One of the secrets people don’t know about the big banks is their cost of good sold. It’s pretty large. 62% of revenue. The WSJ reports the big banks are going to try and get together to cut $2B in costs to improve profitability. They are calling it “Project Scalpel”, but it’s more than just surgery.
This is one of the reasons we have the thesis we have at West Loop Ventures. We invest in early stage companies that are disrupting the backbone of finance.
The back offices of financial institutions in all the various business silos are antiques. Many of them run on DOS. Post-trade operations consume a lot of the cost and human capital at banks. $24 billion to be exact. I was speaking with a bank person who was very familiar with futures clearing. They told me when they had problems, they threw more bodies at it.
The back office has always been seen as a strategic advantage by banks. Co-mingling them could invite co-mingling of data. That’s what they are really afraid of. They don’t want to invite a fox into the hen house. What if a competitor were able to create some sort of snooping program so that banks and their customer sensitive data could be made transparent?
Another interesting point is the different view processes take when they have different regulators. In the SEC world, clearing is seen as a commodity. In the CFTC world, it’s a strategic advantage. Hence, futures exchanges own their own clearinghouses. Options exchanges clear commonly through the OCC. Clearing is “fungible” on the SEC side.
By the way, there is amazing talent that is starting to focus here. HFT shops are full of top-flight engineers that understand finance. My friend Professor Craig Pirrong does a very good job breaking down the HFT industry and the economics affecting it in this blog post. Those talented people, mostly located in Chicago, are spinning out and starting up companies.
If you start to break down industries like insurance, banking, trading, data, payments, commercial real estate, and any other financial business silo, you realize how old the structure underpinning them is. It’s not just enough to write new code. The processes can be re-engineered because the world has changed so much.
Our focus is not normal in the venture industry. Most people invest in the next great smartphone savings app, P2P lending app, or payments app. That stuff doesn’t interest us. But, if you have a post-trade clearing solution we are all ears.