Listen: Trade expenses are cutting into bank profits by 20%

Trade expenses can reduce profits by 20%, with brokerage-related fees being a top-three business expense for many financial institutions, but automation could be the solution. Daniel Carpenter, commercial lead for intelligent automation platform Meritsoft, discusses post-trade automations in this episode of “The Buzz” podcast. “There's been an underinvestment in the backend side of things and operational side of things,” Carpenter tells Bank Automation News . “That's where they need to improve these processes to automate it.” Meritsoft specializes in post-trade process automation, offering an intelligent automated platform for brokerage, clearing and exchange, fees, tax, regulatory and claims solutions. The company surveyed 451 bank and brokerage executives from tier 1 and tier 2 banks and inter-dealer firms, with 88% of respondents reporting trade expenses as a top-three annual cost. Eighty percent of those surveyed said trade costs in 2020 were between $250 million and $1 billion. While some of the expenses have been constant, respondents said they’ve been exacerbated by the volatility of Brexit, COVID-19, and the uptick of mergers and acquisitions in the last 18 months, Carpenter says. Tier 1 and 2 banks are global systemically important banks, according to Meritsoft. Tier 1 banks include $3.7 trillion JP Morgan, $1.39 trillion Goldman Sachs and $1.4 trillion Morgan Stanley, while examples of tier 2 banks include $1.5 trillion Deutsche Bank, $1.8 trillion Barclays and $2.9 trillion BNP Paribas, Meritsoft said. The underlying technology issues for trading are complex as the systems deal with multiple countries, regulations, currencies, asset classes, and high volumes and flows, Carpenter tells BAN. Digitalizing the data around that would be a start, he adds. “A lot of people haven't digitized enough data,” Carpenter says. “When we speak to houses, it isn't being digitized, it's still in PDFs, it's still stored in segregated databases, Excel still plays a prominent part, and so forth.” In today’s podcast, Carpenter discusses trading challenges, and the role automation, artificial intelligence and machine learning can play in reducing trading expenses. Subscribe to The Buzz Podcast on iTunes , Spotify , Google podcast , or download the episode .

The following is a transcript generated by AI technology that has been lightly edited but still contains errors. Loraine Lawson Good day and welcome to The Buzz, a Bank Automation News podcast. I’m Deputy Editor Loraine Lawson. I recently spoke with Daniel Carpenter, Commercial Lead for Meritsoft, which is a Cognizant company. Merisoft specializes in a the field of post-trade process automation and recently conducted a survey of 451 executives at tier 1 and tier 2 banks and inter-dealer brokers in the US, Canada, the UK, France, Italy and Spain. We discussed the report’s findings, starting with the fact that trade expenses have reduced profits by 20 percent. THe report also notes that brokerage-related fees are a top-three business expenses for almost every participating organization. I asked Mr. Carpenter what's happening to create this loss? Daniel Carpenter A. they've always had the expenses. And what you've seen is a lot of volatility in the last 18 months, whether that's being driven by you know, things like Brexit, or by COVID, or by new regulations, well, maybe there's a whole world of why, you know, there's been a huge peak in volumes. And that's been well documented, as well, as there's articles out there around that the increase in volume and flow, we're getting a global market. So people, big houses now going more global, and therefore, their flows are getting more larger for the bigger houses and more complicated. So they've got the flow issue going on, as well. There's mergers and acquisitions. Which means that again, there's more flow going on that. I mean, if you look at the current news around China, and bonds and the way that's impacting the market, that's having an impact, because as soon as as a movement of something that's not expected, obviously, there's a huge spike in volume. So what's happening with the houses, is they're trading, by nature, they're incurring a fee, or a commission or a bill or brokerage. And they have to calculate that and someone's going to invoice them and then charge them for it. So volumes are up, driven by all those conditions I talked about. And then on the other side of the fence, they've now to got the handle on volume the bills and invoices against it to pay them. More trades equals more commissioning which means more brokerage sort of philosophy. So that's what's happening behind that. At the same time, obviously, there's a lot of text being going on, correct. You have your, your area of expertise, as they say, this is looking at the, you know, what are they doing to, to sort of handle this flow, because before it was seen a cost of doing business, but getting back to our analysis, then if some people it's impacting the profitability by up to 20%. Going back to the figure we thought we were talking about, they're spending $750 million a year, that's a lot of money that's been lost in hitting profits, is 20%. So you've got to look at that and say, Well, okay, how do we improve our profitability? How do we reduce our costs? And when we think about technology, are we leveraging technology to the best advantage and in this particular space, because so much money has been focused on regulation, and control and compliance. And their area of business, there's been an under investment in the backend side of things and saying, okay, operational side of things, how are we going to invest? What should we be doing? And that's where they need to improve these processes to automate it. And that's why we were handling from a sort of tech angle as well as just a sort of financial angle, what can people do to improve? Loraine Lawson So before you get into that comes to my next question, before you get into what, what they can do to improve? Can you talk a little bit about what is going on there that they are not doing right now? What are the sort of technology challenges? That why does this problem exists from a technology standpoint? Daniel Carpenter So I think, again, we're dealing with a pretty complex area. So we're dealing with multiple countries and rules, we're dealing with multiple currencies, we're dealing with multiple asset classes. And we'll be using some pretty high volumes and flows. And so if you add all those together and say, Well, you know, how do we handle that? A lot of people haven't digitized enough data. So the first thing you got to think about is I've got to start tracking this data electronically. The trade data they probably already have, that has to be true. They are trading electronically. But what they got to think about is the data that they're linked to the trade data. So if you and I come to a contractual arrangement, we're going to say you're gonna pay X dollars, x cents per share, etc. I've got to digitize that data so I can apply when a trade comes in and I can apply the right rate card against it so that a lot of data, When we speak to houses isn't being digitized, it's still in PDFs, it's still stored in segregatated databases, Excel still plays a prominent part, and so forth. So you've got the old age problem, you know, more digitized data, whether it's structured or unstructured; it's certainly not centralized. So when you're talking big houses, you start thinking about, well, we're running this as a business unit in Europe or America. And then you can add a lot of complexity that causes multiple - there's Europe plus UK, now, then you say, each country, and then within that you've got different asset classes. So actually, the complexity of the data that needs to be stored is, is quite a lot of a data items and attributes need to be digitized. So that's where they're not helping, and that's where they need to address it as much as catching it and calculating. I'll pause there. Loraine Lawson Yes, a data specialist wants to me that, unbeknownst to technologists, Excel is the largest database most popular database. Which leads to a lot of silo problems in , because it's not actually a database. But so the report has specific stats that show how little automation banks have actually put in place. All across our respondents, 50% said they have very little on automation and only 10% say processes are heavily automated, which is still shocking. How to automation help, and what should banks be automating here? Daniel Carpenter Wow. Okay. So I think we'll start at the end of the journey, where do I want to be, and then we can work backwards.How do I get there. So I think where we want to be I would like to have real-time analysis and analytical capabilities out of my transactional data, so that I can analyze where I'm spending money and with whom, whether I can get to a better rate between, you know, Counterparty one versus Counterparty two, so that I can accrue the right amount of fees if I'm the the CFO. So I can improve my client servicing so they can see what they're going to be paying. So I can reduce the lead times down for reconciliation and payment down from being several months past several weeks past month end, or several months past a month end, frankly, down to a sort of, you know, within a day of the month, and whenever the invoice comes in, that's where I want to be. And I want to do that with as little cost as much make it frictionless as a process. So that's, that's the Holy Grail. So do that you got to work back into what I've already got the trade data so, I'm doing a trading I'm cashing in on my trading platforms, I go back to the point I was talking about there as well, where's my digitized rate card, so I can actually say which rate card is that should be being applied for when the invoice comes in, I can handle it. I'll come on to that in a second. The next thing we have to think about is that a lot of contracts are with global entities. So if I'm Company A as a broker, I'll be dealing with maybe 500 different counterparties in different markets provide different asset class access, and so forth. So that's 500 different rate cards that I've got to digitize. And within that, you can almost guarantee that I will have one Counterparty whose parent company actually owns 10 of my counterparties. So I've got that hierarchical relationship I've got to understand to say, well, the group name is x. And they want to get discounts across their subcategories of if you'd like counterparties, underneath that sort of get up 10 or 15, or whatever it may be. And that's not uncommon. So you've got to digitize that hierarchical arrangement, as well as the rate cards being pulled in, as well as the trades coming in. Once you've got that you can start that way, we can now start having a journey in the race to pull that together. And that's that is not easy. So that's where you know, people like Cognizant and are coming into the technology, but also the resources, the ability to sort of do this process. So then step four, and say find now quality and what I want to do on a daily basis is reconcile so what I'm going to do is calculate it and create this dummy invoices says Loraine is submitted, you know, 50 trades, and this is how much we're expecting her to bill at the end of the month. And so I accrue that on a daily basis so I can track my financials proper. I won't get into there's a lot more complexity behind some of these trades, because some of the trades pricing is not, it's not just as simple as that's the price that's the trade, the price could be in five weeks time it changes and comes back again and has retrospective impact. So there's a lot of complexity around pricing. But once I've done that, let's just assume we get to the month end then there's a case of Loraine is one of my 500 counterparties that's going to send an invoice to me. And each of those invoices is going to be a different format, pretty likely. So what I want to be able to do is again, take and template each of the invoice and say well, I'm Loraine in search and her invoice in this format. And she's going to send it as a CSV or XLS, or a PDF. And I want to digitize that. So when it comes in, I can make it frictionless. I can reconcile against what I'm expecting. So I'm now getting to the reconciliation process. It's no surprise, if I speak to houses that they actually don't reconcile on an accurate basis, what they will do is make an assumption, they will say the invoice Loraine this month is is 10% within tolerance of last month, and therefore, I will pay that bill, which obviously, when you're talking about volatility of markets is a dangerous assumption to make because this, this month's win couldn't get much greater. So anyway, there's, if you get to that point, then you've done the reconciliation, you've done your accounting, then you can get into the analytics and start saying, well, is Loraine giving me a good deal? Are we using the right rate card? Do we need to renegotiate our contract? Should I be trading somewhere else? So that's sort of the journey that people are on. But a lot of analytics can't happen because the houses don't have digitized data. They don't have it centralized, they don't have baseline currency stuff. So you've got to go through many steps to get to the sort of the Holy Grail. But that's where we focuson. What you're seeing in these statistics and percentages, as part of the report is, there's a little bit of automation, some people spend a little bit of money here and there, some people have done some outsourcing. But in reality, it's the majority of people are seeing this as an area they need to focus on to reduce costs, to focus on cost mitigation. Loraine Lawson So it sounds like a lot of this is a data problem. Daniel Carpenter Again, there's there's different elements. So yes, you've got a huge data, you're absolutely right, there is a data problem, whether it's centralization, or cleaning, or whatever you want to call it. There's also you know, by adding in workflow and STP, and all the other good stuff, then we can look at the headcount side of things, minimize headcount, because you automate the reconciliation, you reduce your headcount in effect. So you can think about it as a not only a sort of a data issue, it's a headcount savings issue. And then by nature, you reduce your taxes and you get your payments sorted out. On the back of it, there's a regulatory and oversight compliance angle that people will think about as well to make sure they're complying. But a lot of these things are commodities, you know, if I, if you move from Bank A to bank, B, Loraine, what you're gonna find is actually the process is pretty much the same way you get the systems will be different, the workarounds will be different, but the actual way I do it have to do is similar. So as it's a commodity, many houses went bespoke, in house development to work around. You know, what, why would you go vendor? Why aren't you looking at the outsourcing side of things and thinking, well, there's people who are doing the same process for me, I can go and do it and leverage it to get the benefit of that investment in technology, and architecture and cloud investment, or going down the AI route or going down ML route. There's a whole load of things that we can do that if you're doing it as one house, you don't get the benefit, or maybe the return on investment, whereas the vendor, with multiple clients, obviously will provide that return on investment for everybody. Loraine Lawson Is there an element of fearful about regulatory compliance here today? Daniel Carpenter Absolutely. No no, I mean, the banking sector is getting more and more regulated. And there's more and more reviews going on. So you know, if you are as an example as CSDR loan, where if you settle late, then you will get a penalty charged to you by by by a CSD effectively, they will charge you that penalty automatically. And the reason a lot of people get late is their trading data is maybe incorrect, they may have missed something, so it's sort of associated so there's there's two, there's transparency, there's loads of regulations that are trying to drive people for better practice. And yes, you know, brokerage fees and commissions, you know, trade expense is definitely impacted by that. It's not just a cost thing or revenue thing. Loraine Lawson I also wondered if the regulatory if they may have regulatory fears about using an outside source? Is that an issue that you've had to deal with in? Daniel Carpenter It's not? I mean, in terms of this being? I guess your question is, you know, as a bank, would I outsource or whether let someone else do it for me or use someone else's software because I'm heavily regulated? The answer's no, they, they would absolutely it's well, within, it's growing there's no doubt that the first step was always going to be SaaS, you know, in providing as a SaaS based service, that's fine. Now, there are people doing that now we provide SaaS-based and then there's the whole full blown outsourcing where I'm now not just doing the tech, I want to actually do the day to day operations. I'll provide the management and the oversight but I want the analytics and the capability and we deliver on that front. So that's that's definitely acceptable. There's no there's no issue around that for people being down that route. The biggest problem that people is they're the cost entry, I mean, 41% of them are sort of saying that they what are the cost barriers to doing it. And this is where we need the front, the front office people to step in, because everything I've talked about is a tech and an ops problem, really, but actually, the beneficiary is the company in the front office. So if the front office will come in and say there is a problem, it's our second biggest cost you're going to improve my profitability, and I will get much better granularity and can renegotiate contracts, etc, then, they're the ones who will help drive this forward, rather than saying, well, it's an Ops/IT problem, it becomes a, an issue that can be addressed by everybody, and everyone will benefit from it. Loraine Lawson Why aren't they having that conversation do you think? Daniel Carpenter I think they all now, I think they all know, I think, you know, it's everyone was very focused on other things, for obvious reasons over the last several years, and in the last year, COVID, overseas hit a lot of people, and we're working from home and everything else. So it's not been a priority. And I think prior to that, you know, it was the business was good. It was always an area of well, you know, that's the cost of doing business. Obviously, when challenged, change, volumes go up, volumnes go down, then volatility people look at How can we improve our processes? Where can we make savings or improvements? How can we prove our bottom line, and that's why they are the front office are definitely more active and proactive when we speak to them and get to the COOs, the CFOs, they're the sort of people are saying, well, this can make a big difference. It's not, you know, it's a project and it's something, that's got to be done. And it's going to take a while, but actually, the dollar figure that's going to be impacted by this is quite substantial. Loraine Lawson You mentioned AI/ML - all those artificial intelligence technologies -- how do they fit into this? What role do they play in addressing this problem? Daniel Carpenter So I think, again, it's very precise, if you talk about DLT (Distributed Ledger Technology), as an example, then the issue around that is potentially you've got to get everything lined up first. So we're talking about the data problems and digitization problems, you're not gonna be able to do DLT until you sorted out the upstream, the digitization and data centralization. So that's one I would sort of pick fairly quickly. I think when it comes to ML and AI side of things. And from our perspective, we, as a group, you know, again, Cognizant is very big into AI and cloud. But I think, from our perspective, when we look at it, you can start doing trend analysis, if you start putting items into a system and centralizing it you can start providing, if you like, next level of analytics behind it, what are the trends going to be on Monday? If we're trading in eggs, can I see my trading volumes are going up, so therefore, I should move my flow on a Friday to a different market, you can start using the AI capabilities to actually make informed decisions or automate informed decision you don't even need to wait the system can do for you and say, okay, fine, what we're gonna do is look at our fees and expenses as part of the whole picture, and start making some informed decisions about it. And if you invoicing, you know, we can start seeing when the invoice is gonna come, rules nobody more money in the bank on the 31st, because you get a big invoice from customer x. Yeah, as opposed to everyone else, we can move things around. So it's, it's taking it that that way forward. But it's a journey. I'm not saying today, people can start saying let's do ML and AI, I think you can see that when I'm saying what report is highlighted, the foundations need to be built properly. Loraine Lawson And yet, there were like, 12% I think your survey found 12, 13% something around it in a day, probably are at that point. Daniel Carpenter Absolutely. And there will be houses who were doing it and looking at things. And and absolutely, you know, that's great. You know, it's good to see that people are doing it, and we're on the right trend. And we're seeing that other people are doing it. But it's a minority. And I think the other thing I would think of is they're doing it in silos. So it's not so hard to apply AI and ML. If you're one country, one asset class, I'm not saying those houses are the more you the bigger you are the more data you have disparate data sets everywhere around the world. That's that's where it becomes harder and harder. No doubt. You know, it is I wanted to find out what people's thoughts and trends were. Loraine Lawson So how many years out do you think we are at Holy Grail? Daniel Carpenter Well, I think in terms of the pre a pre AI ML bed, I think that's there today for those who want to, in terms of us delivering a centralized data solution, multi asset class, invoice automation, reducing friction, improving cash flow, that technology is there today. Outsourcing is there today. SaaSes are there today. So that the foundations it's the banks have to be willing and want to do it as a project, and it's got to get the priority. And as I said, the cost of entry has been one of those issues for people. And it's got to get the response give us the priority. You can see that from there. They want to do things in this area. It's the decision makers and the executive got to say fine We recognize that now that it was not just about this getting reg button that it's actually important we invest in some of this, which will make a substantial financial difference. Loraine Lawson You’ve been listening to the Buzz, a Bank Automation News podcast. Thank you for your time and be sure to visit us at BankAutomationNews.com for more automation news. You can also follow us on Twitter and LinkedIn. Please don’t hesitate to rate this podcast on your podcast platform of choice.

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Brokerage fees are top business expenses for 88% of FIs

Open Lending logs 138% YoY jump in certified loans, increased refi penetration

Deals and Dollars: Socure pulls in $450M, catapults valuation to $4.5B

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