The digitalisation of the capital markets is a huge, laborious project that has been under way for years, with progress made incrementally against a backdrop of painfully slow cultural change.
However, most market participants that took part in our survey expect the pace to increase in the wake of the coronavirus pandemic, which upended ingrained working practices and forced banks to adapt, develop new approaches and fix old problems.
Digitalisation can mean several different things in the capital markets: replacing paper security certificates with electronic records; replacing the telephone with a software-based trading platform; replacing an investor roadshow with a series of video conferences.
Over the summer, GlobalCapital surveyed debt and equity capital markets professionals to discover how the pandemic had affected this trend, among other aspects of life in the markets. The survey showed that people expect the pandemic to speed up technological changes across the board, with 77% of respondents either agreeing or strongly agreeing that the process of digitalisation would be accelerated by the experience of working from home and working through the crisis.
Time to adapt
There are some obvious candidates for technological investment during a period of enforced remote working. Videoconferencing and screen-sharing, once the preserve of tech-savvy early adopters, have become must-have skills in the past two years, as banks have had to adapt to ensure they can continue to do business without in-person meetings.
However, the switch has not been without its pain points. Many market participants are still forbidden from using some of the most popular videoconferencing platforms because of internal data protection and cybersecurity rules, so meetings suffer delays because of the need to find a mutually acceptable medium.
The quality of digital conferencing services available in banking has certainly improved over the past year or two. But as is so often the case, the progress has largely manifested itself as a change in attitudes, rather than some technological leap forward.
“I am not quite sure that those improvements are the result of technical developments on the side of the suppliers, or the know‑how and readiness to use them on the part of the consumers, i.e. the investors, issuers and bankers,” says a head of debt capital markets at a European bank.
Most people recognise that the increased willingness to accept digital alternatives to face-to-face meetings has made the capital markets operate more efficiently from a time and cost perspective. And there are signs that banks have sought to reinvest the hours and money that they have saved in further technological improvements, creating a virtuous circle.
“Hospitality, travelling, physical conferences and all that stuff are a significant part of the cost structure of a DCM business,” says the DCM head. “That’s money that we have saved. We are certainly not going to save that money and then throw the most lavish parties when we can again. This money is now being spent on digitalisation, the projects we have that allow us to, in a way, replace and improve on aspects of physical meetings through digital services.”
A financial technology company founder told GlobalCapital that they were able to pitch to more companies more easily since the advent of lockdowns because, by setting up video calls rather than going on a roadshow, they were able to get their demos in front of decision makers at banks much more quickly and with less planning and investment.
For many people, however, even the latest advances in remote working technology are no substitute for old fashioned in-person communication, especially between colleagues. “If you’re not sitting next to someone, or shouting across to them, or visiting them at their desk whenever you need to, that makes some things less efficient,” said a second DCM banker.
Build back offices better
But beyond virtual meetings, market participants report that the pandemic — and the surge in capital markets activity and complaints of burnout that accompanied it — have also accelerated changes behind the scenes.
“It’s not just a question of videoconferencing,” says Charlie Berman, founder of Agora, a capital markets fintech. “The pandemic has highlighted how manual so many of the processes in capital markets are, and how much work was required to keep them operating through the pandemic.”
Fixed income fintech company founders are fond of pointing out that the last major technological innovation in the debt capital markets was the transition from fax to email in the 1990s. And while electronic modes of communication such as email and instant messaging fulfil an important role, they have been pressed into service for jobs to which they are ill-suited, the fintech evangelists say.
For example, bankers and lawyers use email to send term sheets and other bond issuance documents to colleagues within different teams or to counterparties. But because the data is not structured, all the terms must be manually transposed between the systems being used — a time-consuming and risky process.
“We have separate infrastructures for settlement, reconciliation, fund administration, custody, etc,” says Brad Levy, the CEO of Symphony, a communications platform for banks. “They are all firewalled from each other and the only link between them is essentially email, which is a very shallow system that doesn’t facilitate the workflow.”
As a result, time is wasted and risk introduced by people having to manually transfer or “double key” data from one system to another, with little transparency built in.
“There has been over-investment in the front office, while back office systems are left antiquated,” Levy says. “Our goal is to bring the workflow out of email, and into our platform where there are tools to make it more efficient.”
Symphony enjoyed a usage increase in the hundreds of percent in the early days of the pandemic, much of which has stuck around.
“The pandemic has really made people aware of the need to digitise,” says Robert Taylor, co-founder and chief technology officer of Origin, a capital markets issuance platform. “There are insanely manual processes handled through long email chains with no data structure.”
The imposition of remote working on the bond market has also exposed the impracticality of even more antiquated practices, some of which are still encoded into law in some jurisdictions, such as the requirement for wet ink signatures on certain documents.
Germany recently passed a law allowing bonds to be registered digitally rather than in paper format with a wet ink signature, but will need to pass more fundamental corporate law reforms for shares to be fully dematerialised. In Nordic jurisdictions, e-signatures are already commonly used for identity verification.
When teams were sitting together in the office, verification of hard copies with wet signatures was more practical, but remote working has made the need for change more urgent.
Brexit boost
In Europe, a major event that preceded the pandemic had already spurred moves in this direction, according to Origin’s Taylor.
“Brexit actually kick-started some developments in this respect,” he said. “Teams that were previously in London ended up being split between London and Paris and Frankfurt.”
The pandemic has only added to the sense of urgency on the legislative and regulatory front.
It is difficult to garner support and resources to fix a system that already works, and the capital markets weathered the challenges of the pandemic remarkably well. But for those difficulties thrown up by lockdowns, the solution was often more or better technology, while the cultural openness to digital processes fostered by the experience of the pandemic is unlikely to fade.
Some steps forward taken during the Covid-19 crisis, such as the EIB’s recent blockchain outing, would have happened anyway, sooner or later. But there is a strong sense across the capital markets that the experience of the pandemic has had a profound impact on attitudes to technology. The rate of change, as a result, looks set to accelerate. GC