ISSA – the Zurich-based International Securities Services Association – is a sponsored talking shop. With a grab bag membership of global and local custodians, CSDs, exchanges and tech companies, it has always struggled to define its raison d’être. Its achievements are modest, and much of the valuable work it might have taken on has instead gravitated towards, amongst others, SWIFT and ISITC.
ISSA has never been able to decide whether it’s a highbrow think tank or a forum for operational change and best practice. It wants to be both – and that is the problem. Contrast its approach with ISITC, which has stuck to its mission without pretending to be the next G30. ISSA doesn’t have that clarity of purpose. As a result, it has never been a force for change. Many people would probably say that the most they know about the work of ISSA is its handbook.
ISSA has now taken another shot at being seen as “an opinion leader”. In collaboration with Oliver Wyman, which purports to know something about the asset servicing industry, it has recently published a report on the future of the securities services industry. It’s free, which is appropriate, because that’s just about how much it is worth. It is 30 pages of mostly recycled views of what might happen to the industry, without a single unique insight. It stands alongside McKinsey’s 2018 report on the industry as being remarkably lacking in genuine, informed thought about where the inserv business might be heading.
It also has no sense of self-awareness. On the one hand, it points out that revenue growth is anaemic (my word, not theirs – they characterise it as “stable”) – 1pct CAGR 2014-2019 – and predicts that core industry revenues will be lower in 2022 than in 2019. The authors completely miss the broader point that, over that period, every custodian reported higher AuC/A without a corresponding rise in fees. As an example, in Q3 2020 J.P. Morgan reported AuC of USD28.6trn, an increase of 11pct over Q3 2019. Securities services fees over the same period were flat.
This does not look like a business model that would be attractive to non-traditional competitors. Yet the report says that “over the long term, we expect new entrants from the technology sector (including, but not limited to Big Tech) to enter Capital Markets and challenge incumbent business models as they have done in other sectors of the Financial Markets, either by launching services on their existing market platforms, making acquisitions, or by entering via partnerships with incumbents”. Why do I hear an echo? In my 1993 book, The Custody Atlas, Colin Grimsey, one of the pioneers of the global custody business, suggested that the future of the industry was in information provision. On that he was spot on. But he went on to say that, if that were the case, future competitors could include Reuters, SWIFT and General Electric, all of which “are already well placed to provide extremely high-grade services”. Since then, custodians and their clueless consultants have worried about a host of other potential disruptors, almost all of which have looked at the business and concluded that it was not worth the investment, let alone the regulatory challenges. If you don’t have a banking licence, being in the inserv business doesn’t make sense. Big – or small – tech doesn’t do regulation.
What’s equally puzzling is that the report makes no mention of the fact that, if anything, the tide is heading in precisely the opposite direction. State Street’s acquisition of Charles River demonstrates that, as do a whole host of other, smaller transactions (BNP Paribas, for example, has been very active in acquiring stakes in fintech companies). State Street has gone so far as to say that it believes that its primary competitors will not be other custody banks within three to five years, whilst BNY Mellon has struck numerous deals with fintechs to accelerate its transformation into a digital powerhouse. Custodians have also embraced the so-called disruptors – actually enablers – to improve the client experience. Firms like Confluence, Fenergo, Finomial and Finos are all helping in this effort, yet the report fails to acknowledge this. Larger tech companies, such as Broadridge and Digital Asset, are also working to improve the infrastructure. Are these the challengers to which the report refers?
It’s hard to believe that anybody actually felt that this report was necessary. Ever since Jacques-Philippe Marson felt compelled to write his vision of what the business might look like, numerous people have tried and failed to articulate an understanding of future drivers of the inserv business. ISSA and Oliver Wyman are merely the latest example – and, sadly, they won’t be the last.