Review and analysis of building a digital infrastructure

By Francis Gross, Directorate General Statistics, Senior Advisor, European Central Bank

**Disclaimer: The views expressed in this interview represent the personal opinion of the author, not necessarily the positions of the ECB or the ESCB.**

Francis, can you please tell the Risk Insights readers a little bit about yourself, your experiences and what your current professional focus is?

I’m a French engineer who had the luck to take part in the first wave of globalization of the German automotive industry, mainly throughout the 90s. There I experienced first-hand how fast a really stable-looking industry could change radically. I realized that, more than the politics of the time, technology was the main driver of change.

Upon joining the ECB’s DG Statistics in 2006, as a newcomer to finance, I found to my surprise an industry-wide, fast growing gap between breakneck adoption of information technology and antiquated data practices that were becoming increasingly chaotic as a consequence. I was also struck at how little sense of urgency there was about it. The crisis of 2008 exposed the deficits and triggered a number of helpful measures, still insufficient in my view.

My focus since 2006 has been on raising awareness of the problem, especially at leadership level, developing a narrative and concepts, and driving concrete action. I developed and promoted the concept of a global reference data utility as a feasible first step with immediate benefits and transformational power. The Global LEI System reflects part of that idea quite well. It now needs to be made into a global public-good infrastructure with universal coverage. That remains my focus today.

At the Technology & Innovation Risk Summit, you will be presenting ‘Review and analysis of building a digital infrastructure’. Why is this a key talking point in the industry right now?

Everyone across the financial sector, public and private, struggles with the digital explosion. Technology races on and becomes ever more diverse; competition drives fast and massive adoption. Many strive for real-time, global, networked, automated. Data volumes explode exponentially. Data flows involve ever more parties. The brain/machine ratio goes towards zero. Firms, markets and regulation morph fast as a consequence. National borders become less relevant for industry and regulation, yet laws are made by sovereigns.

We are fast discovering that the local solutions a firm, a regulator or a state can implement need global standards to interoperate. Some of those standards must be embodied in the form of a single, global data infrastructure mandated by the sovereigns to ensure rigorous implementation and rock-hard quality in real time. A logical starting point for such an infrastructure would be to offer a globally standardized representation – a digital twin – of the facts we all agree upon, for each fact. For example, the idea of a business becomes a fact for all, worldwide, once a sovereign grants it identity as a legal entity, hence the relevance of the LEI.

In the words of Jean-Claude Trichet: everyone needs it, there can only be one of it, no one can do it for themselves hence we must do it together.

How can Financial Institutions best ensure they build an effective digital infrastructure?

Digital infrastructure has many layers. Some can be handled by an institution for itself, others must be handled together at industry level, yet others again by industry and regulators together. Typically, higher layers of infrastructure can be done more locally, but they need good underlying infrastructures to work effectively – for instance any data cleaning effort will ultimately be defeated as volumes, speed and diversity grow. Those underlying layers we all need can only be built together, for instance the Global LEI System.

For those deeper layers of infrastructure, financial institutions, public and private, would benefit from explicitly designing, together, a common conceptual architecture of a digital infrastructure for finance. For that, leadership must learn to differentiate between areas where competition can be left to rage and areas where cooperation is better, i.e. areas where we will win or lose together. And here lies another challenge: leadership in financial institutions must hear the message of the technically literate who overcome the urge to please and speak the truth, even when it is uncomfortable in the short term.

What are the key considerations financial institutions need to make when considering new and upcoming technologies?

The business case for the adoption of new technology should be broad-based, taking into consideration the wider business environment and the longer-term, possibly collective impacts that are harder to quantify and require collective action. Beyond the immediate financial case, company boards and regulators alike should therefore dare vision and think strategy. Experience in test projects, if assessed with technical rigour, honesty and an open mind, can help gauge the systemic impact of new technologies and identify needs for change in and beyond the project, e.g. in infrastructures. That in turn can increase chances of success and reduce risks associated with new technology, for an institution and for society.

What challenges must financial institutions overcome in the face of rapid change in the technology landscape?

Adopting new technology fast is risky, yet it can be a matter of survival in a competitive environment. If it can be done, someone will try, going as far as is allowed or not prohibited. For an institution left alone, that can be a dilemma: damned if you don’t, damned if you do.

A major challenge lies in the speed and pervasiveness of technological change generating a certain institutional schizophrenia: fast adoption of the latest technology for competitive advantage versus slow and cautious recognition of and reaction to wider, deeper problems. In other terms: problems appear fast, are ducked at first, and solutions appear too little, too late.

Infrastructure is a key example, again: it takes time to build and adopt, and it must be built to last even in a fast changing environment. Institutions should work together on the simple measures we all agree would help, formulate a bold vision of their target status (e.g. for the LEI: global, universal, mandated by law, accurate in real-time) and then go about early, implementing them vigorously, so that they’re ready when need arises.

Financial institutions need more digitally enlightened leadership.