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   Investment Thoughts - Capital Markets

Why Financial Institutions Struggle to Modernize…and Why They Have to
Prattle is pleased to publish this interview with Zac Sheffer, CEO and Founder of Elsen, focusing on the modernization of financial institutions and the future of data in finance.

 

 

 

 

Can you tell us a little about your background?

 

My background is in engineering. I graduated from Northeastern University in 2013 with a degree in Mechanical Engineering, and worked at Schneider Electric before diving into finance. I came up with the idea for Elsen during a brief stint working at Credit Suisse when I realized the tools I was using to analyze data at one of the leading investment banks were less sophisticated than what I was using at school. I saw an opportunity to improve the way financial institutions used their data. Back at school, I enlisted the help of my then-roommate Justin White, and we began working on what is now Elsen.

 

You’ve written that most financial firms are “still using decades-old technology at the core of their business.” Could you give examples?

 

While modern technology like machine learning and analytics are transforming the business landscape across industries, the financial industry is lagging behind. Many of the largest financial institutions in the world still run on ancient IBM mainframes. While most of the retail banks and consumer-facing institutions have done a good job at building websites and apps that offer a modern look and functionality, the back-end is still powered by the same old machines. And very few institutions have put the same time and effort into building modern, intuitive applications for their own employees to use. It’s understandable that they put the customer first, but to remain competitive and empower their employees, it’s time they invest in solutions for their workforce too.

 

Given how competitive finance is—and how much money the biggest firms have—why is the industry lagging?

 

The decades-old technology these institutions are using is unable to support new IT services, and replacing old systems would not only be extremely challenging and time-consuming from an IT perspective but very costly. And while antiquated, the current technology meets regulatory and compliance requirements, so firms are hesitant to make changes. With hundreds of thousands of workflows (including compliance) depending on these mainframes, any delay or execution error could cause serious issues for a financial institution and its customers.

 

Financial institutions care about two things above all else: trust and security. And right now, they aren’t yet convinced that the risk of updating their back-end technology will be worth the reward. There needs to be an easier way to build the next generation of financial applications in a way that lowers the risks of implementing new technology, while providing a clear and quick reward.

 

There’s a big trend toward quantitative investment in finance. What is driving this shift?

 

Digital transformation is a top priority across industries, and with the availability of and accessibility to data, financial institutions need to adapt. Research from EY found that 83 percent of banking, capital markets, insurance, and wealth and asset management professionals agree that data is their most valuable strategic asset. However, financial firms face numerous challenges in extracting value from data, including legacy infrastructure still used throughout the industry and a shortage of skilled data professionals. In fact, only 26 percent of respondents rated their organization as highly mature in terms of its ability to realize value from data assets.

 

Despite a few slips and returns that trail the market, quantitative investment strategies will undoubtedly play a significant role in the future of finance—but that doesn’t mean that fundamental strategies will completely fall by the wayside. As technology improves, people with a traditional financial background are being given the tools to implement quantitative strategies without having to program or code software. One path forward is taking a hybrid approach: combining the best of both worlds into a quantamental future.

 

What does Elsen do and why is it important?

 

Elsen provides a platform for financial institutions to quickly build and deploy applications that make it easy for anyone to harness, understand, and make quick decisions with vast quantities of financial data without a team of expert programmers. Rather than trying to displace institutions with new technology, Elsen’s platform-as-a-service offering empowers them to build applications for either their own employees or their clients.

 

How is technology improving investment decision making?

 

Since the beginning of the financial markets, investment professionals have basically all been working with the same information to develop strategies and make trades. When everyone’s looking at the same thing, it becomes difficult to beat the market—or find things that others don’t see. But now, more data from increasingly diverse sources is becoming available to help investors see and try things they weren’t able to previously. That’s what makes this so exciting and why the industry is putting so much effort behind new, data-driven strategies.


The shift is happening industry-wide, but it’s especially visible in hedge funds. Traditional, or fundamental, investors are being overshadowed by a new breed of quantitative funds that use data and sophisticated analysis to make investment decisions—and they’re starting to take over Wall Street. Quantitative hedge funds are now responsible for 27 percent of all U.S. stock trades by investors, up from 14 percent in 2013, according to the Tabb Group.

 

And, let’s not forget the progress being made in artificial intelligence (AI). It is an exciting time to be in the industry.

 

How are firms finding, evaluating, and operationalizing data in 10 years?

 

Increased competitive pressure from startups has led many large institutions to realize that if they don’t innovate now they won’t be around to see the future of finance. Financial institutions need applications that allow investment, research, and analytics professionals to quickly and easily work with massive amounts of data.

 

Advances in technology and access to massive data sets have opened up new possibilities for seeking alpha—possibilities that never crossed the minds of fundamental investors. Quantamental investing, which combines the best of fundamental and quantitative strategies, is redefining how asset managers handle their portfolios.

 

About Elsen

 

Elsen is the platform-as-a-service company for large financial institutions. The Elsen nPlatform enables anyone to effortlessly harness vast quantities of data to make better decisions and quickly solve the most complex problems. The company is headquartered in Boston and is backed by a combination of venture capital and hand-picked angel investors from the startup and financial community including Accomplice, Boston Syndicates (BOSS), Hyperplane Venture Capital, Launch Capital, Sequoia Strategic Advisors, and Bret Siarkowski. For more information visit elsen.co.

 

 

 

Prattle, February 7, 2018

07.02.2018


 

Themes

 

Asia

Bonds

Bubbles and Crashes

Business Cycles
Central Banks

China

Commodities
Contrarian

Corporates

Creative Destruction
Credit Crunch

Currencies

Current Account

Deflation
Depression 

Equity
Europe
Financial Crisis
Fiscal Policy

Germany

Gloom and Doom
Gold

Government Debt

Historical Patterns

Household Debt
Inflation

Interest Rates

Japan

Market Timing

Misperceptions

Monetary Policy
Oil
Panics
Permabears
PIIGS
Predictions

Productivity
Real Estate

Seasonality

Sovereign Bonds
Systemic Risk

Switzerland

Tail Risk

Technology

Tipping Point
Trade Balance

U.S.A.
Uncertainty

Valuations

Yield