By Ludovic Blanquet, Chief Strategy & Transformation Officer, Xceptor.
As the curtains begin to draw on 2022, financial institutions are anxiously navigating the challenges imposed by war in Ukraine, rampant inflation, and looming recessions. If it was hoped the diminishing threat of Covid would offer some respite, that hope was short-lived. However, advancements were made in other areas that suggest the light at the end of the tunnel may not be a freight train after all.
For the first time, we saw evidence that ESG is shifting from a box-ticking exercise, cloaked in aspirational language, to becoming something tangible and measurable. Bolstered by a suite of AI technologies that can analyse rich datasets, clients have been made more able to report on their ESG regulatory requirements while meeting their sustainability goals.
Global events put T+1 planning on the backburner somewhat but as we’ll explain, this will ramp back up in 2023.
Elsewhere, significant regulatory developments in the digital assets space are allowing the technology to enter the mainstream, meaning large incumbent players are beginning to adopt it at scale.
In the tax space, a similarly significant publication of regulations and guidelines emerged that cover tax reporting and capital gains taxes resulting from crypto and digital assets transactions. It would seem that both are to be subject to similar tax principles as traditional assets and investments, making life easier for financial institutions.
But now, with 2023 about to hatch, what can we expect from the coming 12 months?
T+1 will regain the momentum lost in 2022
For the trading and asset servicing industry, if 2022 was earmarked as the year for comprehensive T+1 planning, then, on reflection, we can say that it fell short. The volatility visited upon international markets as a result of the conflict in Ukraine forced firms to work around a deluge of sanctions and applied pressure to reduce trading across a range of assets. Against this complex, geopolitical and trading backdrop, few firms made meaningful progress towards finalising their plans for T+1. This will change in 2023.
As the new year progresses, the industry will begin to look at ways of mitigating the issues that could arise as a result of reduced timeframes, including cross-border difficulties and the possibility of an increase in settlement failures.
Technology will sit at the heart of this evolution with counterparties moving away from manual processes like emails and faxes and towards automated solutions that align with ever-modernising books and records.
Financial institutions will also need to factor in the seemingly inevitable convergence between T+1 and technologies that support digital assets. Likely starting in 2023, the handling of at least some volume of digital assets will become widespread and T+1 strategies must accommodate this. Which brings us to our next prediction.
Digital assets will move closer to the mainstream
During 2022, emerging frameworks and the publication of regulations and guidelines began to pull digital assets from the fringes of the financial ecosystem closer towards the centre. But then FTX collapsed. As one of the world’s largest cryptocurrency exchanges, the implosion sent shockwaves through the industry and dented consumer confidence in the resilience of digital assets.
In order to prevent another FTX and shore up customer confidence, regulators will spend much of 2023 looking at ways they can bring order to the highly fragmented digital asset landscape. This will likely involve prohibitions on the co-mingling of customer capital and demands that assets are kept in custody, isolated from the main business.
The challenge for institutions that handle digital assets will increasingly become their inherent real-time nature versus the slower trading and settlement cycles of traditional assets classes. Less time to handle means less time to get things right.
While T+1 planning develops and the handling of digital assets becomes more widespread, a new global standard for financial information is also poised to launch.
ISO 20022 to supercharge financial business transactions
Expected in March 2023, ISO 20022 is set to transform the way the Swift community exchanges payments messages, unlocking major opportunities for financial institutions.
By creating a common language for global payments, a raft of benefits is anticipated, including enhanced customer experiences, boosted operational efficiencies, and the enabling of innovative new services.
ISO 20022 is an advancement that will support a deeper, broader understanding of underlying assets that, in turn, will enrich products and services across the industry and heavily reduce exposure for business end users.
Able to share the likes of purchasing histories more easily, brands will be able to target their customers with more relevant, real-time marketing content while asset managers will be empowered to engage with their B2B clients at a much deeper level.
Automation will gather strength
2023 will see advancements in data automation that triggers a re-think by financial institutions as to how the technology can be institutionalised. There will be a shift from the traditional desktop/user dynamic towards the technology being used for more robust efficiency building at enterprise level.
Within firms across the globe, technology and operations teams will begin exploring how processes can be improved as a result of mistakes identified in workflows. This behavioural shift will mark a second coming of data automation; a new medium-touch approach that further frees business operations teams to focus on nurturing more valuable customer interactions.
Though many financial institutions have already been adopting automation, 2023 will see greater investment in the technology beyond isolated use-cases as a means of helping operations teams do more with less. As well as driving efficient growth, more integrated automation will boost productivity and deliver cost savings in an environment characterised by surging inflation, rising energy costs, labour shortages, and geo-political conflict.
Data automation platforms hold the key to success
Following Russia’s invasion of Ukraine, the scramble to meet compliance rules around the servicing of sanctioned states brought home the need for deep and broad process digitisation capabilities for many financial institutions.
Whether it’s preparing for T+1, learning to handle the real-time nature of digital assets, adapting to ISO 20022, or ramping up automation capability, the competent extraction and transformation of data while offering end-to-end automation of complex processes will be imperative.
For those financial institutions yet to empower their business operations employees with technology that allows them to make large-scale modifications while maintaining workflows, 2023 will be the year that changes.
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