increasing exponentially. Many firms are also using new sources of alternative data, which provide opportunities to obtain additional colour around valuations or risk capabilities. The same data can provide additional input into investment decisions and this could be key in investment management processes for portfolio managers or in trading operations for banks. In short, there is more raw material to work with and this presents an opportunity for firms, but also a challenge in terms of how they capitalise on the material.

The other major driver of change is regulation. Risk management, financial reporting and valuation have always been data-intensive as they are the ultimate data aggregation functions in a firm. The demand for longer data histories, more contextual information on quality and provenance, and the need to explain specific data points as well as increased detail from portfolio level down to trade level information exacerbate the regulatory challenge.

The process organisations use to source and curate their data is also coming under ever-greater scrutiny. This means financial services firms need to have data lineage capabilities. They need to show regulators how they came to a certain price, for example, what sort of business logic was applied and what quality checks were passed.

In summary, the advance of regulation puts more demands on the process by which data is sourced, integrated, curated and prepared.

Addressing the Challenges

In dealing with this data management landscape, many organisations feel they have a ‘millstone around their neck’. There is simply too much information for firms weighed down by their own complex legacy systems to deal with efficiently and quickly. This makes it difficult to change risk and finance processes that involve bringing multiple data streams together, and equally difficult to collate multiple sources to come to a complete picture that can be used in an investment management process.

Many firms are insufficiently agile to manage this process in-house. Running systems infrastructure is costly and making changes to architecture more so. Firms are further hampered by a lack of in-house skills. In this case, specialist providers with detailed knowledge of financial data products, formats and standards can bring best practices to data sourcing, aggregation and mastering.

Given the pace of regulation and the emergence of new, encroaching fintech competitors, what should firms do? Today, we are seeing more financial services firms opting to tap into the services of outsourced or third-party solutions providers. Many smaller firms have moved wholesale to a managed services approach, while larger businesses might opt for a more phased approach, perhaps choosing to start with pricing reference data, for example, and then migrating to other areas of data management over time.

Managed services are now available that provide packaged integration with data providers, configurable mastering or aggregation, and a menu of access options ranging from user interfaces, reports in the formats and frequencies required by a firm’s applications and APIs, and ad-hoc consumption by data scientists. Transparent views on the status of data collection and preparation processes, performance against SLAs and reporting against preconfigured quality metrics can substantially improve operations and reduce cycle time.

For financial services firms, the benefits of moving to these services can be immense. When firms select a managed services provider, they effectively push the implementation risk out to the provider. If the business has done its procurement homework and found the right provider, it will also reduce the cost of change and make it more predictable. Data change is a given, as businesses frequently onboard new data sources, connect new applications and feed increasingly data intensive business processes.

Managed services work because the provider knows its own applications best and is best suited to configure the application for optimal use by the client. Moreover, any upgrades are done by the provider, ensuring the client always has the latest version and making internal upgrades a thing of the past.

The rewards for outsourcing in this area are so compelling that over coming years, we are certain to see a growing number of financial services firms opting for a managed data services approach.

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