Who remembers when The Bank of New York bought a 4.9pct stake in what was then KAS-Associate in 2001? At a time when BNY was buying almost indiscriminately, it looked as if KAS would be yet another deal. But it didn’t turn out that way, and KAS had to wait until 2019 to be rescued by CACEIS.
The golden age of consolidation in the custody industry, which BNY kicked off in the mid-nineties, has long passed. Of the 47 M&A deals recorded by Scrip Issue YTD, only one has involved a custody bank – U.S. Bank – buying another custody business (from MUFG Union Bank). Whilst the banks are still actively investing in, and buying, other businesses, they are no longer interested in adding assets that contribute almost nothing to the bottom line. They look to the poster child of a low-value, low-margin provider – take a bow, J.P. Morgan – for validation of this approach. In Q2 2021, J.P. Morgan’s securities services business recorded AuC growth of 17pct YoY, but reported a 9pct fall in revenues over the same period.
Smarter banks realised many years ago that asset growth was not the answer – and a few also understood the longer-term ramifications of the collapse in securities lending revenues after 2008. As early as 2009, a new trend was emerging: instead of custodians buying market share, they were focusing of what State Street referred to as “product adjacencies”, such as trading platforms and specialist information providers. Hubristic deals, such as the 2010 USD2.3bn BNY Mellon acquisition of PNC’s GIS business, were already becoming a thing of the past.
At the same time, a new breed of independent fund administrator was emerging. Many were in a hurry to expand, with the backing of private equity to fund acquisitions. In 2012, SS&C announced four acquisitions, for example, and new names began to appear on the scoreboard. Industry consolidation was alive and well, but without the banks’ involvement.
It continues today, as seen with the faintly ridiculous three-way bidding war for Mainstream, an Australian administrator with a spotty client service reputation. Vistra started the bidding, then SS&C and Apex countered, with the latter declared the winner. Meanwhile, the banks were looking at very different transactions: BNY Mellon bought Milestone, widely admired for its pControl product, whilst State Street acquired Mercatus to round out its Alpha service for private markets, and U.S. Bank took a stake in Lumint, the FX management specialist. Northern Trust, meanwhile, has built a highly successful capital markets business on the back of its 2015 acquisition of Aviate Global, adding BEx, the FX trading platform, in 2018 and striking a strategic alliance with Lumint. BBH recently launched an innovative service called Connectors that links clients to third-party fintechs whilst offering full integration with inhouse platforms like Infomediary.
Perhaps the most interesting part of all this is the banks’ embrace of fintech as an enabler, rather than a disruptor. A new generation of tech-savvy managers has recognised that the digital and data revolution cannot be successful with the old mentality of “not built here”. Nowhere is this more evident than in the crypto currency space, where specialists like Lukka, Fireblocks, Pure Digital and Securrency are attracting investment from the banks.
State Street’s 2018 acquisition of Charles River set a new bar for the industry, so that it was no longer sufficient to try and survive on middle and back office services. Northern Trust, for example, coined the term “whole office” to encapsulate its strategy, whilst acquiring a stake in Equity Data Science, an investment decision support tool. Elsewhere, BNY Mellon hired Mark McKeon from State Street to head front-to-back solutions, a newly created role.
Others will have to follow. This is not about building links to OMS providers, important as that might be. There is a fundamental shift in the industry, initiated by the trust banks, that is transforming the way they do business and the range of services they can offer. Where does it all end? For decades, custody banks have felt threatened – by information providers such as Bloomberg and Reuters, by technology firms like IBM and SWIFT, and many others that they felt might encroach on their territory and do a better job. But the tables might be turning: the banks are becoming very good at data management and technology integration, whilst still settling trades and collecting dividends. Huge data management deals, such as the one between Janus Henderson and BNY Mellon, are pointing the way to the future.
At a very intense SIBOS meeting in Boston in 1994, State Street’s CEO, Marsh Carter, summoned the top brass from SWIFT to a meeting to warn them to stay in their lane. It worked, and SWIFT backed down from its plans to build a broader asset servicing offering. Today, it is the banks that are changing lanes, with fintechs as their partners and enablers.