How Many Utilities Does the Industry Need?

nicholas-hamilton

What started as enthusiastic talk within the reference data industry about the benefits of utilities is increasingly being put into practice, with the announcement this month that Swift is working with a group of large banks on a utility for know-your-customer (KYC) data.

When it is launched in December, Swift's KYC Registry will join a growing list of reference data utilities—at the end of 2012, Euroclear and SmartStream teamed up to create their Central Data Utility; GoldenSource has also partnered with IBM to create the Global Data Utility; and the Depository Trust and Clearing Corporation is working with a group of banks on a client reference data utility.

There are good reasons for this scramble to establish utilities, the most obvious of which is cost reduction. At a time when financial firms are trying to make the most of reduced budgets, utilities create the potential for significant savings because service providers perform a common data management task only once and share the results with a group of users, rather than doing the same work separately for each user.

Utilities can also lead to greater standardization—because a larger number of users will be sourcing the same data from a common source—and improved levels of data quality, because this group of users will be available to provide feedback on the same data.

However, these benefits only become significant if a utility attracts a large number of users. If it secures only a handful of users, the hoped-for economies of scale and competitive pricing will not materialize, and there will be less of an impact on data quality.

As more utilities become available in the reference data space, the benefits of each solution are likely to be reduced. This is because the market will be spread out thinly across a wide range of utilities, each of which will find it harder to secure a critical mass of users.

As vendors look for new operating models, questions have to be asked about how many utilities the industry really needs. It will be interesting to see, in the coming month, how vendors differentiate their utility offerings and which of these rises to the top.

For more on this topic, see this feature and this video interview with Euroclear's Martijn Groot.

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