Financial Institutions May Recover Lost Glory If They Aggressively Adopt Technology Fee Compression As Far As The Eye Can See Long gone are the days of white-collared shirts, suspenders and fat fees. The Financial Services industry is reducing headcount across the board. No pocket of the capital markets is immune. Investment Banks, Depository Institutions and…
For the past few years I’ve poked around the machine learning (“ML”) and artificial intelligence (“AI”) space. I advised Boston-based DataRobot back in 2014 when they started to build their machine learning platform. I’ve thought about how we at CEORater may leverage ML to score CEOs and companies. Typically when we read about ML and AI it’s from the perspective of a pure-play vendor who markets and licenses its platform across multiple industries for a variety of use cases. Often the use cases we read about are focused on “power users” – people who have a PhD in Statistics or some similar quantitative background.
Recently I had the opportunity to demo SS&C’s (tkr: SSNC), new back-office, middle-office platform (“Singularity“) which has machine-learning, artificial intelligence and robotic process automation (“RPA”) at its core. This was my first opportunity to observe a fintech platform that was built from the ground-up to fully-leverage ML, AI and RPA.
From a background perspective, Asset Management firms of all flavors (small, mid-sized and large, traditional, hedge funds, private equity etc.), Fund Administrators and Insurers use a variety of SS&C products and services to value assets (equity and fixed income securities, derivatives, bank loans, private placements and real assets to name a few asset classes)/ strike an NAV, settle trades and report on asset holdings. The company’s Singularity initiative will replace siloed products with a common ML-based core layer that will have modular AI and RPA services that sit on top.
Multi-tenant machine learning is a significant competitive differentiator. Some readers pride themselves on identifying businesses that have a competitive “moat”. For non-investors a “moat” is a source of sustainable competitive differentiation. Challengers who wish to compete against companies with established moats best be prepared to completely shift the paradigm and render the moat obsolete. You’re simply not going to spend your way around, over or through a moat. Brute force won’t work. If any company ever had a moat, SS&C has one in the world of portfolio accounting systems.
SS&C’s moat is about to get significantly wider and deeper as Singularity is rolled out. This is in no small part due to the multi-tenant machine learning layer. This means that as Customer X has an experience that requires a “learning”, the benefit of that learning is enjoyed not only by Customer X but also by the other customers on the platform. This multi-tenant element to Singularity’s machine learning layer is a powerful scale differentiator primarily for three reasons:
- Large installed customer base: SS&C has a great many customers and users – therefore more opportunities for machine-driven learnings – the benefits of which accrue to all SS&C Singularity customers.
- Purpose-built from the ground up: SS&C has incorporated machine learning into Singularity from Day One, providing the company with a significant and sustainable advantage over competitors who may try to retrofit a third-party’s machine learning layer on top of legacy products and services. Retrofitting legacy technology simply can not be as effective from a throughput and efficiency standpoint as a new, modern-architected platform.
- Cost prohibitive: It’s not an insignificant dollar amount that’s required to build a modern, ML/ AI/ RPA-powered Fintech platform from scratch. To replicate Singularity from a domain-expertise and technology perspective would be cost prohibitive.
VC’s would be wise to avoid trying to disrupt this market. As I see it, the only way to replicate what SS&C has built would be to acquire the company.
Many of our readers are Technology CEOs and institutional investors. If you wish to tell your company’s story, or a portfolio company story let us know. Beginning in 2019 we plan to occasionally profile Technology companies in these pages and on our CEORater Podcast. Send me a note directly at email@example.com. Thanks for reading!
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Successful CEOs possess each of the attributes described below. This is an unscientific analysis based upon my prior experience covering and acquiring companies (equity research analyst; M&A executive) as well as my current role as founder of CEORater.
It is important to recognize that while these attributes are qualitative in nature they do impact the bottom-line.
Effective communication is the most important attribute for CEOs to embody. Our lead photo is that of Steve Jobs, the Great Communicator.
- Great CEOs are great communicators: Great CEOs communicate effectively to shareholders, customers and most importantly – employees!
- Get your reps in: Jack Welch used to say that when he got sick of hearing himself repeat a particular message he knew that message was starting to take root with employees. Rocky Marciano knew the best way to maintain his edge on fight night was hard sparring during training camp.
- Coach the coaches: Want a force multiplier effect in your organization? Coach your direct reports.
Great CEOs hold themselves and direct reports (and by proxy all employees) accountable. Do not confuse accountability with intolerance for it is important to encourage smart risk.
Don’t shoot to kill: Sales person misses sales target. OK fine, no variable compensation reward for the period. What behavior will change as a result?
- Is there a communication breakdown in the sales process?
- Where is the pipeline weak?
- How are we engaging with customers and subsequently ingesting and disseminating that sales intelligence? Is that information circulated not only across the Sales organization but with Product Management?
If behavior changes for the better – i.e. improved communication – the miss may have been worth it.
3.) Employees First:
The tried and true principle of taking care of your own first. In return employees will take care of customers. The benefits trickle down to shareholders.
Past and present CEOs that put employees first:
- Sam Walton, Walmart;
- Aron Ain, Kronos;
- Jack Welch, GE;
- Tony Hsieh, Zappos;
- Bernie Marcus and Arthur Blank, Home Depot;
- Reed Hastings, Netflix;
- Scott Scherr, Ultimate Software
Don’t confuse “taking care” of employees with free lunch, coffee bars and foosball tables. Those trivial items may help at the margin, but at the end of the day employees want to be recognized and rewarded for successful missions – both large and small.
4.) Intellectual Curiosity:
Intellectual Curiosity is an attribute we have paid increasing attention to as of late as we began our CEO Personality Analytics effort this May (“Personality Analytics: Technology CEOs Analyzed“)
Our experience is that intellectually curious CEOs are never satisfied (that’s not to say they are perpetually dissatisfied). They are relentless about “what comes next?” and “what aren’t we doing that we ought to be?”
- Intellectually curious CEOs are more likely to solicit feedback from direct reports.
- They are motivated to find the truth, not to have their opinions validated.
- Intellectually curious CEOs are more likely to consider and deploy creative strategies and tactics to deliver customer value.
- They view obstacles as opportunities rather than impediments.
- Intellectually curious CEOs create “adaptable” cultures capable of flexing their business model as customer dynamics and competitive landscapes change.
We consider long-term to mean 10 years or more. Similar to the “time value of money” principle where investment decisions made today can have an enormous impact in the out years, capital allocation decisions made today can impact a given company’s competitive positioning and operations in significant and unimaginable ways 10-20 years in the future.
- Amazon (AMZN): As recently as a few short years ago analysts beat up Amazon for re-investing profits when AMZN appeared to be close to achieving operating profit break-even. Those investments made over a 24-year period (primarily in physical distribution) have paid off handsomely, enabling Amazon to offer same-day delivery service for a mind-boggling number of products. A competitive “moat” if I’ve ever seen one.
- SS&C Technologies (SSNC): Founder, CEO Bill Stone and his team have taken a measured, strategic approach over the years to augmenting the “core” business with a series of reasonably valued strategic acquisitions. This strategic approach has enabled the company to build the deepest and broadest product and services portfolio across the financial services industry in non-discretionary product areas such as portfolio accounting. Early in the company’s life-cycle certain acquisitions may have seemed somewhat inconsequential. However, 30-plus years and $13 Billion of market cap later the company is the leading Financial Technology provider with solutions that address back, middle and front office workflows across the Financial Services industry.
No love without trust. One could also use the word “transparent” to describe a CEO that exhibits consistent behavior whether engaging with a senior executive, a front-line staffer or a customer. We opted for the word “trustworthy” because at the end of the day employees typically describe their CEO as someone they “trust” or don’t trust.
Why is it important for CEOs to be trustworthy? If employees don’t believe you “have their back” – they are less likely to break theirs – for you or for the company.
Technology news items that caught our attention this week:
U.S. venture capitalists didn’t fund this Duke professor’s powerful facial recognition platform, so the Chinese government did: Link
Gamers rule the world. Now they have their own stadiums: Link
Some have asked the question regarding our most recent article: Personality Analytics: Technology CEOs Analyzed – “what does it mean?”
Let’s contemplate one example as depicted in the enclosed picture which plots the 56 Mid-Cap Software CEOs we reviewed against the personality trait “Openness“. The output is that the two CEOs who scored in the 99th percentile (Ryu of Guidewire Software, “GWRE” and Marr of Tyler Technologies, “TYL”) are:
1.) less likely to suffer stalled revenue growth on their watch;
2.) less likely to allow their products and services to become stale;
3.) less likely to be disrupted by a competitor or new market entrant;
4.) less likely to see their respective customers move elsewhere and/or become disintermediated from customers;
5.) more likely to adopt new technology to deliver their respective products and services;
6.) more likely to identify adjacent market opportunities..
..as compared to the Mid-Cap Software CEO universe we analyzed (56 CEOs in total), all else held equal.
Meet new Anthem CEO Gail K. Boudreaux
from WSJ: “Bitcoin is moving from the margins of the financial world closer to its center.
CME Group Inc., CME 0.78% the world’s biggest exchange group, said Tuesday it aims to launch a futures contract based on bitcoin by the end of the year. The plan, subject to regulatory approval, would be a big step forward in the evolution of the digital currency.
Futures are a way for traders to bet on whether the price of a commodity, such as oil or gold, will rise or fall. Introducing a U.S. futures contract based on bitcoin would enable Wall Street banks and trading firms to protect themselves against price swings in the digital currency. It could also provide retail investors with an easier way to trade bitcoin.
Bitcoin was conceived in 2008 by an anonymous creator known as Satoshi Nakamoto. It is a purely digital currency, or “cryptocurrency”—essentially, strings of ones and zeros flitting around in cyberspace—designed to act as an alternative to government-backed currencies.
Many officials and bankers around the world, including J.P. Morgan Chase Chief Executive James Dimon, have been reluctant to embrace bitcoin. Its reputation has been tarnished by an association with money laundering and other illicit activity, while volatility and uncertainty over its legal status have kept the digital currency trading in the shadows of global markets for years.
CME’s plan to bring bitcoin to the futures market offers a stamp of approval from a financial giant at a time when the digital currency’s supporters say it is gaining respectability.
“It is a legitimization of bitcoin as an asset class,” said Daniel Masters, chairman of the Global Advisors group of companies, which runs a bitcoin hedge fund and exchange-traded notes linked to digital currencies.
The move is nonetheless risky for CME, which could face embarrassment if the bitcoin market implodes, as some skeptics predict will eventually happen. There is no guarantee that its bitcoin initiative will succeed. Many new futures contracts introduced by exchanges fail to take off.
Still, CME’s plan sent the price of bitcoin surging. After the exchange’s announcement Tuesday, the digital currency’s price rose above $6,400 for the first time, up more than 4% for the day, according to CoinDesk. It has more than quintupled so far this year.
Listing bitcoin futures on CME or another U.S. exchange would make it easier to trade the digital currency by allowing market participants to bet on whether its price will fall, something that’s currently difficult to do.
Futures allow “long” investors, who think the price of a commodity will rise, to match their bets against “shorts,” who expect a price drop. Introducing bitcoin futures could help smooth out some of bitcoin’s wild price swings, traders say, because it would give bitcoin pessimists more opportunity to express their views in the marketplace.
“When you make the market more even-sided—to make it as easy to short as to go long—I think the biggest effect you get is a decrease in volatility,” said Mr. Masters, of Global Advisors.
The recent price run-up, along with dozens of launches of digital currency-focused hedge funds in the past year, has sparked interest from Wall Street. Goldman Sachs Group Inc. has said it is considering starting a trading operation for bitcoin and other cryptocurrencies.
The value of all bitcoins in existence recently surpassed $100 billion and now stands at $106.9 billion, according to coinmarketcap.com. By comparison, the market capitalization of Goldman Sachs is $93.8 billion.
Other big players remain skeptical. Mr. Dimon said in September that he viewed bitcoin as a “fraud” that “will eventually blow up.” South Korea and China are among the countries that have tightened regulations around digital currencies in recent months.
But most market participants say banks would be more likely to trade or make markets in bitcoin if a futures contract takes off. That’s because shorting bitcoin can help a financial institution insure against a price drop. A cryptocurrency trading desk at a bank could turn to the futures market when it wanted to reduce the risk of its bitcoin holdings.
Futures could also pave the way for retail investors to get more involved in the digital currency, especially after the Securities and Exchange Commission earlier this year rejected efforts to launch the first exchange-traded fund based on bitcoin.
Trading the virtual currency can currently be logistically tricky. Since U.S. brokerages generally don’t offer a way to trade digital currency, people who want to buy or sell it need to set up accounts directly with a bitcoin exchange. There are dozens of such exchanges around the world, many of them small and lightly regulated.
But if a major U.S. exchange launches futures tied to bitcoin, investing in the digital currency would become similar to trading commodities, with investors able to use popular retail brokerages.
Bitcoin futures could also become the basis for an ETF linked to the digital currency, in much the same way that the United States Oil Fund , the world’s largest crude oil ETF, is built out of oil futures rather than physical barrels of oil.
CME traces its history back to 1848, when the first futures markets formed in Chicago to allow farmers and grain buyers a way to trade agricultural commodities. It now runs a huge array of markets, from oil and gas futures to financial contracts tied to interest rates.
Tuesday’s announcement sets off a horse race between CME and its smaller crosstown rival, Cboe Global Markets Inc., to see which exchange operator can launch bitcoin futures first. Cboe said in August it was planning to launch bitcoin futures by the end of 2017 or early 2018, pending regulatory approvals. A Cboe spokeswoman declined to comment.
Both CME and Cboe are regulated by the Commodity Futures Trading Commission, which would need to sign off on the launch of any bitcoin futures contract.
The CFTC has lately been friendlier to bitcoin than the SEC. In July, the CFTC granted a startup called LedgerX approval to clear bitcoin options, making it the first U.S. federally regulated platform of its kind.”
Several weeks after publishing our podcast Amex CEO Ken Chenault announced he was stepping down. Not a moment too soon. Amex is not innovating and Fin Svcs is an Innovator’s Game. Listen to CEORater Podcast Episode 35.