Vikas Srivastava, chief revenue officer at Integral, talks to Profit & Loss about why the software-as-a-service model is increasingly gaining traction in FX, and how it might prove to be a democratising force for the industry.
Profit & Loss: What’s the biggest technology challenge you see FX firms facing today?
Vikas Srivastava: One of the big challenges that we see firms in the FX market struggling with today is that they’re being asked to do more with less budget.
Take regional banks, for example. They have established FX businesses with long-standing clients, but over the years the demands of these clients have been increasing. They now want their regional bank to serve their FX needs electronically through a variety of channels, including multi-dealer platforms.
But when customers sign up to the multi-dealer platforms, multiple large banks will also start pricing to them, thus creating increased competition for the regional banks. To counter this competition, the regional banks need to improve many aspects of their FX business, including pricing and hedging.
These days clients don’t just want RFQ pricing, they want streaming prices across spot, swaps and forwards. In addition, if regional banks just aggregate prices and publish it with a spread, they won’t win against the competition. So, in order to win business that needs to have an axe or a skew, and in order to have those you need to have much more robust risk management systems.
In addition to these external demands, they also have internal growth targets that they need to hit and face pressure to improve their rankings on all platforms.
As I said, the problem is that they don’t have the budget they need to invest in the technology necessary to meet these growing external and internal demands.
P&L: Is there a solution to this conundrum?
VS: The heads of these FX businesses at regional banks effectively have three options.
The first is that they can build the technology themselves. The problem is that it could take them years to do this. There’s no guarantee that they’ll get it right and it’s very expensive. The second is that they can buy the software that they need. But the difficulty there is that they still need to do all the integration work and make sure it fits their workflow. Or the third option is software-as-a-service (SaaS), which lets these banks use the software they need without the overhead of ownership or time delays, and as a result is much more cost effective than the other two options.
This is because SaaS lets them pay for just the software that they need. A bank may decide that initially they need a really advanced aggregator, a basic pricing engine and the ability to distribute their prices to customers on FXall. With SaaS, they can get that and that’s all they pay for. Now as they start to develop and ramp up their FX business they may want to add other elements. They can now do that in proportion to the growth and requirements of their business, meaning that they only ever pay for things that they really need and use.
And one last thing that’s worth pointing out is that SaaS is delivered via cloud technology. Being part of a cloud-based service means that they are accessing best-of-breed technology and functionality. Firms self-select which parts of it they want to use. The beauty of this is that by utilising a SaaS model, all firms can potentially have access to a level of services and functionality previously only available to tier 1 institutions with large IT budgets. This allows smaller firms to compete with more sophisticated players in the FX market, while also giving them a lot of flexibility. If they need new functionality, instead of having to hire additional staff, design the internal build, get a cost estimate, etc, they can just subscribe to additional functionality that already exists in the cloud. It drastically improves the turn-around time of adding new tools and functionality in an ever-evolving business.
P&L: But SaaS has been around for some time, we’ve seen it in other industries and even in FX it isn’t new – nor are the cost pressures facing many firms. So why do you see more of a trend towards this model now?
VS: I think that the drivers and pressures that I outlined before have been building up for some time, the budgetary pressure on firms today seems to be a lot higher than it was even a few years ago, while the demand from the end-customers has reached a critical point where they’re no longer satisfied with getting a simple screen from their bank.
I also think that firms have tried and failed to build a lot of this in house, which took time to play out. In other cases, they spent a lot of money buying technology, often with limited results. So this is naturally leading them to the SaaS model.
P&L: But one of the advantages of building your own technology is that it lets firms differentiate themselves from the competition. If they’re subscribing to get the same technology as everyone else, then surely they’re giving up a potential advantage?
VS: That’s a critical point and I think that it goes to the core of what differentiates a good technology partner.
If it is exactly the same functionality and exactly the same product, then you are correct, you cannot differentiate yourself. And if you cannot differentiate yourself, you can’t win in business.
But if you have the appropriate, modern and well-architected advanced technology, then the differentiation comes with how you configure your workflow and integrate your proprietary models and analytics. The whole point of SaaS is that you can leverage its flexibility and configure the technology in many different ways – we have over a hundred clients using our technology and there’s no two firms that are using it the same way because they all have unique business models.
The services that the bank is providing to customers is completely bespoke to their own workflow and the specific business needs of their clients, so the software that they require will be configured in different ways to support that.
P&L: Do you think the regional banks are really feeling the heat in terms of competition from the larger players?
VS: I think that more FX activity is continuing to move towards electronic channels, and there’s a lot more competition in these channels. The regional banks are under pressure from all sides – the clients want more and there are competing banks with better technology vying for their clients. If they want to remain competitive, then they don’t have a choice. They need to upgrade their technology.
Having said that, I think that the regional banks can take this problem and turn it into an opportunity. With modern SaaS, for the cost of one headcount you can have access to great technology and for the cost of two headcount you can get most of what you need to run an institutional-grade e-FX business.
SaaS pricing is very affordable and therefore it lowers the barrier to entry for these banks. Instead of feeling like they’re under threat from competitors, they can acquire better technology and then start to expand their footprint, increase their access to new customer segments and expand their businesses.
The SaaS model is great for the FX market because more banks having access to this advanced technology means that more of them will be able to compete at a high level for customer business. In the end, who benefits from this? The end-customers do.