Sibos 2014 Keynote: Tech, Services Merge While New Barriers and Competitors Rise

To hear Chris Perretta and Peter Cowhey tell it, a chief financial technologist today is surrounded by a maelstrom of small tasks and transformational challenges, from improving mobility and cyber security, to recruiting and retaining young graduates, to making the "hacker" mentality-which they used with a positive connotation-more widely productive.

But Perretta, State Street's CIO, and Cowhey, University of California at San Diego's dean of the School of International Relations and Pacific Studies and Qualcomm chair in communications and technology policy, really boiled down the issues to two: building a digital enterprise right, and fending off those who can potentially do it better.

"Two things about technology today are dramatically different than in the past," Cowhey explained. "First, startup costs are 80 percent lower than in 2002. Second, ubiquitous mobile internet has allowed user interaction and observation to develop a whole new way of generating innovation, leading to change in markets that were relatively untouched. Look at agriculture and Monsanto, which is creating the ability to guide planting decisions, spacing of seeds, and depth of planting, by using information based on sensors in fields, and then selling to farmers a crop insurance package based on managing variations in climate and following the best farming practices. If you were writing an economic history of the world, this will be the age where the distinction between traditional goods and services will disappear, and that creates huge stress on technologists. If Monsanto is in the insurance business that's a much different struggle for them than traditional goods."

An Era of Transformation
For his part, Perretta said State Street and other financial services firms must cope with that distinction's collapse by developing a more "holistic" model of strategy and development, recognizing that data—like any manufactured product—must be attended to in an end-to-end process even as different constituent parts of the assembly line are switched in and out.

"Systems are growing in capability faster than our typical strategic three-year cycle," he said. "In that time, the amount of power available to us could quadruple and as it relates to the cloud, is almost infinite, so the real question for us to define is what we're capable of doing earlier. There's an economics of opportunity that we haven't had in the past."

Both speakers pointed out the more challenging side of an era of transformation, as well. On one hand, Cowhey said, financial services firms are coping not only with waves of regulatory change but additional legal and even political issues like data privacy and sovereignty piled on top.

"There is great risk to the potential upside of all of this, which is that people will take problems of privacy and security and use them for other purposes, where regulators, for example, will plead a case that because of real problems with privacy and security, a firm can only trust a locally domiciled firm or provider to manage these things, and this can get you into deep trouble maintaining a global infrastructure. So we have to find a little bit of convergence. Our starting points for understanding privacy vary by region. If you compare the US to EU, in the US there are only certain very narrow constitutional protections concerning privacy, otherwise there's no right to it, whereas in the EU there is that right. The difference comes from the US system deriving from Common Law, which looks at problems, develops precedents, and periodically formulates them into regulations. It's problem-specific. The EU uses a continental tradition that develops a comprehensive approach first and then applies it, so that's a very different starting point."

On the other hand, there are the emerging markets, which Cowhey—a former Clinton Administration official—predicted would be the next venue for financial innovation, though not an equal-opportunity one, noting Alibaba's foray into auctions and banking as an example. "They will create new hybrid financial services from traditional products, but these markets are going to be asymmetrically regulated with very different treatment for local and foreign companies. We tend to think of the West as where the innovations take place, whereas the innovations for tomorrow might be behind some of those barriers," he said.

Becoming the Predator
And therefore, beyond flexible infrastructure, modularizing systems, and leveraging regulation-driven investment to clients' advantage, Perretta said his biggest worry isn't necessarily running State Street's operation on a daily basis; rather, it's keeping his head on a swivel.

"If someone has the data surrounding your core business, you might find yourself left capturing low margin business but traditional competitors capturing the higher margin all of a sudden. We all have to be paranoid. Was IBM worried about Amazon or did limousine companies worry about Uber?" he said. "You might not see the bullet that hits you. So we think: If we were a startup, what would we do to destroy our business? We really understand where we're vulnerable, and what part of our business is exposed to a non-regulated entity [like Google or Alibaba], and likewise, what are the other entry points where we can be the predator rather than victim."