The Technological Reinvention of the Custody Bank

The old perception of pillared institutions vaulting securities, collecting income and calculating net asset values for funds belies the custodian of today, which more resembles a technology provider than a stodgy bank. The custody industry is beginning a transformation in terms of the technology it uses to support the sell-side consumers of its custody services, with a focus on automation and data analytics.

The old perception of pillared institutions vaulting securities, collecting income and calculating net asset values for funds belies the custodian of today, which more resembles a technology provider than a stodgy bank. In this era of regulatory changes, disruptive technology, cyber threats, and commoditized custody services, custodian banks must adopt and even develop their own innovative means of attracting and retaining assets, or risk submitting to the outdated perception of their business.

TABB Group recently interviewed a select group of sell-side COOs, heads of operations and heads of technology at mid-sized banks and brokers in the US regarding their own priorities, and, in turn, what they expect from their custody banks. We found that the custody industry is beginning a transformation in terms of the technology it uses to support our respondents, while the focus on customer service reigns supreme. Adoption of automation for remaining manual processes, combined with better data analysis, are critical enablers of the high-touch coverage the sell side covets. 

The priorities of the sell-side consumers of custody services, particularly mid-sized banks and brokers, are being compelled by the needs to achieve value, comply with regulation, aggregate data, and reduce costs. Their initiatives are both technical and workflow-oriented in scope. The first objective of our outreach was to gain an understanding of how they are prioritizing their development budgets, both from technological and non-technology perspectives. Most of our respondents named the industry’s move to settling transactions on trade-date plus two (T+2) as their most immediate concern and a move to trade-date plus one (T+1) as a very likely next step in the coming few years, given the SEC’s current investigation into the viability of such a change.

Looking ahead, our respondents expect their own operational efficiency to be impacted most by blockchain or distributed ledger technology (DLT), both in the next year and over the next five years (see Exhibit 1, below). Some mentioned that they already have internal teams in place that either are working on DLT or are participating in industry working groups.

Exhibit 1: What technology will most impact your operational efficiency over the next year? The next five years?

Source: TABB Group

Our outreach additionally sought to gain an understanding of what mid-tier sell-side custody clients are looking for from their existing custodian bank relationships (see Exhibit 2, below). The sell-side customers such as the banks and brokers we reached out to have a very distinct set of criteria with which they evaluate their existing custody relationships. Both segments plainly believe that their custodian must possess knowledge of their business, whether bank or broker.

Exhibit 2: What is most important to you when evaluating your experience as a customer of a custodian (on a scale of 1 to 5 with 5 being of most importance)?

Source: TABB Group

US sell-side customers of custody services expect their custodians to keep up with emerging technology trends and automate wherever and however appropriate to enhance their service levels and to keep fees down. Expectations for their custodians basically mirror their own priorities: automation, operational efficiency, competent staff.

They want their new and current custodians to be able to provide intelligent customer service and to manage their transactions and interactions through technology. They want a custodian with a strong balance sheet and credit rating. At the same time, they want their banks to invest in technologies that they can benefit from, either in terms of efficiency, meeting regulatory demands or lowering costs.

Investment in cloud, digital identity and distributed ledger technology were the top three priorities for their custodian banks in 2017. Custodians must automate whatever inefficient processes remain to reduce those exceptions, by whatever means necessary, while diverting resources to high-touch client service capabilities to best serve their sell-side customer base.

To learn more about how custodian banks are transforming their technology and innovating to better serve their sell-side clients, download a complimentary copy of TABB’s latest report, “Safekeeping Empowered: Reimagining the US Custody Business,” courtesy of BNP Paribas.

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