Growth Readiness

Remediating Risk: Securing

the Path to Growth

THE ROAD TO RISK INTELLIGENCE

When Sir Tim Berners-Lee created the World Wide Web three decades ago, he transformed a set of existing technologies into one comprehensive package.

His digital vision revolutionized the way we share information and use data — facilitating major economic and social change in the process.

In today’s investment industry, asset managers and asset owners are becoming increasingly reliant on heightened data connectivity and intelligent use of data to compete and drive growth. At the same time, the promises and uncertainties of a digital future are unleashing an avalanche of new operational and technology risks.

To secure a new path to growth, the industry will need to find innovative ways to protect and defend enterprise data, and to strengthen operational resilience — achieving new levels of risk intelligence.

As was the case with Berners-Lee, the technologies to power new levels of risk intelligence have already emerged, from artificial intelligence to big data to cloud. The major challenge for the industry now is knitting it all together to better identify and manage the risks that confront them.

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GROWTH READINESS

Our new research shows how leading investment organizations must respond to the risk challenge.

Embed resilience The ability to operate at scale, and to process and analyze vast volumes of data in real time, are critical to success in today’s investment industry. Three-quarters (72 percent) of the respondents to our survey are prioritizing investment in cloud infrastructure as this becomes the new normal for the industry. And robotic process automation (RPA) — which can help to enhance data governance and reduce risks associated with manual tasks — will be a high priority for 57 percent of respondents.

Destroy inefficiency Asset managers and owners will need to seek and eliminate pockets of inefficiency as they build their new operating models for growth. Two-fifths (41 percent) of our respondents are looking to cloud providers for microservices that will enable a more agile IT infrastructure — helping them respond effectively to compliance requirements across multiple jurisdictions and accelerate the innovation cycle.

Protect the enterprise The investment industry is banking on emerging technologies to drive future growth, but this innovation will expose new risk. Strengthening cybersecurity is the most important outcome sought from technology spending in the short term: 45 percent of respondents cite this as a top priority over the next 12 months.

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Digital advances are changing the formula for success. However, many in the industry have struggled to keep up with the pace of change.

In our 2017 Growth Readiness Study, we found that only 43 percent of investment institutions believed they were adapting their technology infrastructure quickly enough to compete in the future. Only 46 percent felt this about their operations capability.1

Pressure on balance sheets and staggered regulatory changes have led many asset managers and owners to focus on incremental improvements to existing systems, rather than wholesale change.2 But today, there is no time to lose: investment institutions need to modernize their technology architecture to compete.

Our survey respondents are taking action to reshape their institutions’ digital foundations. Three-quarters of asset managers are making cloud infrastructure a high priority for investment and more than half of all respondents say the same about RPA.

Both of these technologies are critical to reducing operational risk in today’s data-driven environment.

As investment institutions look to sophisticated big data and artificial intelligence-based tools to generate an investment advantage, cloud can provide the capacity and resilience to reduce the likelihood of system disruptions.

Amid demanding data management requirements, digital leaders are increasingly moving critical workloads and entire enterprise operations to the cloud. For instance, over the last couple of years we have seen asset managers becoming more comfortable relying on third-party cloud providers to handle their order management, accounting and risk systems, among other activities.

Alongside cloud, our study found that among institutions exploring cognitive computing solutions, 24 percent

A NEW STANDARD FOR OPERATIONAL RESILIENCE

¹ A New Climate for Growth, State Street, 2017² For more discussion of the industry’s approach to digital transformation, see All In: Changing the Innovation Mindset

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Figure 1: Cloud is the new normal

To what extent is your organization prioritizing the following emerging technologies for investment? (Percent citing “High priority” or “Very high priority”)

Source: State Street Growth Readiness Study, 2018

Robotic process automation (RPA)

Asset Manager Asset Owner Insurer

Cloud infrastructure 75%

61% 56% 54%

65% 77%

are developing applications to test infrastructure resilience and enable predictive maintenance. While still in its infancy, this technology ought to be given greater consideration as a mechanism to fix faults before they occur and help reduce costly downtime.

RPA has a significant role to play, too. By automating and standardizing processes, institutions can reduce the risk associated with manual tasks such as data entry and adjustments. Take the back office, for example. Reconciling information from brokers with accounting records, such as

trade-date information, can create huge workloads and poor data accuracy when managed manually. This risk can be averted through RPA.

The RPA that our survey respondents are investing in should set them on the path to better data governance, to make sure that accurate, reliable and timely data feeds are available. To maximize the benefits of RPA, however, institutions will need to work toward automating workflow processes across the front, middle and back office, for end-to-end automation.

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Industry leaders have recognized that legacy technology is no longer competitive and are putting cloud strategy front and center. But this is only part of the story.

Our survey respondents are turning to microservices to maximize the competitive advantages of cloud strategies. Inherently more scalable than legacy IT infrastructure, microservices are modular building blocks, where each service is an application focused on performing one specific process. These modular blocks communicate with each other via application programming interfaces to perform more complex tasks.

In our survey, 41 percent of respondents say they are looking for cloud providers to deliver a broader range of microservices to help them deploy and scale new solutions.

A microservices architecture can also play an important role in helping investment institutions speed up innovation, as developers can create, maintain and improve new services independently. This agility can be a significant benefit for analyzing and identifying threats such as fraud, regulatory and investment risk.

As the industry uncovers new data sources that better identify risks, analytics software can be adapted and tailored to incorporate this.

DESTROYING INEFFICIENCY: AGILITY + RESILIENCE

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6 REMEDIATING RISK: SECURING THE PATH TO GROWTH

Figure 2: Maximizing competitive gains from cloud strategy

Where would you like to see your existing cloud provider(s) improve the services it delivers to you?

Enhanceddata securityprotections

Range ofmicroservices

provided(i.e., software applicationsdelivering independently

deployable, small, modularservices to serve a specific

business goal)

Range of third-party information/data sources our

cloud providerdelivers to us

More wide-rangingservice level

agreements (SLAs)

42% 41% 32% 31%

Lower cost/price

27%

Source: State Street Growth Readiness Study, 2018

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PROTECTING THE ENTERPRISE

The burst of digital innovation in the industry has profound implications for the protection of enterprise data. Digital distribution channels such as client applications will create potential entry points for those seeking to steal client data.

Increased reliance on cloud infrastructure and the involvement of third parties in processing data for activities such as compliance management can also increase the risk of data losses.

Our survey respondents are laser-focused on these emerging threats. Even amid competing technology priorities, 45 percent say that strengthening cybersecurity is one of the most important outcomes their IT investment must deliver over the next 12 months. Sophisticated tools are emerging to help institutions tackle the cybersecurity challenge. Among survey respondents developing cognitive computing solutions, 39 percent say they are looking at cyber risk management applications.

Machine-learning algorithms can now be applied to monitor behavioral patterns and flag anomalies to detect risks of cyberattacks or fraud. For instance, unsupervised learning algorithms can monitor the vast volumes of data that cybersecurity

software produces. Establishing a baseline for normal activity enables detection of abnormal events that could represent attacks. Meanwhile, supervised learning algorithms can be trained to detect specific threats, such as identifying malware by recognizing associated software code.

Artificial intelligence solutions can play an important role in streamlining and tightening know-your-customer (KYC) and anti-money laundering processes, too. For instance, image recognition software can be used remotely to analyze clients’ identity documents, while external data sources can be automatically scanned to determine KYC risk scores.

In addition to bolstering their own cybersecurity solutions, asset managers and asset owners will need to pay greater attention to the data security practices of their service providers, as more third parties begin to manage business functions.

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Figure 3: Cyber risk tops the tech agenda

What are the most important outcomes your technology investment must deliver over the next 12 months, to help realize your institution’s growth ambitions? (Percentage citing rank 1, 2 or 3)

Source: State Street Growth Readiness Study, 2018

Strengthening cybersecurity

45%

Improving investment performance analytics

44%

Improving risk and liquidity analytics

43%

Harnessing unstructured data to improve investment outcomes

40%

Improving the experience we can offer to end investors/clients

39%

Optimizing back- and middle-office efficiency

36%

Cutting our costs

35%

Creating new services (e.g., robo-advice)

34%

Providing more detailed information to clients

28%

50%

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As the industry rapidly turns to a model built on digital foundations, investment institutions need a technology architecture that is both resilient and flexible. But like anything, new opportunity brings new risks.

Investment institutions will transfer critical workloads to the cloud. They will increasingly rely on third parties to manage non-differentiating business functions. They will create new online distribution channels, and they will forge external partnerships to help drive digital innovation.

As they undertake this transformative change, institutions must also embed new technologies and processes that will set new standards for operational resilience.

The rapid evolution of technologies such as cloud, big-data analytics and artificial intelligence, among others, means that the tools required to be risk intelligent are at their disposal.

As institutions adopt these technologies and learn how to integrate them, digital leaders will improve their ability to better identify and manage risk, whether that is identifying system faults before they occur, improving the accuracy of fraud detection or flagging potential cyber risks before they damage an organization.

Through this approach, industry leaders will embed risk intelligence into the fabric of their institutions, helping them to navigate a secure path to growth.

A SECURE PATH TO GROWTH

GROWTH READINESS

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The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.

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About the Research

State Street commissioned Longitude Research to conduct a global survey of more than 500 executive respondents representing institutional asset owners, asset managers and insurance companies during July and August of 2018.

The respondents span investment, operations and distribution roles and collectively represent 19 countries. Approximately 37 percent of respondents were located in the Americas, 40 percent in Europe and 23 percent in Asia Pacific.

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