What Financial Services Can Learn from Telecom

In our work with leading financial services firms, we’re often surprised to learn of the large number of execution venues and broker dealers – both large and small – that continue to manage their billing processes using spreadsheets or outmoded systems. Why would manual processing of this standard back-office procedure be considered disadvantageous, or even dangerous? The answer is painfully simple: Today’s markets are competitive and only the strong will survive.

Industry Similarities

This call for modernized billing systems is a familiar song. It was sung loud and clear a decade ago when telecommunications was the fastest growing industry in the world. In order to remain competitive, telecom providers needed to update legacy systems, in order to consolidate services to a single bill, provide customers with access to call detail data and associated fees, track and invoice for taxes to growing a multitude of jurisdictions, and ultimately, position their companies for growth in a highly competitive global environment. The trend continues today in what some consider the third wave of evolution for billing services in the telecom industry.

A recent Booz & Company report, “Evolution or Revolution? Strategies for Telecom Billing Transformation” shows that billing improvements are now one of the top telecom IT priorities, with 71% of survey respondents placing it in the top three priorities for 2011. The study goes on to say, “Executives are experiencing firsthand the critical role of the billing process in supporting new products and pricing models, bringing them to market quickly, improving revenue capture, and reducing costs.”

Drivers of Change: An Industry Comparison

Despite the obvious differences between B2C and B2B industries, billing for financial services firms, in many ways, is similar to that of the telecommunications industry. Today’s financial firms need to process and invoice more complex trades and more parties, roll out competitive pricing in response to changing market conditions, and improve customer service in order to attract liquidity and differentiate. However, in contrast, capital markets firms are much further behind than their telecom counterparts.

If telecom is in the midst of its third wave of innovation, capital markets firms are slow to recognize the first. Arguably, with more money flowing through the financial system, as well as an increased focus on regulatory and compliance requirements following the global economic crisis in 2008, automating billing and revenue management processes should be much higher on the list of priorities for any broker dealer or execution venue that wants to thrive during this recovery period and beyond. The lack of focus, priority and urgency demonstrates that capital markets firms have yet to recognize the strategic benefits of billing beyond simple automation.

A Blind Eye Does Not Beget Better Billing Practices

Manual billing may have been an acceptable way of dealing with month-end invoicing back when there were fewer execution venues and trades moved through the system mostly intact. But today, in a high-frequency world that eschews latency of any kind, trade complexity is the norm. And with trade complexity comes errors, inefficiency, and delays. Today, few firms can confidently and more importantly — immediately — answer these questions:

  • Were we overcharged?
  • Did we receive all of the rebates to which we are entitled?
  • Was the correct rate applied to that trade?
  • Do we have easy access to historical trade detail in the event of an audit or compliance requirement?
  • How quickly can we implement a price change?

Today, there are a number of billing solutions built specifically for capital markets firms. These systems automate bill-related activities including calculation, presentation, and collection. Solutions such as those offered by Firm58 support revenue-generating efforts by helping firms implement flexible pricing models and cost-plus billing in order to support new high-frequency clients and provide detailed analytics about their revenue streams. In addition, firms offering Software as a Service (SaaS) platforms allow for web-based access to post-trade details to enable self-service in near real-time.

Bracing for the Future

During the late ‘90s, telecom companies experienced a challenging regulatory and competitive environment. On the regulatory front, the Telecommunications Act of 1996 passed with a goal to “open up markets to competition by removing regulatory barriers to entry,” forcing regional phone companies to open up their networks to inter-carriers. In quid pro quo fashion, this act also allowed regional phone companies to provide long distance services, unfortunately regional phone companies needed to develop a billing system, adding huge costs and delaying market entry. Ironically, as regional phone companies focused on developing a long distance billing solution and compensation solution for inter-carriers, the small inter-carriers focused on their product offering. The inter-carriers began to offer more complex bundled services (email, phone, dial-up, paging), which the regional phone companies had a difficult time billing for.

For those telecom firms whose billing systems could not scale in support of new wireless products and complex pricing requirements, the future was bleak and in some cases, ended in buy-out, merger or bankruptcy.

If similar technology revolutions in other industries are taken into account, there is no question that modernized billing capability for capital markets is a strategic differentiator. What remains to be seen is who will emerge victorious and who will be cast away while the sea change passes them by.