Introducing the Future: Industry trends and Challenges in 2024

As we begin a new year, we thought we’d share the wisdom and insights of some of our clients on trends, technologies and topics that will be the focus of attention in 2024 – and that will potentially shape the future of financial markets. 

Growing importance of real-time liquidity data

Liquidity management will take an increasingly prominent role on the financial stage in the coming year, as firms’ stakeholders and market regulators recognise the limitations of current metrics around real-time liquidity data. 

The Federal Reserve and European Banking Authority have already issued guidance that shows liquidity, in particular intraday liquidity, is on 2024’s priority list.  Boards and Regulators expect Early Warning Indicators, utilising data or information to predict an imminent stress event, to be based on real-time liquidity metrics, combined with other data, such as risk data and social media sentiment. These indicators will not only be based on liquidity metrics but will also incorporate risk data and social media sentiment, presenting a comprehensive and proactive approach to mitigate risks. 

“Liquidity and liquidity risk is racing up the agenda in banks and financial institutions. Having a high Liquidity Coverage Ratio (LCR), – the proportion of high quality liquid assets held to ensure short-term requirements can be met – has been shown to be a poor measure of an institution’s stability – as demonstrated with Credit Suisse; real-time liquidity control is the best way to address market confidence.”

Path to post trade nirvana – T+1 and beyond

For much of the financial services industry, forthcoming changes to T+1 settlement from May 2024, and the associated implications of this transition, remain very much front of mind. Yet more regulatory changes (Mifir/EMIR Refit/ASIC Rewrite et al) and associated reporting obligations in the latter half of 2024 will also be a crucial focal point for market participants.  

“The need to streamline and optimise post-trade processes, and greater automation, will be key to ensuring a smooth and painless transition.The advancement and adoption of technologies for post-trade operations, such as blockchain, AI and cloud computing, and greater collaboration between traditional financial institutions and fintech companies will further fuel innovation and competition in post-trade solutions.” 

The use of blockchain, cloud computing and AI will continue to be the focus of industry debate, particularly in the world of post-trade operations, and with respect to their potential to significantly increase efficiency and security, and enhance market transparency.

At the same time, while T+1 and even more ambitious T+0 goals are laudable, as an industry event panellist observed in late 2023 “while trading is very much using 21st century technologies, post trade processes are still in the Victorian era”.  

“The reality is that despite technological leaps in financial market infrastructure development, legacy mindsets, dated technologies, data silos and non-interoperable systems have remained the order of the day. However, as digital assets and technologies mature – in tandem with financial industry perceptions of them – there is growing cross-industry interest in how they can be leveraged to resolve “TradFi” transaction processing challenges including more efficient settlement and collateral management.”  

The future IS digital…

While the digital asset landscape faced significant challenges in the first half of 2023 following the FTX fallout, real-world digital assets geared towards institutional interests came increasingly to the fore in the second half of the year and this has set the stage for the sector to further expand in 2024. 

“There is, unquestionably, a lot more buzz in traditional markets around the potential of new digital technologies to transform end to end transaction lifecycles; we feel optimistic that 2024 will herald a real acceleration in the pace of digital change.”  

Tokenization (and fractionalisation of on-chain assets) is also forecast to grow exponentially in the next few years, with many of the world’s largest financial institutions acknowledging growing investor interest in – and demand for – tokenized digital securities and DLT-based trade finance solutions. Estimates vary, but conservative forecasts suggest that the tokenized digital securities segment will be worth some $5trillion, and digital trade finance $1 trillion, by 2030.

“For service providers, new digital assets and technologies that support traditional transaction lifecycle processes such as cloud infrastructure, managed services and AI are creating a host of new opportunities with respect to how market participants connect and engage.” 

In terms of Web 3.0, there were more than a few green shoots which portend good things for 2024 including increased institutional adoption of critical “digital building blocks” including new payments rails and capital markets infrastructure such as digital custody, real world stablecoin adoption by SMEs, particularly for expedited cross-border trade and last but not least, progression of DeFi ‘back-office’ for traditional credit instruments, with the aim of reducing the cost of issuance. 

“We are watching developments in these areas closely, and anticipate first mover adoption for segments for whom traditional financial services provision is more expensive and less efficient, particularly for SMEs and with respect to more bespoke lending models (for example, trade finance).”  

Bridging the climate tech/climate fintech gap

The need to address climate change is real and immediate. In 2024 the sector is expected to see higher levels of investment compared to traditional fintech, with considerable innovation in product development and key technologies like blockchain, AI and IoT across an expanding industry.

“Recognising the many siloes that exist in climate markets – and the absence of a bridge between climate tech and climate fintech – we realised that our technology and experience in the digital assets market could tackle issues like these. Further, it is an opportunity to leverage our digital financial market infrastructure in the burgeoning climate fintech space and to move from a software and SaaS company to a SaaS and PaaS company.”  

“Any time, any place, any device” connectivity to the global financial ecosystem

Financial markets participants continue to be focused on technological and service delivery innovation for more effective “any time, any place, any device” connectivity.  There is increasing customer demand to move from fixed service contracts to more flexible and nimble subscription models – including Data, Network and Infrastructure as a Service solutions. Beyond ‘as a Service’ solution delivery, greater industry collaboration is the route to a continuously enhanced service offering, whether in terms of accessing new markets, enhanced market data services or more seamless regulatory compliance. From a global industry perspective, ongoing geopolitical impacts will continue to create market uncertainty, requiring participants to be vigilant with respect to volatile political and economic conditions and their potential impact on technology, regulatory and customer strategies.

“More efficient market access, greater cross-platform and system interoperability and highly secure and compliant communications technology is the baseline for all trading platforms today, alongside a laser focus on the customer experience.”

Standing up for the under-banked and unbanked 

Some banks are tentatively embracing Web3 technologies to deliver process efficiencies – for example in wholesale cash management, custody and asset servicing.  However, they face a growing threat and challenge from non-bank fintech disruptors. 

“A key challenge for ‘new wave’ crypto firms seeking financial – or other – services is overcoming the hurdles of traditional AML/KYC management processes. Web3 and decentralised technologies offer the potential to reshape the personal identification process, establishing proof of identity that is vested with individuals and ‘fungible’ with respect to any and every application for which proof of identity is required.”  

Enhanced security offered through blockchain networks underpin the development of a secure, non-transmutable, digital ID that, over time, will do away with today’s convoluted, non-transferable document-based model in which banks, utility providers and all other entities requiring proof of identity may have different requirements with respect to the number and height of the hoops through which potential customers must jump. 

As we embrace the promise of 2024, we are at the forefront of a transformative journey for institutions, financial firms and services providers alike as they navigate a changing and challenging landscape. By harnessing the power of real-time data and cutting-edge technologies, financial market participants can drive innovation, foster resilience, and continue to shape a prosperous future for themselves and the industry as a whole.