Wall Street is going high-tech. But it’s not that easy
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OZY's original series The Word on Wall Street charts the future of finance. Read more.
By James Watkins
The Daily DoseJUL 16 2017
Picture the scene: You’re walking into the office with your fellow math or computer science grads, past the foosball, pool and Ping-Pong tables on the way to your standing desk. People are wearing hoodies and company-branded T-shirts, shorts and even flip-flops if it’s warm. There’s a canteen with unlimited free food and drink, as well as an array of colorful and oddly shaped couches. (Can you sit on them, or are they just squishy works of abstract 3D art?) It’s one step away from playground slides and nap pods.
California dreaming? Or a scene from HBO’S Silicon Valley? No, this isn’t the new head office of Google or Facebook; this is a view inside the actual offices of a leading quantitative trading firm in the financial district of New York City in 2017.
Meanwhile, at the CS50 Fair, the flagship event at the end of Harvard’s famous introductory computer science course, lined up among balloons, candy and colorful stress balls, are smiling representatives from Google and Facebook and Microsoft and … investment management firm D.E. Shaw. A recruiter wearing a branded hoodie hands out branded packets of gummy bears as well as branded checked pajama pants, upstaging the poorly fitting T-shirt giveaways from the Silicon Valley regulars. At Yale’s equivalent event, hedge fund Bridgewater makes an appearance.
Just two years ago, there wasn’t a financial services firm to be seen in those settings, but Wall Street employers are now competing for the same tech talent as Facebook and Google. In fact, they’ve even moved up their interviews for summer internships to earlier in the year to compete like for like with Silicon Valley, says Robin Mount, director of career, research and international opportunities at Harvard’s Office of Career Services.
The financial services industry is going high-tech, and so the behemoth corporate organizations behind the big-name banks, asset managers and insurance companies are facing a fundamental challenge: how to attract, train and retain a very different sort of talent. “We are a tech company,” Goldman Sachs CEO Lloyd Blankfein has said on a number of occasions — admittedly, Wall Street execs have been saying this for years — but it’s finally beginning to ring true. Goldman now employs around “9,000 individuals in various engineering roles,” according to a recent company report, out of the company’s 33,000 or so employees. More than one in three new recruits are STEM majors.
Recruiting young tech talent to Wall Street is increasingly difficult when Silicon Valley can lure techies with their funky startup cultures.
Gone are the days when salespeople, traders, bankers and managers ruled Wall Street — in 2000 Goldman had 600 equity traders; now it has two. The technological shift is forcing finance companies to reexamine their recruiting practices and reinvent their corporate culture to bring a little Silicon Valley style to Wall Street. But what will happen when the coastal cultures collide?
***
“A fundamental shift” is afoot, akin to “an industrial revolution in finance,” says financial technology industry veteran Kathleen DeRose, founding investor and board member at Zurich-based Evolute, a technological wealth management firm, and fintech executive-in-residence at New York University’s Stern School of Business. “Wall Street firms will separate into technology haves and have-nots.”
Technological disruption is coming to pretty much every area of the financial industry: While a substantial proportion of finance firms’ large IT departments has long focused on maintaining legacy systems and regulatory compliance, innovation teams are starting to find algorithmic solutions to replace entire bodies of manual work in investment banks. Insurance companies are experimenting with machine learning and big-data analytics; consumers are increasingly willing to replace their asset manager with a robot, while pushing for more user-friendly customer interfaces; and infrastructural technologies such as blockchain threaten to change the way the entire industry works. “I’m hard-pressed to name any segment of financial services where [the tech revolution] hasn’t occurred,” says David Boehmer, global managing partner of financial services at executive-search firm Heidrick & Struggles.
Stock exchange 1 color
The New York Stock Exchange in 2020?
Source Eva Rodriguez/OZY
This is not totally unchartered territory for Wall Street. Before the dot-com boom, large banks “were on the cutting edge of technology,” as one of the few industries with enough data for number geeks to crunch, says professor Vasant Dhar from the Center for Data Science at NYU’s Stern School of Business. But as Wall Street organizations mushroomed in size and prominence, and California started to steal some of New York’s technological shine, the roles of tech leaders in banks increasingly “became about managing bigger and bigger teams and managing outsourcing, more than they were about building and inventing stuff,” says Boehmer, with most IT budgets spent on maintaining outdated systems.
But several factors — including technological advancement, the threat of disruption from burgeoning fintech startups and consumers who are increasingly tolerant of dealing with machines — all mean that’s changing, and fast. Banks are once again having to fight their way to the forefront of technological innovation, and now even the buy side of the financial services industry, including smaller funds and asset managers, is experiencing the technological revolution.
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But navigating this shift is no easy task. “It’s not as if you can hire 20 Ph.D.s and miracles happen,” says Dhar. Recruiting young tech talent to the long hours, cold winters, stressful workloads and bureaucratic cultures of Wall Street is increasingly difficult when Silicon Valley can lure techies with funky startup cultures, laid-back and flexible attitudes to work and altogether more pleasant climes.
A tech manager at Goldman Sachs tells OZY that competing with Silicon Valley for talent, as opposed to competing just with another investment bank in an almost identical building down the block, is a completely different value proposition for potential recruits, forcing a rethink of what financial services can offer employees. And with the deep pockets of tech giants, Wall Street can’t just pay a shed load more money, says Boehmer: “Compensation really doesn’t do it anymore; it isn’t the silver bullet that it maybe once was.”
“Move fast and break things,” as Mark Zuckerberg famously urged his employees, is often anathema to the necessary obsession on Wall Street for regulatory compliance.
The challenge extends beyond hiring: Maintaining and making the best use of tech talent once it walks through the door requires an organization-wide culture shift, says Evolute’s DeRose, which can be challenging when the organizations in question number in the tens or even hundreds of thousands of employees. Most companies have visionaries at the top, change-hungry millennials at the bottom and “a lot of people with children and mortgages in the middle who do not want to adapt,” she says. Plus, the creative, collaborative, disruptive, inventive work culture required at the forefront of tech innovation — “move fast and break things,” as Mark Zuckerberg famously urged his employees — is often anathema to the necessary obsession on Wall Street for regulatory compliance and to “keep the machine running at all costs,” says Boehmer.
So how on earth can Wall Street make the required changes? Well, some already have — small quantitative hedge funds are ahead of the game, Boehmer says, noting they have long held technological primacy at the core of their business models. Others who are learning to thrive in this shift, he continues, include those who have developed career paths to positions of importance and leadership that don’t sacrifice technological invention and building for ever more mundane corporate management.
Collage
Traders, bankers and analysts have to adapt to promote disruption and innovation in corporate cultures.
Source Eva Rodriguez/OZY
The crucial question facing Wall Street executives is whether to build this tech-ready culture in-house or buy it by acquiring fintech startups. While there have been some big-name acquisitions — most notably Blackrock’s 2015 acquisition of online robo-advice firm FutureAdvisor and Goldman Sachs’ 2016 purchase of digital retirement-savings app Honest Dollar — and many banks’ venture arms have been pouring investment into fintech startups, the rising trend is for less formal partnerships between the Davids and the Goliaths. JPMorgan Chase has partnered with online business loan provider OnDeck to co-create a new loan product; Bank of America-Merrill Lynch is collaborating with Microsoft on implementing a blockchain-based financial-transactions platform; Capital One has partnered with fintech companies Bill.com and Gusto to provide better financial management tools to its small-business customers.
And then there are the companies that have set up Silicon Valley-based outposts so innovation can occur in satellite campuses away from the mother ship — Wells Fargo’s San Francisco-based Digital Labs showcases touch screens and virtual reality simulations of its new products; in addition to San Francisco, Citi has innovation hubs in Tel Aviv, Dublin, Singapore and New York City. Meanwhile, the website for Capital One’s innovation labs boasts that its various locations feature arcade machines, Ping-Pong tables, a speakeasy and even “a shuffleboard table and a napping nest.” Ernst & Young has trademarked the name of the cultural approach to innovation in its Financial Services Innovation Center: “Suits + Jeans.”
But despite the rise of the big players increasingly finding alternatives to acquisition, almost two-thirds of fintech founders and investors expect their companies’ ultimate exit strategy to be via acquisition, rather than an independent IPO, according to a recent U.K.-based fintech survey from law firm Mayer Brown.
***
It’s unclear which strategy will prove most successful in managing the technological transition. Back at Harvard’s recruiting fair, at least one computer science major is not convinced by the big players’ attempts at tech recruiting. The finance world in general no longer appeals to Katarina (not her real name) because of its negative social impact, she says. Instead, she wants to focus on coding and building things. But Silicon Valley isn’t a cultural haven either — the perceived misogynistic culture at many tech firms (including scandals at Uber and 500 Startups) is a turnoff for her too. Katarina interned at Goldman last year, but has no intention of returning; instead, “smaller trading companies have been attracting a lot of tech people because they incorporate tech culture,” she says — D.E. Shaw’s pajama pants have clearly worked their magic.
So for Wall Street to win in the increasingly high-tech job market may require a few more branded giveaways. And, hey, while they’re at it, a few more Ping-Pong and foosball tables couldn’t hurt either, to really spice up the coastal competition. Of course, it’s not that easy: “That has been one of the first things that happened — ‘if we build foosball tables, they will come,’” says Boehmer. So if that hasn’t done the trick yet, it’s surely time to step it up — get ready for a playground slide weaving its way through the New York Stock Exchange, or product launches by Jamie Dimon delivered in a polo neck and jeans. It’s only a matter of time.
James watkins 3James Watkins, Reporter
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