ERUPTION (Eddie Van Halen RIP)
Custodians respond to the new normal – and it’s working.
13 October 2020: Welcome to our world, you could hear the Europeans and Japanese muttering under their breath as the U.S. banks began to confront the reality of a long-term low/no interest rate environment. But, for the trust banks at least, they were well prepared for the wilting of net interest income, with some going so far as to say that, in some ways, it would be preferable to have an earnings stream that was minimally dependent on NII. After all, stock analysts consistently hammer banks that appear to be too reliant on market-related fees, a lesson well-learnt after the crash of 2008.
But these banks have been laying the groundwork for years. The painful loss of securities lending revenue post-2008 meant that they had to look for something else to replace it. At first, they hoped to find that elusive silver bullet, a new business line that could deliver 100pct (or more) of the lost securities lending income. They soon came to realise that this was an unrealistic goal, so they set about building a portfolio of businesses that were not primarily reliant on market forces, such as performance and risk analytics. But there was one thing that these banks knew would be bigger than everything else they were working on: Big Data. When BNY Mellon acquired PNC’s global investment servicing business in 2010, one of the bank’s senior managers admitted that they now had all this data, but no clear understanding of what to do with it (part of the deal included two data analytics businesses, Coates and Albridge).
It has taken a full decade for the banks – including BNY Mellon – to capitalise on the enormous pools of data that they manage, both internally and on behalf of clients. There are at least four reasons that it has taken so long: legacy technology platforms; the inability of clients to articulate what they needed; the relatively late arrival of smart fintech and cloud-based solutions (coupled with the Not Built Here syndrome); and the challenge of pricing data services.
Things have changed. Some might argue that the cloud was the biggest factor, whilst others would say that the advent of providers like Palantir, Hadoop, Splunk and Docker was the catalyst. But something else was going on: instead of hiring another 100 fund accountants, custodians started to hire data scientists, people who really understood how to make data accessible and, most importantly, value-added. They might have no experience in the global custody business, but so what? As long ago as the nineties, didn’t State Street’s Marsh Carter say that custody was really an information business? Mellon was thinking along the same lines when it bought Eagle in 2001, although it initially lacked the in-house expertise to leverage the data processing power it has acquired.
Around 2016, the custodians started to get the message about failing fast and the end of cathedral building. They also realised that they needed help, and began to recruit whip-smart millennials who had never been inside a bank, much less cared about what bankers actually did all day. They were drafted in to make sense of all the pools of data that were unutilised or undervalued, as well as pull apart all the processes and time-honoured customs and conventions that had led to so much O&T inefficiency. They were enticed with workplaces that looked more like Silicon Valley than Wall Street (think foosball, bean bags and meditation spaces), along with comp packages that had to be, at the very least, on a par with the social media giants.
And what happened? It worked. Just look at RBC, one of the pioneers in the digital and data space, which was wireframing before anybody else knew what it was all about. Like its competitors, RBC fretted about making money out of data, but it persevered, convinced that clients would eventually see the value in its analytics products. Its conviction is paying off. At a recent earnings call, RBC reported that “we are seeing the benefits of our multi-year investments in digital and analytical capabilities in our custody business”. Others report similar progress. Another example is the deal between BNY Mellon and Canada’s iA Financial Group (formerly Industrial Alliance) covering a full data and analytics suite of solutions encompassing a data vault and data studio, performance measurement and reporting, middle office services, as well as custody and accounting for iA Financial Group’s U.S. operations. Four years ago, that would have been unthinkable.
The iA deal shows that the buy-side has become a lot smarter about how to use all this data. The most sophisticated are using APIs, whilst others are tapping into advanced client portals like Citi’s Clarity. Clients recognise the value of data analytics and are ready to pay for it. The digital and data evangelists – State Street’s Lou Maiuri, BNY Mellon’s Roman Regelman, Northern Trust’s Barb O’Malley, RBC’s Jamie Stevenson, amongst many others – are finally winning. You can make money out of data, and keep clients happy. Who knew?