In this THIRD of a five-part video blog series Jim Jockle, CMO of Numerix sits down with Paul Rowady, Director of Research at Alphacution to discuss the recent FinTech Revolution. They discuss how firms are gearing themselves towards a digital culture, and how companies are working to distinguish themselves in this new age.

The five videos cover the following:

Part 1: Paralysis by Analysis: Preparation & Analyzation for Digital Disruption

Part 2: IT Outsourcing and Transformation

Part 3: Revolutionizing Fintech: Looking into the World of Data Automation

Part 4: Technological Implications of Cultural Transformation

Part 5: Digital Noise in the FinTech Space

Jim Jockle (Host): So, you know, you bring up one of the big pain fear factors though, is giving up the data, right. So, one of the biggest barriers to the cloud and you know we’ve seen this from different companies, you know and I don’t want Google, I don’t want Microsoft to have my data. I don’t want Goldman to have my data. How much, you know you mentioned the hype cycle, where are we and how much is it at this point where people are starting to say…ok. You know, I’ll give up this if it’s going to give me that in terms of alpha.

Paul Rowady (Guest): Well, it’s in some ways it’s a necessary evil of the digital environment. We walk around throughout the day throwing off data, right. Our worlds albeit not entirely automated are sufficiently automated and the tools that we carry around with us and everything we touch is sufficiently interconnected that every keystroke is a piece of data. So, you really, you have to go, you know, do your Ted Kaczynski impersonation somewhere in Montana in order to miss giving off some kind of data. You have to just unplug from the grid. Well we can’t function, we can’t play the game unless we’re on the field. And when you’re on the field, you have to use the tools. And if you use the tools you’re throwing off data. So, you have to be, it’s sort of like well you know, is there any real privacy anymore and we can have a long debate about that. I don’t think you can hold that line too well. You have to pick your battles and figure out how, you know, how you’re going to engage with the machine and figure out what solutions you’re going to use and understand that it’s sort of like the difference in DNA between human beings and monkeys. It’s only a few chromosomes, right. It’s not a whole lot. There’s a whole rethink of the value proposition of all of these organizations which you allude to in your setup to the question. Are we a technology company or are we a brand that offers these kinds of services and we’re dealing with the lengthening and sophistication of our supply chain of partners that are actually providing the engine underneath that and we’re adding the last mile, our brand, our people; we engage in smart touch. Instead of low touch vs. high touch, this is getting back to who’s your front man? Who’s your front woman? Those roles are still necessary; it just has to be smarter. How and when do you engage in a low touch solution? How and when do you engage in a high touch solution because they have different economics associated and then having the operational analytics to figure out when you lean one way or the other.

Jockle: It almost exemplifies the question of where do you start because it is so overwhelming at this point in time with so much market movement going on.

Rowady: Well, and I mean, I think that’s exactly right. Where do you start? How do you take this in many cases these massive aircraft carriers metaphor, for these massive organizations, that are spread across geographies and businesses and numerous entities that bubble up into one enterprise? And it’s what creates the hype cycle because in some ways here’s a great example, a lot of banks, if not most of the big ones, have already made announcements, have already developed, are already in formation, and some of the laggards are just now making those announcements to be sponsoring innovation laboratories. I can guarantee you that a bunch of that is marketing. There really is, when you look at how few leaders there are in technology in financial services or just within the top hundred banks in the world, it’s a single digit number and then the rest of everybody falls into a pack that’s within a standard deviation in terms of the way we’re modeling it and there’s like that 80:20 rule, 90:10, where 10% of the players are really doing anything innovative. So, on the one hand you make an announcement hey we’ve got an innovation lab, but the reality is they’re all just playing out of the same playbook. A lot of this gets back to culture, which unfortunately takes a long time to influence. The way you speed up that is for adversity to happen because then you’re motivated. But if there isn’t sufficient adversity and if we get into theories about the role of coordinated interventionism which has diluted the sense of urgency in the financial sector and which has actually done a disservice to the pace of change making it seem as if the status quo is still valid then it actually delays this adversity from happening and for the compression of change to be able to occur because people are motivated. That makes sense?

Jockle: Absolutely. And it comes down to you know, some of the other things we talk about on the blog, is different inflection points. Whether its FRTB, whether it’s the need for XVA, you know a regulatory flashpoint that drives to a date that moves action. But in some ways it also creates inaction in the sense of things are becoming monumental, they’re becoming monolithic in terms of I’ve spent billions of dollars to get to CCAR, right. But at the same point in time, now I got to spend another billions of dollars to get to the next regulatory hurdle and I think that’s an element of paralysis and curtail some of that innovation because you know I’m just trying to keep the lights on.

Rowady: It’s a fascinating narrative but it’s sort of a sad one too, in the sense that a lot of these regulations it’s 80:20 rule, it’s really if your data management was better you’d have the metadata already organized and you’ll be able to see, you’d actually be able to answer much more easily. I’m not saying it’s a layup, but I’m just saying much more easily you’d be able to answer all the different alphabet soup across the geographies. Across the different regulators. I mean it’s actually gotten to the point where we’ve hit that nerve so many times it’s just numb. But, my impression is that a lot of these rules its 80:20 worth, it’s yeah there’s some vernacular that’s different, there’s some different analytics, you maybe need to pick up a little bit different. You know, this one needs to be a little bit spicier, this one needs to be a little bit colder, this one needs a little of that ingredient, in that sense its mostly the same foundational data elements with a veneer of specialty given the nature of the particular rule. The problem is that most of these large organizations have been so fragmented and partially as a result of the landscape. We’ve just ended the first era of modern capital markets, in the sense and now we are transitioning here now how many years, seven years’ post GFC where we’re in the early phases of the next big era, the next big super cycle, in global banking which is going to be much more of an if you go to the playbook of what happened to the auto industry it was entirely vertically integrated all the way down to the ships and the ore mines that Ford Motor Company owned and then over time they sold that off and they lengthened their supply chain. Now there’s this massive ecosystem of suppliers and the auto companies are really design shops, right. And some engineering on new stuff. So, that industrial efficiency, you know Six Sigma era, right, is now going on in financial services across all of the segments to varying degrees.   

Jockle: So your CEO better have a black belt.

Rowady: Should have some kind of belt, maybe, yeah, needs to have some nun chucks, right. A whole bunch, an arsenal of weapons to deal with what’s happening and what’s coming.