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Gain Insights into Current Trends and Challenges Impacting the Financial Services Industry

Is Blockchain a disruptor or enabler for Transfer Agency?

Richard Clarkson
Solution Consultant

We have been awash in the Financial Services over the past several years of hearing of the next big technology that will change the face of the industry, and Transfer Agency has been no different.  In the year 2017 it is the turn of Distributed Consensus Ledger Technology (also known as ‘Blockchain’) to set pulses racing and generate many reams of papers from various parties.  Whatever happened to Big Data from 2016?

The principles behind Blockchain are over 40 years old, however with the increase in computing power and its use behind Bitcoin, the industry is now awash with articles and Proof of Concepts purporting to show the benefits of this technology.  There is no doubt that the Financial Services industry suffers from many inefficiencies and some of these can be addressed by the Blockchain.

Transfer Agency can be seen as a line of business that would greatly benefit from the disruptive capabilities of Blockchain.  This is particularly salient as Transfer Agents and Asset Managers are still paying lip service to the idea of moving forward with best of breed technology when they are inhibited by legacy systems.  

The impact and cost of legacy should not be underestimated as the advent of FinTech’s and their nimbleness means existing players must decide whether they are to adapt and compete with respect to their core service offering or wither and die.  Transfer Agents need to determine if their existing environment can support growth and provide the flexibility for the changes that are coming?

The opportunity to seize the moment and have a truly value add service for Asset Managers and Investors is now.  This can only happen, though, for those Transfer Agents are not weighed down by Legacy; who have a holistic view of their approach and whose technology is modern, flexible and reliable.  With a modern platform at a Transfer Agency’s core innovation is possible ensuring that the modern Transfer Agent is relevant to the market.

The acceptance of legacy is not an option as the next generation will wonder why the industry exists since the stock answer is “we always did it that way!”.  Does this latest and possibly greatest fad in Blockchain now provide the impetus to change our approach to TA and the platform that underpins it?  Or will Transfer Agents continue down the well worn tactical path and bolt on another ‘patch’ to an already complex and overstretched ecosystem?

So, what are the pain points that Blockchain can truly eliminate?  Will it be challenges in a process such as Reconciliations (for example) or can it be truly disruptive enough to negate a Function such as Transfer Agency?  Further we need to question whether the disruptive use of this technology will come from within the industry or from a new source, namely FinTech?  Can we, that is Transfer Agency, as an industry, really disrupt ourselves or do our own vested, legacy interests win out?

There is no doubt that a ‘Blockchain’ can and will have an impact on the industry and the potential number of players within it.  Discussions continue to take place around some of the main challenges with Blockchain as there will be a need for everyone to agree on a standard or agreed protocol.  Consensus is fundamental to the technology underpinning Blockchain. 

Given the industry’s traditional inability to agree locally, regionally and globally to the same protocols I would expect that there will be several variants of a Blockchain that will come into existence over the next few years.  It is not likely that there will be a single global standard Blockchain which will negate the need for Transfer Agency, as some as suggesting.

So how does Transfer Agency look forward and get ready for Blockchain disruption? This where the likes of the Hyperledger consortium can help due to the consortium's approach to Blockchain using open source collaboration, modular architecture, horizontal/cross-industry technology support, and support for enterprise needs (see Oracle joins Hyperledger).

Many firms are engaged in Proof of Concept tests to understand and determine what processes can be improved by Blockchain.  The Proof of Concepts have shown benefits in small scale lab conditions where environments are controlled.  An example of a successful Blockchain use case in a lab environment utilising Hyperledger is the ability to send/receive instructions on the Oracle TA platform via Hyperledger and thereby managing the single source record.

Questions are arising though as to whether these tests can scale to real life scenarios.  The amount of data and processing power to provide a reliable and robust solution is not currently within reach, but it may not be that far off into the future for the industry to ignore.  (It is also worth noting that there are stability issues within Bitcoin where outages of up to hours have occurred, how will this impact Asset Servicing in a real world scenario?)

As noted at the start of this blog, we have been, within the Asset Servicing arena, inundated with articles, papers and announcements of Blockchain breakthroughs, but like the overall Financial Services industry we have yet to see Consensus on the way forward.  Indeed, we have even seen the banks join and leave various Blockchain consortia over the past couple of years as they individually seek to identify what is the best way forward.

Not only does the industry have the consensus issue to resolve there is also the challenge to decide which process to apply Blockchain too.  There have been numerous commenters highlighting the benefits that Blockchain will bring.  Two processes that are often seen as ripe for disruption are Settlements and KYC / Client On-Boarding.

The ability for an Investor to open an account in a fraction of the time that it currently takes has to be a welcome development as it improves the experience of engaging with a Financial Services Provider let alone the costs involved for the Transfer Agent, which for account opening can be significant.

This brings us about to Transfer Agency as the process of being a Transfer Agent is seen as a necessary but unloved part of the Mutual Fund cost chain.  Asset Servicers and Asset Managers get little value out of the function and at best see it as a Cost Centre that must be endured.  TA’s do provide a number of key procedures however their true value is not seen in the overall package that is offered.

The cost of legacy systems within Transfer Agency means that the ability to respond to the latest developments in Financial Services is exceptionally slow and reinforces the view of an industry that does not add value.  This can have its benefits (as fads can pass by without any effort or effect) however when a true disruptor arrives Transfer Agency will not recognise it and so TA itself will be passed by.

To remain relevant Transfer Agents should look at themselves and determine if they have a best of breed system that is based on an Open Architecture.  With this bedrock they are in a position to assess and react to the current dynamic in technology.  Does the latest discovery mean the Transfer Agent is potentially loses its relevance (Blockchain) or can it ride the storm as legacy gives it a buffer (Big Data)?

At this point in time we know Transfer Agency is inefficient with previous technological changes not fully embraced to make a difference.  As Blockchain looms large is now the time for Transfer Agency to recognise the Disruptor and look within itself to see if TA can survive on its legacy environment?  Either way Blockchain will impact us all, the how and when will only be confirmed in history.

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