Thanks for re-platforming, now do it again
It’s hard to remember that the platform market is a relatively new industry given how it has established itself as the dominant route for retail investors to access investments. The trend shows no sign of abating as the AUA sitting on platforms topped over half a trillion by the end of 2017 with year on year growth of 22.4% (The Platforum, UK Adviser Platform Guide, Mar 18). Like anything that grows quickly you can encounter growing pains, and one area that it has manifested itself within the industry is in technology.
Column inches in the financial press have been filled with tales of re-platforming woes for provider and user, coupled with confirmation of the eye-watering sums invested. Spreadsheets and access databases that once powered the industry in its infancy are no longer scalable or fit for purpose under the weight of regulatory interest, AUA and inflows. Last year it was calculated by FinalytiQ that once all of the in progress re-platforming activities are complete, FNZ (37%), GBST (25%) and Bravura (20%) will power 82% of the market. That is in contrast to a mere 13% that will remain on proprietary technology.
The arguments for and against outsourcing are well established. In the case for proprietary, owning technology gives control over your own propositional development. Outsourcing is a factor (among many) driving the platform market closer to commoditisation, although platforms hold the power to negotiate a certain level of customisation. Critics of outsourcing warn that platforms will pay for custom developments that then end up becoming available to all.
As FinalytiQ point out, the three dominant providers of platform technology now represent a significant systemic risk to the market, the platforms and the end investors they serve. Based on £516.65bn AUA on platform at the end of 2017, the £191bn (37%) that will be run on FNZ technology is a sobering thought about how the platform industry is being built on a trifecta of back office systems.
This structure of the platform industry means the threat of a new entrant, specifically one that will end up in the top five of AUA, is low. There are start ups, particularly in the Financial Technology (FinTech) space offering a different way to invest with a superior user experience. Meanwhile, the banks are re-entering the market with robo-solutions to leverage their brand and existing customer base as the Retail Distribution Review (RDR) shrinks in the rear view mirror.
It would appear then, that we are in the throes of technological change that will fundamentally alter how we leverage technology to deliver platform services in the future. The introduction of the Open Banking Standard in the banking industry allows a customer to share their data with a third party though Application Programming Interfaces (APIs) ;something that will be required to support the Government’s proposed pensions dashboard. Open Banking was initially implemented to increase competition and switching, a similar objective to that stated by the FCA as an outcome of the impending Platform Market Study. It seems only a matter of time before all financial service firms, including the platform industry are subjected to the same standard of allowing access to investor data.
If we do see such a change by the regulator, systems will need to be modular and built on interoperability. Effective integration facilitating the flow of data internally and externally will be crucial. This could further drive the platform industry to commoditisation as aggregators accessing data from multiple platforms through APIs will have functionality to provide financial advisers with a front-end ‘platform of platforms’. This would exchange investor information and potentially extend to transactional instructions into the platform. That would focus the value on thin margins from the back office and demonstrating relentless efficiency at scale.
If that happens the back end of the platform offering is the part that will retain value. If you don’t own proprietary technology, it is difficult to see how a front-end platform will retain any value as data seamlessly flows from back end to aggregator’s front end. In five years time, the proprietary platforms’ competitors could end up being FNZ or GBST rather than its platform counterparts.