Why Interconnectivity is Crucial in Financial Services

April 4, 2019

Interconnectivity is crucial for today’s businesses. Simply relying on point-to-point connectivity just doesn’t cut it anymore, especially as the cloud becomes more popular across the enterprise, as the number of connected endpoints skyrockets and as teams require constant, global access to key IT resources to achieve true success.

While this holds for just about all organisations today, it’s especially key for financial services firms. At all ends of the industry, network connectivity is now a major requirement for businesses to succeed.

Interconnectivity in the front office

At the forefront of the financial services space are the teams and individuals responsible for buying, selling, and trading assets. Think banks, hedge funds, high-frequency trading firms, government entities, and wealth management consultants, just to name a few front office financial services areas. In all of these elements, standard P2P connectivity no longer cuts it.

For anyone at the financial forefront, it’s crucial to have unfettered access to market data. Mere microseconds now separate successful transactions from failing investments. This is why space in colocation facilities with financial exchanges are now premium property.

And without true interconnectivity, disaster can strike. Should issues arise in trading, billions of dollars can be lost. Without a mesh network, transactions can fall through the cracks, adding losses and causing a myriad financial and trust issues. This has been underscored in the dozens of stock exchange outages over the past decade.

Unplanned downtime is costly in any industry, but it’s especially so in financial services. One study found that while a so-called “critical IT event” can cost a bank over $140,000 on average, when reputational considerations are taken into account, the annual cost to a banking institution jumps to more than $5 million. These costs—along with the need for greater interconnectivity—will likely continue to increase as banks focus more on their mobile apps and shut down physical branches; BB&T announced $300 million in data centre spending in April 2018 in the wake of widespread ATM and mobile banking issues.

And then there’s the regulatory concerns. There is a host of laws and regulations governing financial services firms, which underscores the need for interconnectivity so that customers always have ready access to their hard-earned funds. If financial services fail to live up to their fiduciary responsibility in this manner, then they will face significant fines; the New York Stock Exchange learned this the hard way in early 2018 when it received a $14 million fine stemming in part from a 2015 computer failure.

This need for interconnectivity is prevalent in emerging financial markets like cryptocurrency trading as well. If there is a lack of quality connectivity within the entire network, disparate parties may be unable to verify new blocks, which can cause major issues.

Interconnectivity in the middle office

Within the financial services space, there are a whole host of individuals and corporations working in a middle layer to add trust and provide sage advice to the front office organisations. This group includes insurers and financial analysts. For them, interconnectivity is also paramount.

For example, consider the work of financial analysts, who compile reports on their markets of study and provide inputs to the front office on how markets are progressing and who are making noteworthy moves. If they have outdated, old, or inaccurate data, they are severely crippled in their ability to provide accurate, useful insights. They also require interconnectivity to effectively disseminate their findings to all potential clients and customers as well.

These same principles apply in insurance as well. If insurance companies are unable to get the data they need, they are unable to adequately determine risk. After all, actuarial services and support are just as reliant on clean, quality data as is any other industry vertical.

This space is also increasingly looking to new technology like the Internet of Things and Artificial Intelligence. Especially in the insurance and risk management space, the IoT enables them to collect more data than ever before, and then use that in combination with AI to more accurately assess risk. But, robust connectivity is needed for both technological initiatives to function well.

Interconnectivity in the back office

As is the case with any business sector, financial services firms have back office support teams like Human Resources and Legal Departments. As these teams become more dependent on the cloud, the need for true interconnectivity also rises.

In order to support the needs of globally distributed organisations, HR is especially reliant on cloud computing. Using cloud software makes it much easier for HR – and really any other back office organisation – to compile information from disparate sources and make it available to teams and individuals whenever needed and wherever they may be.

But, to provide these services, these kinds of cloud applications should be underpinned by robust interconnectivity. This way back office teams are able to always service the wider organisations and provide support anywhere and at any time per demand. For the back office, interconnected cloud applications enable them to complete their duty to the wider business no matter what.

Enabling interconnectivity in financial services

In some ways, connectivity needs within this space can seem oxymoronic. On one hand, globally distributed teams are relying on the cloud and needing constant access to disparate data sources. On the other hand, because it’s a highly regulated space dealing with especially precious commodities, security is paramount. How can both be achieved within one network topology?

The key is a hybrid network. In some instances within financial services, robust direct connections will be needed. For example, these kinds of connections can help banks securely transfer account information between branches and ensure uptime so a trade is never missed. But, for other use cases, virtual cross connects can help provide scalable yet reliable connectivity.

While there are many ways to establish and develop an interconnected network, it’s something all financial services firms require. And, as the Internet of Things grows, as markets become more distributed and as latency and reliability become greater concerns in the space, the need for interconnectivity within financial services will only continue to grow going forward.