Keep humans at heart of fintech, warns State Street

One of the key tasks for Jessica Donohue, chief innovation officer for State Street Global Exchange, employing 800 staff across the UK, US, Poland, China and India in the bank’s data and analytics consultancy arm, is adapting ideas from outside the industry to the needs of financial institutions.

Technology developed in Silicon Valley in particular, in the areas of machine learning and natural language processing, pioneered by the likes of Google, Facebook, eBay and Amazon, is now being integrated by State Street into its portfolio analytics, data science and risk management toolbox, being built by Ms Donohue’s teams for institutional clients.

“Some of the very best applications of technologies take a process of technology or innovation from one industry, become aware of what it does and then ask, ‘how do I apply this to another industry?’” 

Financial technology – or fintech, to use the fashionable term – has been all about tapping into the success of consumer-focused Silicon Valley firms, many of them non-financial start-ups. 

One key trend she expects to spread to the financial industry is that of ‘human-centred design’, currently in its formative stages among some modernising private banking groups, looking to beef up their digital presence.

“A lot of businesses have been successful in tailoring their experience to the consumer,” says Ms Donohue. “Banks have traditionally not been very good at this in the high net worth and retail banking spaces. But the idea of customising your user experience is now getting a lot more attention.”

The positive response of customers to these initiatives is in turn inspiring more ideas from previously backward financial institutions. “A profound part of this was that banks always thought they were different from other sectors and perfectly understood their own business,” smiles Ms Donohue, clearly acknowledging the irony that her employer is one of North America’s biggest financial names.

“But they are finally beginning to realise their customers are consumers, they are human beings and that they need to think of this end customer and always keep them in mind.”

Those banks “touching” consumers on a daily basis are getting there quicker than banks dealing predominantly with other institutions and intermediaries, she reckons. “Many banks still don’t want to believe there is a human being we are providing a service to. We treat institutional clients as if they don’t have the same rights to an enjoyable experience. In the consumer space, there is the ‘customer delight’ idea, yet in the institutional space, that has not been the goal.”

State Street is working with Stanford University to help fintech start-ups design their user interface. “Design is still a foreign language to most institutions, but it doesn’t have to be.”

While State Street focuses predominantly on servicing traditional institutions such as pension funds, it is increasingly encroaching into wealth management. “The high net worth space is very interesting and our bank has built a lot of products – particularly ETFs – that can be used to service that space and also provides custodial services for private banks, but we have not made it a huge focus area to date.”

Yet this focus could be changing, bearing in mind the bank is looking closely at robo-advisory techniques, while many predictive intelligence systems developed in Asian private banks such as Singapore’s DBS and Korea’s Shinhan are now also being deployed institutionally. 

“Our mandate is to create products and services that can facilitate a decision made by someone else,” says Ms Donohue, referring to portfolio analytics and risk tools which can help portfolio managers decide which assets to invest in. “We want to be at the cutting edge of what clients need in terms of both fundamental research and academic partnerships.”

The major change she sees is that operators in the finance world are no longer petrified of wrestling with never-ending streams of data and not knowing how to best use them.

“Clients are clearly getting more confident and comfortable about using their data, although it’s still an evolving space,” she says. “But even as institutions get better at managing data, there are more regulations appearing for them to contend with, so regulators are driving a good part of the activity on the operations side.”

The incorporation of new data streams into the investment process is perhaps more challenging, she admits, with quantitative expertise and talent often hard to locate, citing the common “quant in a box” problem, where quant experts within hedge funds or asset management groups often cut themselves off from their colleagues instead of integrating themselves.

But there is also a case of some more traditional private banks not quite knowing where they stand in the quantitative continuum. “There is a question out there being asked, particularly in the HNW space, which is not surprising: ‘Is this sophisticated use of data a glimpse of what the future looks like, or is it just a trend or fad? Are the clients at the end of the day really going to want these investment products with a lot of embedded technology and data sources, which people don’t really understand?”

Many banks are questioning how long it actually takes their staff and clients of the firms to get their heads around the new way of thinking. “Will there be a lasting demand for products based on predictive analytics? Only time will tell. People will study the returns from these strategies over time and learn from that,” assessing the quality of their predictive analytics systems along the way. 

If returns are boosted, then wealth managers will increasingly use data analytics as a sales tool, believes Ms Donohue, although personally, she believes the industry is heading only in one direction. “There is no doubt in my mind that these systems are here to stay.  Markets are driven not by economics, but by individuals.”

State Street’s analysis of flows over many years has found that in addition to momentum, there are behavioural factors which drive investment into particular asset classes. Early on in the project, her team saw they could predict and model economic factors such as inflation through mining data.

“But that is not the goal,” she insists. “You need to know the trend, the sentiment, and what that means for further stock prices. Short-term prices are just as much driven by sentiment as by fundamentals. These are real sources of insight and I am sure they are very much here to stay.”  

Enhancing expertise in alternatives

State Street’s recent acquisition of GE Asset Management has refocused attention on providing services to the alternatives industry.

“As a global custodian, with a big and complex portfolio, we have always had to think from a multi-asset class perspective,” says Ms Donohue.

“In reality the world is not divided into clean and crisp asset classes, as people would like, so we are more interested in the risk characteristics of investments.”

As the largest provider of services to private equity, hedge funds and real estate asset managers, the group’s recent acquisition will help enhance this expertise, she believes.

State Street plans to potentially use private equity cashflow information from clients to create an effective private equity benchmark product, which does not currently exist in the market and then build an index, which can be used to support a new suite of exchange traded funds.