Video Transcription

Des O'Donohoe: Hi, everyone. Welcome back to Fund Recs HQ. And today I have Julie Farren from Deloitte. Welcome Julie.

Julie Farren: Hi Des. Thank you very much for having me.

Des O'Donohoe: So, what are we going to talk about today?

Julie Farren: So, today we're going to talk about disruptive technologies in asset servicing. So, last April we published a whitepaper on our view around disruptive technologies and how we will view that they really impact the asset servicing industry and particularly around asset management and fund administration as well. So, if you look at today's environment and the emerging technologies that have come to the forefront, you see the likes of Airbnb, Netflix.

Des O'Donohoe: Yeah. Real disruptors.

Julie Farren: Real disruptors even into iPay as well and how they've disrupted and even the times disintermediated the industries, but how they have benefited users. But what we've seen is a slow uptake in financial services particularly around the asset services as well of the uptake of these technologies. So, what we feel is with the disruptive technologies that we've chosen, that there would be a cost efficiency, risk reduction and better quality of service to the clients and operational service delivery as well to the clients and enhanced and improved.

Julie Farren: So, if we look at why asset servicing is currently standing in the way of disruptive technologies and looking at the world today, there's over 200,000 people currently employed in the asset servicing industry. The industry itself has gone through a period of change over the 20 years with acquisitions and poorly integrated acquisitions as well and multiple legacy systems that are in play for the last 20 years. You also have the fax machine still sitting at the core of TA.

Des O'Donohoe: Still there. Just holding on for dear life.

Julie Farren: Exactly, which is the funny and the irony that the person sitting beside it is using the smart mobile device and is able to make a P to P payment off their phone, shop on their phone.

Des O'Donohoe: I have to use that example. I think Andrew White said that his grandmother with her smart device has more capabilities than your average bank which speaks volumes.

Julie Farren: Exactly. So we argued that the high-level of employees in the industry is down to a lot of these manual processes that are embedded and have been embedded over time and incorporated.

Des O'Donohoe: Yeah.

Julie Farren: So, these are one of the reasons why we feel that some of the disruptive technologies that have come to the forefront will actually gain that cost efficiency that administrators are looking for.

Des O'Donohoe: Exactly.

Julie Farren: And so if you're also looking at some of the other trends that have emerged is that Assets Under Management (AUM) has increased over the past two years, but the asset servicers are still struggling with cost. And the industry is driving operational excellence as well. They want better service delivery, they want to adjust deductions in costs and these technologies that we view and that we've pinpointed, that we feel that these would add the value and change even the ecosystem as we know it.

Des O'Donohoe: Totally agree with that because what we've always said at Fund Recs in terms of who's going to be the most successful in the administration space is the ones that can serve us the most, not only the best, but can reduce the cost, do more funds with the same amount of people. So what we feel is really important is people get on top of those technologies early because it is happening.

Julie Farren: Exactly. So to pick up on the technologies that we've highlighted, there's three areas. And the first one is robotics, robotic process operation, RPA. The second is cognitive machine learning, which goes in conjunction with your RPA. And then the third one is blockchain (we've seen a) big hype around blockchain at the moment.

Des O'Donohoe: You always wonder how it can get into a conversation, but in fairness to you guys, you did a very solid case study. Was that last year? On blockchain.

Julie Farren: So we did a fantastic POC and it was not just fantastic with the use case around the technology, but it was a great news story for Ireland Inc. And the collaborative work with Irish funds. So we went on a journey with Irish funds, FinTech working group, and we decided that we would look at a piece of disruptive technology and how we could apply that to the business process and even look at how to change the ecosystem. So in Deloitte we've always said, you've got to think big, you've got to think really big, but you've got to start small and you've got to start really small. And the POC is a fantastic start point.

Des O'Donohoe: Yeah. You've got to get your initial proof of concept right even at a smaller scale and then you build it from there.

Julie Farren: Yeah. So what we did is we looked at how blockchain can be used to create efficiency around regulatory reporting and then onwards to the regulator as well. So how the legacy systems, or basically your accounting engine, your investor engine feeds through, into a blockchain through your smart contracts, and then how the process can take place within the block and move onwards to the regulator in a very secure fashion. We've also designed it around a maker-checker process.

Des O'Donohoe: Brilliant.

Julie Farren: And we've also decided that the regulator for the CBI, all their checks and validations are actually done prior to your submission as well. So there's no back and forth with the regulator.

Des O'Donohoe: Because you know with audits. My experience in the industry, there's so much toing and froing, over and back. If you can do it that way it's going to save a lot of time, effort for everyone.

Julie Farren: Exactly. And it's also even designed to go that step further that we can even put RPA and introduce RPA into it. Now RPA didn't play a role because we were demonstrating blockchain. So if we take a step back MMIF, Money Market Investment Fund was the choice of regulatory report that we used for the POC. And Des, as you know, it's like, Marmite, you either love it or you hate it. But it was a fantastic new story for the collaboration work that was involved and for Irish Funds and how the administrators came together because of regulation, there's no cost differentiation in it. You have to produce the report. It is a requirement for the fund administrators to produce this. It goes into each one of the regulators' jurisdiction, and also those kinds of rules that have come down for the report have been driven from the ECB as well.

Julie Farren: We also did a compare and contrast with one of the other jurisdictions in Germany, and we can see the data point sets are similar to the German regulator as well for the fund administrators there similar to what the MMIF is actually producing too. So if we looked at the piece of technology, we demonstrated that we can securely send true smart contracts and the information security into the block, it's stored, it's immutable. We also used another piece of technology called IPFS and for all the trekkies out there, the Interplanetary File Sharing System, and what it is is a piece of technology that sits on top of blockchain. Similar to the HTTP function sits on top of the internet. And what it does is when the information comes through, it shatters it like a pane of glass across the block. And each person in the block gets a piece. Now only the users who have access to that information actually can put the pane of glass back together and view what went into the block.

Des O'Donohoe: And the building block was Ethereum. Is that what you were...

Julie Farren: So we used Ethereum as well as our blockchain provider. So what we did was then we built in how to produce the report on a preparer reviewer, it went into the blockchain. The preparer went in, they went in, they looked back to the accounting engine, validated their final positions, and they then ran it through the beta checkers. And then they signed off and it went on to the reviewer and the reviewer has the authority then to send that secure note onwards to the regulator. And we could actually demonstrate the encryption and the note and time as well, the time of delivery and stamp to the regulator too.

Des O'Donohoe: And all lovely and immutable. That all went well?

Julie Farren: Exactly.

Des O'Donohoe: It kind of changes this thing. Okay. So obviously it went very well. What's the next step in that process? Is there a next step? How do you see that playing out?

Julie Farren: So the next step in the process was that we would need to develop a pilot. Unfortunately, the regulator wasn't involved in the POC. So as Deloitte, we acted as the regulator at the time, but we demonstrated very clearly you could apply the blockchain or RegChain as we have called it in Deloitte.

Des O'Donohoe: Sure enough, we need some more terms out there.

Julie Farren: Exactly. And how it can be applied to a future ecosystem. Having your engines that still exist, they'll always still exist, but how you apply blockchain. And then as I alluded to as well, you can put the robot in as the preparer for the report and then have the human as the person who reviews it and sends onwards. And then you have great data analytics off the back of it because the information in that regulatory report can produce fantastic analytics as well.

Des O'Donohoe: Very good. Very good. Julie, absolute pleasure coming in to see me today. Thank you very much.

Julie Farren: You're welcome. Thank you.