How to adopt new technologies without betting the bank on the wrong startup? Broadridge’s global head of strategy Michael Tae says the New York-based fintech behemoth has the solution.
As hundreds of industry leaders, government officials and pioneering startups from across the globe gathered for Hong Kong FinTech Week in early November, the Hong Kong Monetary Authority was eager to show that regulators in Asia’s leading global financial center are on top of their game when it comes to any new and unfamiliar risks arising from the application of artificial intelligence in the city’s banking sector.
HKMA Chief Executive Eddie Yue revealed in his keynote speech that almost 90 percent of Hong Kong’s retail banks have already adopted or plan to adopt AI software, venturing into uncharted waters in terms of systemic risks, cybersecurity and regulatory oversight. A week earlier, the HKMA published high-level guidance notes on the application of AI, a move that was both a preemptive regulatory strike as well as a statement to startups and investors of Hong Kong’s ambitions in the fintech firmament.
For their part, fintech players, old and new, are keenly watching the developments – and prominent among the “grownups” is New York-based Broadridge, which began as the brokerage services division of ADP, became independent in 2007 and that now generates more than US$4 billion a year in revenue by providing advanced technology and operations, communications, data and analytics solutions for the financial services industry and other businesses.
“Broadridge sees a couple of trends affecting the industry,” says Michael Tae, the group’s global head of corporate strategy. “First, there are fee pressures coupled with changing client preferences. Second, there are operational demands for improved execution and reducing costs. And lastly, there are regulatory changes impacting financial institutions.” And across the world, he says, all of these factors have been continuously squeezing financial services companies ever since the global markets collapse a decade ago.
Besides his extensive experience working with financial services entities at McKinsey & Co and Merrill Lynch, Tae has a strong regulatory mindset. Not surprising, given that he was a senior policy adviser to the US Treasury during the global financial meltdown. Broadridge sees great opportunities for technology to solve procedural inefficiencies within financial institutions. Since his time working for the government, regulatory control of financial markets has rightly gone into overdrive, resulting in increased compliance – and the accompanying higher cost of compliance – by all players.
“There is only so much opportunity firms can find from cost-cutting. We believe the real answer, then, is using technology to improve operational efficiencies, while also helping improve the customer experience and identify new revenue opportunities.”
For now, the NYSE-listed company is focused on what it calls the ABCDs of innovation: AI, blockchain, cloud and digital. But Tae reminded us that there are misconceptions about blockchain and AI.
“To many, the first thing that comes to mind is cryptocurrencies. But in the B2B context, blockchain is a closed and controlled system with permissioned access,” Tae says. “Is blockchain transforming businesses? There are many pilots that are occurring across the industry that have strong potential to transform financial markets as we know it.”
Compliance tasks tend to be highly manual, making them prime candidates for the application of AI and blockchain technologies. He explains one real-life use case that Broadridge is going into production involving bilateral repos, or repurchase agreements – a short-term agreement to sell collateralized securities and later buy them back at a slightly higher price. Broadridge helped to put the transaction process onto blockchain smart contracts. The result: savings in time and money for the client, as well as a staggering reduction in the number of man hours and cases of human-error.
Blockchain, it would seem, is a highly complex process to improve seemingly small, yet very important and significant processes (in this case executing trading of assets).
Is blockchain transforming businesses? There are many pilots that are occurring across the industry that have strong potential to transform financial markets.” – Michael Tae, Broadridge global head of group strategy
A thriving ecosystem
It was only a couple of years ago that venture capitalists were pouring vast amounts of money into startups in the hope of hitting a “unicorn” – industry speak for a privately held business valued at over US$1 billion. Whether they hit a jackpot of mythical proportions or not, these same venture capitalists expect a return on their investments, and in recent years, there has been increased pressure on funded fintech startups to create realizable returns.
For a while, the balance of power swung back toward the banks and large fund houses, as they moved to acquire startup technologies that were supposed to add value to their businesses. But technology moves quickly, and despite the flurry of activity, the banks soon discovered that the acquisition of small tech companies just wasn’t their “bread and butter.”
It was through these dynamic back-and-forths that a unique ecosystem emerged. At one end are the large established financial institutions; fintech startups at the other.
“An ecosystem has been established where large financial services firms and fin techs rely on one another,” says Tae. “There are these large established players – the banks and fund managers – and they have a myriad of operational and procedural inefficiencies. Then there are these small and agile fintech startups with lacking scale, but which have really useful solutions to niche problems.”
Broadridge has positioned itself as a bridge between the two, says Tae.
To provide its clients with the best-suited emerging technologies, Broadridge has a three-pronged innovation strategy. First, partner with the big financial institutions; second, invest in suitable startups; and third, identify the best solutions for clients through the group’s Innovation Centers of Excellence, and then to invest in and develop the best of those discoveries.
As financial services firms continue to look for solutions to issues of costs, revenues, and scale, Broadridge believes its unique offering lies in its diverse and extensive network of customers built up over more than five decades and which together face a myriad of problems. By zoning in on the best solutions for the most common problems, Broadridge says it can “mutualize” the cost and risk burdens that individual clients would otherwise have to bear alone.
“As a fintech grownup, we serve the financial services industry. As regulatory and cost pressures continue to bear down on the industry, mutualization allows industry participants to focus on differentiating activities within their markets.” On the lookout in Asia
With a market capitalization of more than US$14 billion and high levels of customer retention, Broadridge is looking to global expansion to drive growth – and Asia is an area of focus. The company has a presence in Hong Kong, Singapore, Japan, Australia and India. Tae says it looks at its existing network of customers globally and locally, to identify and meet their needs in those markets.
“Asia is a vast market, but the same story holds whether it is in the US, EU or the wider Asia region. Financial services firms are all facing similar issues,” he says. “The broad megatrends financial services firms are employing to respond to pressures are mutualization, digitization, and data & analytics, which are apparent in each region.”
Broadridge sees real opportunities for innovation in Asia-Pacific. Just one example, the Hong Kong government identified financial technologies as one of the four pillars of strength for development, as well as expected increases in expenditure on tech research and development, the city has issued a stern challenge to other aspiring fintech hubs in the region.
“Whether we buy, build, or partner, we are committed to drive the innovation roadmap and develop solutions that allow our clients to get ahead of today’s challenges and capitalize on tomorrow’s opportunities, across Asia and the rest of the world.”
By Cal Wong