Reducing Complexity in OTC Clearing

We are developing solutions for the OTC Clearing market place that will lead to reductions in cost, complexity and operational inefficiencies for market participants.

REDUKTI aims to create products for the OTC Clearing marketplace. This is a niche marketplace, and the target customers are Financial Institutions.

Creating a product for a niche market is different from creating one for the mass market. First of all, domain specific knowledge and expertise are required both for product definition, and its design and implementation. This pre-supposes industry experience. A product’s competitiveness will depend upon the domain specific business problems it addresses.

As in most markets, there are already existing players in the field, many of whom are well established, and used in many institutions. It is particularly challenging for a newcomer to establish itself in such a marketplace.

Even if a product is developed and is superior to existing products in a particular niche, the customer base is demanding and often highly regulated. In this circumstance the product no matter how excellent it is, cannot succeed on its own merit alone. There needs to be a robust plan for support, maintenance and product evolution. Customers will not be convinced by a product that is brilliant but has no backing support structure.

Anecdotally, one of the current well-known brands started in partnership with one initial customer and having successfully demonstrated the product at the initial site, gradually expanded the customer base. This approach is sound if one can establish such a partnership for mutual benefit. However, in the current climate of regulatory scrutiny, product implementation is often rigorously audited, and it is hard to imagine that there is much appetite for entering into such partnerships especially where delivery of business critical systems are concerned.

There is the option of obtaining venture capital backing and setting up the right product support infrastructure. This is an approach that has been taken by a number of start-ups. It is not clear however whether this approach is ultimately successful. Typically, the start-up does well initially while the customer base is small and venture capital backing is there. Problems start appearing over time due to a number of factors:

  • A start-up often finds it diffcult to sell its products and must provide significant discount to customers, and undercut competitors. Often this means that profits remain elusive.
  • A large proportion of the funding is consumed by the initial development effort.
  • The start-up must spend considerable amount of the investment in sales operations.
  • To achieve profitability the start-up needs to expand from the initial customer base who may have obtained special deals.
    However as customer base expands the start-up struggles to maintain a high quality of service to its customers because its resources are not sufficiently scaled up.
  • As time goes by investors become impatient and the influx of funds slows down. Typically the start-up at this point cannot innovate and starts to curtail development activities, and starts asking its customers to fund development of new features.
  • Often the original team that created the product leaves in frustration as innovation stops or is fired as time goes by and profits remain elusive. Usually as a result of this there is a loss of knowledge and expertise within the company.
  • Gradually product innovation slows down or stops completely and the start-up folds or is acquired by some company. The product goes into maintenance mode and the acquiring company tries to make money with the least amount of investment.

Despite the challenges inherent in aiming a product at a niche market with limited set of highly demanding customers, we at REDUKTI have decided to target the OTC Clearing marketplace because we believe we have domain specific knowledge and first-hand experience of problems faced by the industry. The existing way of delivering solutions is too expensive, operationally risky, and difficult to scale, and hence better solutions are needed. We believe that there is opportunity to develop solutions that not only improve operational reliability, but also reduce the costs of running business services. There is also scope for improving the agility of the solution in meeting new and unexpected business needs.

In a future post we will discuss our strategy and approach to addressing some of the challenges described above.