3 April 2020: Here’s an interesting fact. At the end of 2015, J.P. Morgan’s securities services business reported Q4 revenues of USD933m, and AuC of USD19.9trn. At the end of 2019, the same business reported AuC of USD26.8trn, and Q4 revenues of USD1.1bn. In case you are too weary from quarantine or lockdown or Netflix overload, I did the work for you: AuC rose by 34.7pct over those four years, and yet revenue was only up 13.7pct.
Now, you may think it’s unfair to single out J.P. Morgan, even though it is clear that the admittedly challenged senior management team has no clue about the value of different assets. But it is just an example; others are in a similar jam. The difference is that most of J.P. Morgan’s competitors have already figured out that simply gathering assets doesn’t equate to success, let alone prosperity. No one, except apparently J.P. Morgan, wants to take on low-value takeaway mandates from ’40 Act managers or public pension plans. But what to do instead?
In the U.S., State Street’s thinking was ahead of the curve. Even back in the early nineties, the bank was thinking about how to intermediate in all areas of the trade cycle: Marsh Carter’s famous egg chart. It took a while, but that chart is all but filled in today with State Street products and services. Other smart firms can also see the direction of travel. Northern Trust has started talking about the “whole office”, rather than front, middle and back as separate business lines. It is building a genuinely ground-breaking front office solution for asset owners, and has put together a nifty integrated trading platform that enables clients to outsource pretty much everything that is non-core. Northern, like State Street, sees itself evolving towards a fintech model of product development and engineering – and culture.
But you don’t have to be in the front office to make money. Plenty of providers – like BNY Mellon, BNP Paribas, RBC and Citi, inter alia – see huge opportunities with data and analytics. Others, like BBH, are deploying digital solutions to improve investor onboarding, a critical client touchpoint for managers and transfer agents. All are still grappling with the challenge of crypto-assets and how to do the right thing whilst getting properly compensated (see my article, Play with Fire). State Street recently cut a deal with Gemini Trust Company, a cryptocurrency exchange and custodian. Others may have to follow their lead.
Custodians have also learnt that fintechs are enablers, not disrupters. In their efforts to stay at the forefront of tech-enabled investing, they have been happy to partner with, or invest in, fintechs that can add an edge. BNY Mellon is probably further ahead than anyone in this new spirit of cooperation, having struck a flurry of deals in 2019. But they are all, to a greater or lesser extent, signed up to the concept – even those who, only a few years ago, viewed fintechs as the enemy.
There is no juice left in the custody and accounting business. RBC has been particularly open about this, saying that it intends to do no more than remain competitive – meeting market standards – for these products. Others may not be so explicit, but they are surely thinking the same thing. That juice exists, but in non-traditional niches, such as trading desk outsourcing (for FX and stocks), share class hedging, currency overlay, financing, etc., etc. Just look at the growth of Northern Trust’s capital markets business over the last two years, including the 2018 acquisition of BEx, a fintech provider of FX software solutions.
Other businesses – private markets, ETFs, middle office, for example – have been identified as financially attractive compared to mainstream asset servicing. The point is, most of the banks are no longer searching for a single magic bullet, as they tried and failed to do after 2008 and the decline of securities lending revenues. Instead, they are spreading their bets, trying to find a balance of value-added services that really interest and excite CEOs, CIOs, CTOs, portfolio managers and distribution directors.
The intellectual capital required to figure out all this stuff doesn’t come cheap. It’s not easy to convince talent to come to a custody shop – so custodians are trying to look and think more like fintechs, even to the extent of changing the workplace environment (at least in part, this was a reason for Northern Trust moving many of its Chicago-based inserv teams to a new location with more of a Silicon Valley vibe). And, in the end, it may not matter how much money is spent, if you keep on doing things the way they’ve always been done. The winners will be those who truly understand that transformation and innovation need to be woven into the fabric of the organisation and its culture.