The new age of the outsider CEO

Never before have we seen three new CEOs take up the helm of the global custody industry at the same time. And never has there been three new CEOs all considered as outsiders.

Everywhere you look it is becoming trendier to be an outsider. Whether it is in fashion, film, music or art, the outsiders seem to winning.

Be it in London’s Shoreditch or New York’s Brooklyn, the trendy outsiders, also known as hipsters, seem to be dictating the direction of modern day culture. Now, we are seeing these outsiders shaping the direction of banking and finance, with more and more banks hoping to attract a new generation of ‘fashionable geeks’ to the industry.

In the new custody world, three individuals considered as outsiders are now set to shape the business going forward.

These are the new CEOs of the three top global custodians: Charles Scharf of BNY Mellon, Michael O’Grady of Northern Trust, and from 2019, Ron O’Hanley of State Street.

All three are considered outsiders, being that they have all come from outside either the custody or the banking business as opposed to their predecessors.

O’Grady previously oversaw Northern Trust’s wealth and asset management businesses, O’Hanley currently serves as head of State Street’s global asset management arm, and while Scharf previously served time at JP Morgan, he is best known for his time as CEO of Visa.

The fact that these three new CEOs come from backgrounds outside of custody means they will most likely bring a different view to how to monetise the business and generate new revenue flows.

A  recent Wells Fargo research report by Mike Mayo, a well-known Wall Street analyst, describes the investment spending by the new CEOs as a “wildcard” for the three banks.

“The three new CEOs, all relative outsiders, have an unstated mandate to better monetise their platforms. The greatest long-term upside potential is if one of these firms could lead the industry enough to obtain a FinTech type premium,” the report said.

It added ways the new CEOs will improve revenues will be through expansion in capital markets, money markets, hedge funds and middle-office services.

So let’s take a closer look at each of the new CEOs.

Starting with Northern Trust, O’Grady takes over a steady and stable business which in the past has not been caught up in the scandals that BNY Mellon and State Street (see below) have had to face.

It is easy to see that the wealth management business could become an even more central part of the bank’s global business. Over the past decade, the wealth management business has grown just as fast as the S&P 500, making it one of Northern Trust’s top asset gatherers. The bank is also positioning itself to be a key player in private equity administration and aligning itself more closely with technology companies such as IBM to serve this market. It is largely expected that O’Grady will continue this path for Northern Trust.

Northern Trust is perhaps in stark contrast to BNY Mellon, which over the past year has given its asset servicing business a complete makeover. With no Brian Shea, the long-time CEO of BNY Mellon’s Pershing and its investment services unit, steering the business, it is likely Scharf will bring a new focus to technology and payments.

At his first investor services day this month, Scharf highlighted that his bank will increase its tech budget by $300 million to $2.7 billion for the year and aims to provide the “best operating platform in the business.”

Arguably the biggest question mark surrounds State Street’s O’Hanley. He originates from global consultancy firm McKinsey, where he founded the investment management practice worldwide. He had since held leadership roles at the asset management business of BNY Mellon, Fidelity, and now State Street Global Advisors.

O’Hanley has the mammoth task of rebuilding State Street’s culture. While it has taken tremendous steps in promoting gender equality and ESG investing, it has in the past been embroiled in a number of scandals. These include a $64.6 million settlement over charges it conspired to defraud at least six transition management clients by applying secret commissions to billions of dollars of securities trades. In addition in 2016, it paid $530 million to settle allegations that it overcharged clients by adding secret mark-ups to foreign exchange trades. 

 

However, the good news is that State Street is one of the best performing banks out of the three global custodians, having seen its assets under custody increase 15% over the year to $33.1 trillion. Furthermore, State Street’s “Project Beacon” looks to more fully evolve the bank to become a digital enterprise that better anticipates and reacts to real-time client needs.

The advantage for both State Street and Northern Trust with both of their CEOs coming from the buy-side is that they will bring with them their own experience and perspective on what a custodian bank needs to offer to its clients.

“Customers will value this knowledge of their business – a trait that is always rated highly in custodian evaluations.  The CEOs from the buy-side will have a sense of what is essential to retain and attract business.   It will be interesting to see how well they can switch to a service provider mentality, as they discover what is actually achievable,” said Dayle Scher, senior analyst for global research firm TABB Group.

“They will need to combine their tech savvy with their empathy for their clients when considering new product lines that add value and revenues, again without sacrificing the quality of the services that are table stakes.”

What is certain is that all three new CEOs will have to keep an eye on the growing threat to some of their core businesses of FinTech and independent technology companies. Amazon has already dipped its toe into healthcare and is becoming a larger player in financial services.

The need to embrace technology and automation will become more important than ever for the global custody industry. We will see an even greater focus on big data, digital transformation and cyber security this year as a way to meet client demands. Finally, custody banks will formalise their policies towards emerging technologies such as blockchain as a way to bring in new revenues.

These challenges are huge even for the most experienced custody executive. However, for these three outsiders bringing a fresh new perspective to an otherwise tired business could be the key in propelling the industry forward.

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