« Exchanges at Goldman Sachs

The Digitization of Finance

2016-01-20

Don Duet, co-head of the Technology Division at Goldman Sachs, discusses the technological transformation of the financial services industry, and how advances in open source, big data, blockchain and other areas are driving further innovation.

This podcast was recorded on January 12, 2016.

This podcast should not be copied, distributed, published or reproduced, in whole or in part. The information contained in this podcast is not financial research nor a product of Goldman Sachs Global Investment Research. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty, as to the accuracy or completeness of the statements or any information contained in this podcast and any liability therefore (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. The views expressed in this podcast are not necessarily those of Goldman Sachs, and Goldman Sachs is not providing any financial, economic, legal, accounting or tax advice or recommendations in this podcast. In addition, the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs to that listener, nor to constitute such person a client of any Goldman Sachs entity.

Copyright 2016 Goldman Sachs. All rights reserved.

This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This is exchanges of Goldman Sachs. Were people from our firm share their incites on developments, Carly shaping markets, industries in the global climate objects, Ewart globule of corporate communications heretofore, today's episodes about the digitization of finance and there's no better personal talk. The dawn, duet, the go ahead of our technology, envisioned on welcome for the programme to be here like you. Do in an era of widespread digital disruption, the way we shop the way we commute the way we page other technologies bringing tremendous change to almost every human activity. What are some of the key drivers behind the surgeon, innovation and how's it affecting businesses, women at Goldman Sachs for twenty seven years, always in technology, and I have to say This phenomenon for me to have seen, obviously how important technology has been to our industry into our firm, but just really seeing the escalation. That's been occur,
in the last several years, and you think that a number of different themes behind that. What driving that that our secular one very important one is the amount of literacy and comfort level. There is in the world today around technology, where such a core part of everyone's life, where it's become just inevitable that you're picking up your phone. The first thing you do in the morning that you are finding that much of what you did for me that retain the perspective shopping perspective. Your social perspective is at all. Aubrey on technology and much just changing the way people think and the course that bleeds over into the workplace as well, because people are people and institutions are made up of individuals We see that that's one of the biggest macro trends that's occurring in the world today, we always semblance of technology across the board. Acceptance desire, empowerment, who wants to back to ordering things and waiting days months weeks, when you can get information, get devices get
solutions online right away. If you can manage your music yourself, just the empowerment of technology really kind of now made it into the mainstream is just huge enabling at enabling change because the perceptions and the desires and how we want to work today. Our just increasingly different but largely front because are being fuelled by people's capability through technological innovation, that's been happening in every his world, but certainly in the consumer landscape in particular chief, talked about how technologies pervasive in everyone's. live, but the younger generations, millennials and Genji, are often described as digital NATO's people, who grew up using technology, the young age and have a certain natural sophistication with it. How much of these changes described are being driven by that generational shift and by young people's expectations for digital solution to virtually everything. But we think it certainly that the speaker for sure I ll, even at government, and we think about as we bring in your new
younger people into our environment into the firm they expect. demand everything to be available online and digital until we're, certainly seeing that advent of this The generation that has borne digital up in the age of the internet. By would say we're saying that its much, if not that narrow. It's also broader here, the growth in solutions like many of the large social networks that are happening at the baby boner agenda action in the Genji generation that we're sitting, not just the boar native community, but we're saying that it's a broad based acceptance and shift into technology. That's happening again That's then spurring interesting changes in the dynamics of how we interact with our clients in their expectations of us, in the way that we think about the solutions we provide here at the firm into our employees, So one big driver of change has been open source approach. That's really transform the way out of technology companies innovate. It seems almost counter to that a collaborative approach like open source would have a big impact in the business world.
Financial world, but it is including your Goldman Sachs talk a little bit about our approach to open source and why we think it makes sense for enterprise Since every one of the other macro trends that we think is really driving this whole new digital agenda is just the impact that has been had of just the change and innovation and the costs of innovation. Broadly speaking in so Opensource is certainly one big component, the ability to gain access to very complex solutions, whether be software hardware, solutions in the open community in the past, you'd have to purchase or pay for, or the ability to get and tap into the internal expertise of the engineering groups. At many, the big large firms who are now providing opensource solutions as a regular part of how they embrace change DR their own business agenda. Opensource is key that a whole new basis, for
enabling the innovation to become simpler and cheaper and lower costs, which enables people to be able to get more solutions and more business innovation complete, but stepping s back. For a moment, one thing that I think surprises people, often that our industry is just how can any driven it actually is so very few things actually occur a world finance shortly in the institutional markets that we operate within, which is just Goldman Sachs to a single counterpart theres many different players involved. There are many different processes in the cycle in both pre trade, all the way through post trade execution and so there's a natural supply chain and community that is, they are now much of that over many years of investment has moved into what we would think of as a structured digital money. Until there is a lot of information. This tremendous investment in technology that's gone into the banking sector for decades, but the opportunity to really take that forward through things like but source or really embracing more community style technology. Architectures is something that really does both,
to the model of our business, but also enables us to not think about just institutional game, but really can and network game and community scale game people think oftentimes of banks as being of a closer smile all that the banks have their own special sauce and their own special technology really for the market place to work. You're saying it really needs to be one, that everyone is using similar tools, similar solutions somewhere. based on the basis of being able to move information in a digital form and more were finding that the ability to that forward for a community creates the basis for material production infraction of our This then material Jane, which obviously means lower costs for our lost, better experiences. So as an example yeah, there's an initiative which governments access part of that's called symphony where we were able to take a set of services and software that we had them. Internally for really enabling multi party type chat solutions for our own business and for our own customers and really work
to do two things: one to open source software make it freely available for the world to use and then, secondly, to work with the finance community to develop a new entity, that's going to effective way for the first time ever open and secure messaging framework for certainly our industry, but for any industry that wants to use it and why important moment enables us tend to begin to move to where we can imagine not just the basics of sending messages between institutions to becoming secure and open. But then develop? On top of that even more value added solutions. Things like the ability to know that this really is the person that new claim to, because we could have a much more tax logical model for authorization and entitlement to be able to move to Imagine building applications that really provide for much more weight. Workflow, like it apps you'd find today in your smartphone environment, so really creating the base as for the entire community, to move to more they and they
digital model. That starts with having that base layer of infrastructure, which is a core open and secure solution for messaging. That starts at the centre of that Let's talk a little about something Coleman did last summer along these lines, the firm made some news when we announced that we can for certain trading technologies, which again some people think of his very proprietary. How do you think about what kinds of offerings we have? we're to make more broadly available to the financial community I than we. We take a view today that we first and foremost have benefited enormously ourselves from open source that, when you look into are environments when you say how much of our internal software is, what is running on that in open source? Will there be starting with the open source of operating systems with Linux through to open source hardware, with the open, compute project that was to be done with Facebook, that we've been at Korman
through too many different components of our sac that are now currently open source that we continue to find the crates great benefit for us. The other challenge, with being a contributor beyond a intellectual contributor, has been what types of assets would be useful to everyone's as many parts of our business is over. specialized in nature and may not really have all that much broad value, but things what we describe like symphony parts of our trading infrastructure, great opportunities for us to contribute to the open source which, gives us the ability to help everyone in the environment and the community improve which fundamentally does help our business. At the end of the day, you know where our ability to conduct business on behalf of our customers in this effective and efficient manner as pie, simple, becomes more more constrained in a globally connected world by ones ability to have the capabilities to deliver technology services, and so we find that it creates outsize impact for us to have that position. So
little debate round the impact of technology in the industry, some see the whole financial services sectors just right for disruption, then that the new entrants will really take big market share from the traditional banks. Others say the trivial banks very quick adapt and that they're gonna stand topped the what's happening out there and make sure that their customers you get in the ways and greatest technology and experience. So what do you say? How about digitization being a threat or traditional banking. When gets a very interesting, very complex, bait and on one hand, banks have been investing for a very long time in technology and in so much of our core franchises says of the bank's already very technologically driven, so the more classical story of someone coming in a digital player and disrupt highly analogue business, like we ve seen in commerce in other parts of the retail market, spectrums is much less likely
in the financial sector, given that there is already so much of the deep investment in technology and it becomes a very core competency in nearly every one who participates and your bank have also relatively deep moats. If you want to use that term in terms of both the regulatory requirements that are necessary to operate nor businesses, the focus on compliance, and the underlying sets of controls that are needed in order to expensive unless, as It takes a lot of money, at least to replicate what you need to do just to stand right, I'm, along with a lot of expertise. It means a lot of our businesses are very complex if you could argue whether that's good and healthier unhealthy, but the expertise that unnecessary to participate in many of our markets can be quite high, thickly in things like derivatives and risk management. So I think, some of the bear side of the debate on the bowl side for fear. I think you talk about and you see both first and foremost, an enormous amount of investment dollars going into these companies. I think
The last five years over twenty three billion dollars was put into in terms of venture woody capital into, where people opportunity an opportunity it opportunity size that opportunity, where will the disruptors sort of gain a in the traditional having what we tend to see Is that the most interesting opportunity tends to be that again through these technological secular changes that we are seeing that the Oracle model, a banking being a relatively closed loop model, which was driven things, like your physical branch networks, becoming very disaggregated, so the Kennedy GO ended. Imagine having a relationship, the new entity that may not be or historical bank for thing like a loan or something like a mortgage, now becomes much more reasonable, given that your execute,
this on line, you're, not executing it by walking down the street, are driving to your bank. Account of this fact aggregations opportunity creates very interesting spectrum for new entrants to come in and say. Can I pick the particular market segment in the pickle, a customer segment and find ways to create great innovations that make it simpler, perhaps and more efficient for customers? And so we see that really is seeing the interesting secular change- and we see a lot of the thin tech companies, therefore really focused on that side of the equation: how to really disrupt the sails and origination cycle since a that's where most of the profitability tends to be versus the credit mediation and they're just easier in some ways in their simpler and have less of those challenges? Those boats we described earlier so a lot of opportunities, lot of interesting things. I think, from our perspective at Goldman, Europe focuses twofold. One had a week it here,
lay in wait ourselves both in the markets that wherein as well as when we think about the opportunities that could be there to extend Org disenfranchises businesses and then. Secondly, how do we braced the new economy, that's forming around us, and so what types of opportunities are there to take these solutions, services that we believe we have very good solutions around and begin to not just look at our classical customer base, but also look at new ways to extend those products services. As we see this new digital economy to come together. So you ve talked a lot about how Goldman Sachs is adapting. How do you think about, though, that process of continual technological innovation Particular industry than in some ways has been doing the same thing for a long time. Financial intermediation between borrower, savers and- and I like, I think, it's hard about. I think there is no question that transforming and existing businesses Much harder challenges in some point, his in building and illegally, is it aren't often or new after our right exactly- and I think that you know a week,
I'd do anything where we see and learn from people who seem to be best at this is just to early both think about technology as fundamentally business competency for the organisation and then think about change as a continuum that here, we are constantly looking at ways to reinvest in improving customer experiences were concerned, looking at new ways to think about how to facilitate for the types of data and computing and processing that we have to make it more efficient by working with large web firms and understanding how they do things So I think you need to create a culture that is continuously innovating in order to facilitate for that. But I don't pretend that it's easy to do and, as you mentioned, when you get into a system, that's well defined and as
place for many many many years as much of the financial services systems. Have it's hard to drive that innovation from within which a lot about the upside. I guess in many ways improve experience for customers, clients, better network effects. Let's talk a little bit about the risks. Around technology. The interconnectedness of the world is one we're. Threats can also come from anywhere and so how, as technology, changed the way we approach our management of those risks. You say it mean the risks obviously continue. grow in many different dimensions. I mean there certainly the pure risk around cyber security. The advance persists in threats. How are you able to protect your digital assets and The data. Importantly that really rides on those and, as we can t see, the industry move forward in a digital
What that means that more and more of our information services content is going to be in places that we don't physically control our own, and so how do we really work with the emerging public infrastructure to ensure that we can at the minimum project our risk profile impostors. They are, but ideally be able to partner with that part of the community to help us develop better solutions that are inherently more secure and create. protection, but the surface area of where we will have content, we will have data, we're we're. Gonna have application. Services is only going to grow overtime, which means the threats are going to grow, and so I think we look at an end. The need for collaboration is gonna, get because we're not going to control at all in our own absolute. Having than that's a very server farm. Keen awareness point I think for all of us in the community is that you need to co. Invest you need to develop partnerships, you need to be able to help influence. and create awareness of why security really does matter to parts of the industries that may not necessarily so
as clearly as we do coming at things from a financial services perspective, and so a lot of our agenda technology of the last several years has really been aligned to that of? How do we move our own firm forward? firms of embracing and adopting more parts of the public infrastructure spectrum be more engaged in open standards and solutions and crossed the broader technological community to help influence, change in awareness of solutions This is. It will enable our business to perform better in a digital world that those risk continue to grow. All the great innovation we talked about earlier- that helps reduce the cost of solutions and services available to people with that intent, as well as its of helping people with good, and it's a continuous struggle to ensure that we're designing in both the technology solutions, but also in how we develop, awareness and our people access information to ensure that we're controlling inward supporting information from a security perspective that containers challenge
We also need to be aware that, as we digitize more of our industry, that more more of the operational risks that we would historically have thought of, as perhaps being in and form our now more and more into data and software in computing it. So we focus a lot on how to. control the way we build software deliver software roll data, support it protected, think about planning for contingencies, etc, etc, because, again, the principal vector for failure is becoming more and more technology. Then it what the implications are stronger to exploit so? Let's talk a little bit about one area of collaboration, the industry? This got people very excited, sometimes maybe a little over excited but lot about the potential for block change, revolutionise financial transactions for declared the institutional side. What is blockchain actually do What does it have the potential to do and how
far away away from seeing this in everyday application. In sir, the back and processing of the financial industry blockchain is a cripple, graphically secure ledger, so its inability to provide a decentralized way of different institutions looking at the same information in a way that does it require to be the single place and so It enables us to really look at solutions we have a common sense of truth and will to bring that into a digital form. That's both secure, as well as its comprehensive in its census. They now would obviate the need to do what you do. day bilaterally vigorously Much of the industry that we operate in, as we mentioned earlier, theres many different parts and many different counterparts in any type of transactions at the scent Much of the financial services world are effectively many sources of record, where asset transfers of different types of assets need to be
recorded and understood in those are very distributed. Cuz they're again many different players. Many different people involved to counterparts in order to facilitate the growth of our industry and let you have that has been formed around concepts of having multiple sources or even multiple parties, owning a definition of truth, so the like of New York alone, a big part of the reconciling of the ledger of who owns what stocks of the? U S, and so what other institutions around the world? but you end up where, because of the structure of the environment in large part, given the technological capabilities as it was being designed- and the last several decades that you have this situation, where we have multiple version of the truth, which means that everyone needs to reconcile with each other to ensure that they all have the right set of information of who actually owns that asset. When did it get transfer, and it also creates a certain degree of just temporal delay- it's not possible, done right away? Your blog not immediately visible to all that a meeting?
visible all. There is the need to try As for the awareness and knowledge which is quite federated, and that introduces just essentially delay- and so there's lots of opportune war tracking era, where maybe someone missed a change or didn't updated correctly, and so you introduce a lot of inefficiencies to some degree in the process again relative to what we see today, with solutions like blockchain which for the audience not have heard about locked him before is the core technology that underpins much bitcoin and so the we too have a technological solution that enables multiple counterparts to see and enact upon the same understanding of truth on an asset trend. in a way. Again, that's immutable. That's protected! That uses krypton energy to make sure that you can't go back and chain something inappropriately created, you waited envision. The way that we do many parts of the financial industry, particularly again in places where we have multiple parties want
to have a single version of truth, so I think it's quite addressed, so you could see it of custody with essentially time stamps, even see exactly where the asset wasn't. Who, under certain point time, you could see who had it who owned it, the fact that they actually committed to each other electronically and signed it with criminology to ensure that it authorized. You could see all those things that, importantly again by having that all, done in a set of digital transactions? It enables it to happen in a much shorter time frames that also produces a lot of what today the delays which create other types of risk in the settlement cycles, which need to be compensated for another form. So it's exciting. It's interesting. I think that you could ask the question of why couldn't this have been designed before, and I think that that's a very valid question. Part of what we find. I certainly find personally very exciting about. This is just the awareness, I think the awareness that's happened within the financial community. That.
There is a technological answer that can help drive change and improve. Our system is very encouraging, so Don beyond block what are other emerging technologies that we're seeing transform other industries that could have a big impact in this industry. What you most excited about so the couple things you know, we are deeply investing in data. You know we see that the ability to take data and help turn it into information as an asset as a core part of our strategy is a very important biotechnology. Nickel strategy for the farm as well as business strategy in helping us move to a better data driven businesses, as well as Billy deriving expertise, content and knowledge of information so that an urban invest Quite a bit Anna Data science moving instinct and got to data architect. You're, getting the ability to have massive scale or a large scale quarry in analysis of information to really produce knowledge and sets a very interesting space.
as well as machine learning, you know, which obviously, is something. Where were really. I think at the very beginnings in the world of recognising and seeing how you can take a I artificial intelligence and We provide business applications around it, but that's an error that were also investing quite actively and how do we really find opportunities to use a ice? motions and machine learning solutions help us improve existing processes to help us become smarter at our business. Help us serve clients better into those are two areas that were deeply investing in at this point, so you a big division? Firm? It's probably the biggest in terms of just sheer numbers, a division like that needs fresh are all the time and there are a lot of options for young technologists coming at a school or or in there for several jobs a lot of opportunity. What's your pit when you're talking to a young person and technologically savvy wants to work on technology issues wants to be part of something big. How do you tell him to come you should come work here and Goldman Sachs and finance. While I think, first and foremost,
dimension? We are a big part of the firm. I think that's a great selling point for anyone that set aside We are not a bag office job. It's but a core, the firm, the firm, it's a core competency across all parts of the organization, not just the technology division and its. A meaningful opportunity. We and where we find that we are able to acquire great individual, entrepreneurial individuals technologists to really come and help us is because we have great opportunity, the challenges in front of us, our nontrivial, the complexity of our products and our solutions and the markets we operate within or enormously challenging, has immense report. We ve been investing in technology for over two decades and it creates a great opportunity. Therefore, for great technologies to come and join us in actually work on both very hard and technically complex challenges. But work on that. In the context of a changing business, which is really kind of unique, and it's kind of fun in the ability,
an entrepreneur who can really help us find what opportunities to disrupt and change our structure help to find ways to help change the way. The Goldman Sachs interfaces with our clients through very applied technological solutions, and we think that there is a great set of kennedys that we find he always really helping drive. I think part of what we I see is that the ability for us to be in a position of leadership is very important, very compelling as we work to bring people to our firm and so being able to take our products and services and not just have them improve Goldman Sachs, but improving the entire financial community is both inspire. it's also very exciting, and so we create more more of these opportunities. As we move into this digital world, we see that being in a great a tractor for talent, Don excellent discussion. Thank you very much for joining US Thank you very much for having made appreciated. That concludes. This episode of exchanges of Goldman Sachs Objects, Stewart
thanks for listen? This podcast was recorded on January twelve, two thousand. Sixteen, this podcast should not be copied distributed, published or reproduced in whole or in part. The information contained in this podcast is not financial research, nor a product of Goldman Sachs, global investment research. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty.
the accuracy or completeness of the statements or any information contained in this pod cast and any liability, therefore, including in respect of direct indirect or consequential loss or damage, is expressly disclaimed. The views expressed in this pot cast are not necessarily those of Goldman Sachs and Goldman Sachs is not providing any financial, economic, legal, accounting or tax advice or recommendations in this pod cast. In addition, the receipt of this pact cast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs too. That listener, nor to constitute such person a client of any Goldman Sachs Entity.
Transcript generated on 2021-10-15.