What goes around comes around

In the last few months, industry discussion seems to have coalesced around a few key themes. But how new are the challenges they present?

Over the course of 2022, the securities services industry, in several different forums, has attempted to look past the geopolitical and macroeconomic gloom that has dominated many front pages, to the common issues confronting this segment of the financial services industry.   

In so doing, however, there is a risk of overdramatising the consequences for the industry of recent developments. Call me an old hack, but in my view, there are number of themes that seem to come round periodically which are presented as a new paradigm, but really aren’t. Let’s consider three of these. 

Technology 

Once again, it seems, there are warnings that technology companies are set to eat custodians’ lunch. The first great scare was in the early nineties, when predictions were rife that firms such as IBM were well placed to offer the technology that underpinned post-trade services and thereby wrest the business from the financial services sector. What would be left for banks to do? The answer, it turned out, was quite a lot, especially when it came to fiduciary responsibility in the eyes of regulators.  

What has changed, however, is the attitude of the banks to IT. There is perhaps a healthier recognition today that partnering with a technology firm, whether on a large or small scale, could be a win-win. This is an improvement on the common idea that banks’ own IT departments needed to step to provide proprietary solutions or that, if third-party providers did have to be involved, it should be under the direction of the bank. 

With the erosion of those defensive positions, the stage is set for a period of more fruitful collaboration between the custodian banks and both fintechs and big tech. 

Consolidation 

This has happened in the past – for example, both mutual fund administration and global custody – until the market decides that it is not actually working in their favour. In the case of the latter, consolidation reached such a point that GC abandoned its annual Global Custody survey.  

Now, after a long period of commoditisation, competition in that particular domain is coming alive again with different added value areas of competitive differentiation (real or perceived) – so much so that we are thinking of relaunching that survey, though possibly measuring a different set of services from what we historically regarded as key. 

Regionalisation 

This is clearly happening at a sub-custody and local market level and is determined by three key criteria: margins, scale and client convenience. There is some evidence that when those three criteria align – see Nordics, for example – regionalisation works for both clients and service providers. In other areas where markets within a region are more differentiated, the jury is still out. For now, momentum seems to be with regionalisation. I suspect a more mixed picture will eventually emerge. 

(So far in this assessment, there has been no mention of digital assets. Notwithstanding the implosion of FTX and its impact on sentiment, there will be more to say about that once institutional investors begin voting with their wallets.) 

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