Innovation means many things to many people but with respect to financial services, Northern Trust is quite clear that innovation should create real value for the client or shareholder. In other words, there is no point innovating for innovation’s sake.
Too many times people think about innovation as relating to the latest technology, whereas in reality it can be much simpler than that.
“The best example outside of the financial industry is the automotive industry,” comments Pete Cherecwich (pictured), President of Corporate & Institutional Services at Northern Trust. ‘When you buy a car, you have a cup holder between the driver’s seat and the passenger’s seat. That cup holder probably costs next to nothing to make but 20 years ago it was a huge innovation because it added real value for drivers.
“For me, where companies succeed or fail is the extent they understand how clients are truly deriving the value they crave. In our industry that insight might lead to the customisation of products to create new solutions, or identifying creative ways for clients to access the information and services they need.”
One example of how Northern Trust is using innovation to enhance the client experience is a new product suite, which goes by the working title of ‘Front Office Solutions’. The product suite will extend the bank’s asset servicing offering to front office investment teams and will be geared towards making asset owners’ lives easier by providing new capabilities across investment data management and operational co-sourcing. “It will be a package of services that fundamentally changes the way our industry services asset owners and asset allocators,” says Cherecwich.
“Increasingly, many of our large sophisticated asset allocators are moving investments in-house to reduce fees and expenses but they need a different infrastructure in order to do so. They can already outsource much of their processing to us in a cost-effective way but we are taking it to the next level. If the currency of our business is data - accurate, timely, flexible and complete data - how can we provide real lift to our clients? We want to take them out of the painful game of managing their data and instead enable them to spend their time using that data to maximum effect, cultivating key insights to make investment decisions. That’s where the real value is,” says Cherecwich.
Cherecwich, in fact, hired one of his most forward-thinking clients to drive this new line of business and - in conjunction with Northern Trust’s innovation lab - they are using a pioneering human-centered design process to ensure the solution set is fit for purpose but also creates incredible digital and service experiences for these clients.
Listen to the client… then innovate
In the retail sector, companies routinely talk to customers and conduct focus groups to get feedback on what products work well.
Historically, in Cherecwich’s opinion, the financial industry has spent too long using internal staff to develop products ‘based on what they think clients want’, rather than going out and engaging them directly. Relationship teams engage clients and translate what they think they hear back to their product development teams but that translation is specific to each client and often misses more macro, thematic needs.
“Speaking to the clients directly, putting prototypes into their hands and having them react in person, real-time leads to a more interactive and iterative product development process we believe will be more successful. That’s where we are headed,” asserts Cherecwich.
Scale of data drives innovation
Innovation in the retail and commerce sector is, in many ways, paces ahead of the financial services industry. One only has to look at the way machine learning and artificial intelligence is being utilised by the likes of Amazon and Facebook to build solutions and bring them closer to their customers. In some respects it is unfair to compare the two industries. After all, Facebook has billions of users; that is a vast amount of data to have on individuals. As Cherecwich is keen to stress, the institutional financial services industry is a limited ecosystem compared to commerce.
“With access to data driven by technology changes over the past 20 years, it was obvious more value was going to come from the retail sector where that data can be mined extensively. In the financial industry, technology has only recently reached a point where it is commercially viable for us to embrace some of these developments. Now the right business cases are emerging for a sophisticated financial institution like Northern Trust to deploy select technology securely and effectively to drive innovative change in our operating model.”
That is not to suggest innovation has been threadbare in financial services - far from it. One only has to look at the incredible success that ETFs have enjoyed over the last 15 years. Financial engineers simply could not have developed these solutions without the industry having all the necessary financial plumbing in place to execute on them.
Northern Trust in particular has upped its innovation game in recent times, having announced earlier this year what it believes is the industry’s first commercial deployment of blockchain technology in the private equity market. Developed in conjunction with IBM, they say they have taken the disjointed infrastructure, legal and administrative processes supporting alternative investments and developed a new platform for managing, servicing and auditing funds throughout the investment lifecycle.
That said, there are many ways financial services can still seek inspiration from other industries. Cherecwich references a prototype Northern Trust is trialing which uses natural language processing. He makes the point that if, for example, he is watching a UK football match and wants to know something about one of the players, he can type the question into Google.
“Let’s say it’s Wayne Rooney. As soon as I’ve typed in ‘how old is Wayne’, Google will have already suggested Rooney. It’s smart enough to know how to predict your question and obtain the answer. The question is, how do you do that in financial services?
We can already do things like calculate a client’s China exposure but if you were to type in the question ‘What is my exposure to C…,’ we want to be able to predict China, present the answer and even more importantly chronicle any relevant market information. Ultimately, we will present the client with graphics and analytics on their broadest China exposure the moment they type in the question. Inspiration comes from what is possible in our everyday lives, using Google and other social platforms as examples,” says Cherecwich.
“The bottom line is we all want to be in a position to make better, faster, more informed decisions. That is our mission for our clients.”
Deploying Artificial Intelligence
Northern Trust’s systems interface with millions of transaction data points each day. With that in mind, the bank is increasingly looking to AI in areas like reconciliations. As Cherecwich confirms “We are adopting AI and machine learning such that if we have a reconciliation discrepancy and the machine discovers that ‘break’ and corrects it, it can it learn from the experience and automatically identify and correct future exceptions. This business transformation is coming into our industry sooner rather than later.”
This promises to be just the tip of the iceberg, with many financial services firms, traditional software vendors and start-ups all now focused on integrating the latest AI technology advances into their product offerings. Northern Trust says those targeted in the financial sector include:
Additionally, the growing influence of the cloud is also pushing the innovation envelope at Northern Trust. Cherecwich explains he is spending two days at the end of November with Microsoft to learn more about Office 365, its cloud-based offering. “If the world is moving to this type of platform, how do we as a bank interact increasingly effectively with our clients? How do we ensure our data is secure in that model? How can we optimise the exchange of information? It’s a whole different interaction model.
“We need to understand how that platform-based universe could plug into our financial services ecosystem to benefit our clients across the globe.”
Looking ahead as the financial services sector embraces technology innovation, one point that needs to be addressed is the willingness to fail. In the consumer industry, countless products fail. That’s why these companies are in constant feedback loops with their clients directly. For every ten products that get developed, nine will likely fall by the wayside.
“In financial services not too many products and services fail because we have traditionally developed them in a cautious, reactive manner. As an industry we have to get into a mindset of being more proactive with our product development, trying new things and ultimately being prepared to falter at times,” concludes Cherecwich. This is the new paradigm Northern Trust is advocating to its staff and its clients as it forges a bold path to the future.”
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