Utility Model in Capital Markets

In the aftermath of the financial crisis, the regulatory environment has undergone rapid changes and is still evolving, creating additional obligations for financial institutions, particularly in the areas of risk management, reporting and regulatory compliance. Since many of financial institutions have to make same, or similar, changes to their processes and systems due to new regulations, many of them are looking to “mutualize” the costs – an arrangement where an independent third party provides the technology and services that banks can in turn use on pay per usage basis. This is giving rise to a new utility type of offering that is a step in the outsourcing value chain. As a consequence of these changes we have observed in last 6-12 months the emergence of shared service-utility mode of offering which is a highly standardized type of offering built by a third party provider and offered to financial institutions on a pay-per use basis. Often these solutions were conceived in direct response to the user communities’ expressed needs for them. Not surprisingly therefore some of the ones being launched in the market are by bank owned or bank backed institutions and have had active involvement of many banks in their design and development processes. One area that has seen a number of solutions emerge under the utility-shared service model is the know-your-customer (KYC), client on-boarding space. The current practices in managing KYC, on boarding operations are complex and redundant requiring every customer to exchange information with every financial institution they deal with. The utility model on the other hand envisages gathering all customer information at a single space that can in turn be shared with financial institutions. A recent Celent report discusses the drivers behind the emergence of the utility model and studies four solutions in the KYC, on-boarding space that have been or will soon be launched under the shared service-utility model, including SWIFT KYC Registry, Thomson Reuters Accelus Org ID, Clarient Entity Hub (by DTCC and 6 co-founding banks), and Markit | Genpact KYC Services.