The last few years have seen an astonishing assortment of sensationalist newspaper headlines likening big data to ‘the new oil’, ‘the new gold’ and alarmingly ‘the new God.’ Many custodian banks have watched technology companies like Amazon, Google and Netflix monetise their users’ data to brilliant effect, and they want to imitate that success. Identifying new revenue sources is not a nice-to-have but a must-have for securities services whose core custody and fund administration products are facing huge margin pressures.
McKinsey data shows the revenues at securities services grew by only 3% per year between 2010 and 2016, as low interest rates, a relentless ambush of regulation and fee compression took their collective toll. In contrast, Amazon’s lowest recorded annual growth in revenue between 2012 and 2016 was an eye-watering 19.5%. It is improbable a big data strategy of the sort imagined by the custodians will yield Amazon-esque returns, but it could open up the door to revenue diversification, or so the thinking goes.
The big data strategy at most custodians can loosely be deduced as follows. Gather lots of unstructured information about customers and markets which is parked – usually unsystematically – across their businesses and use artificial intelligence (AI) technology like robotic process automation (RPA) to organise the data identifying any trends or linkages. These insights in theory could help banks not only develop customised products on a timely basis, but even sell proprietary and bespoke information and research to clients.
The big data product
Custodians have access to data across multiple markets and intermediaries, along with an entrenched understanding of regulations and local requirements throughout their networks. “Big data analytics is one of the major products we are looking at given the vast repository of information and data that we currently hold. By making sense of this dematerialised data, and reporting the key findings back to clients, providers can increasingly reposition themselves as data custodians,” explains Patrick Colle, general manager at BNP Paribas Securities Services.
Custodians are confident they will be able to provide asset manager and investor clients with invaluable analytics on investment/ market and risk trends, helping customers generate alpha and safeguard their businesses.
“When considering big data and where the custodian sits in the value chain, our institutional clients are looking to their custodians to help them generate both investment alpha and operational alpha. In essence, it is now the custodians’ job to enable clients to have better and more effective access to their own data,” says David Brent, global head of technology sales, investor services at JP Morgan.
One client – speaking at The Network Forum in Vienna back in June 2018 – acknowledged the historic custody model of asset safekeeping, processing settlements and corporate actions and the provision of tax services was irrevocably broken, adding there was presently a race to zero on fees, which was not sustainable. The client however, confirmed that he would be willing to purchase data analytics from custodians provided the information was useful, and contributes to tangible alpha generation or improved risk mitigation.
Monetising data: A false dawn?
Not everyone is convinced big data can be effectively monetised. Critics say many custodians have similar geographical, client and product footprints, suggesting the analytics – at least on the investment side – is not going to reveal anything particularly noteworthy.
The investment analytics market is also very saturated, while a number of buy-side firms are scaling back on brokerage research and moving to execution-only relationships because of the MiFID II inducement ban. This could make data analytics a tough sell for custodians.
The cost of mining data and investing in the necessary technologies to aggregate it all will not be trivial either. Just like any product – if custodians want clients to buy their investment or risk analytics, the data needs to be truly exceptional, and significantly different to what a lot of the brokerage community and other technology providers are offering or launching. Daron Pearce, EMEA CEO for asset servicing at BNY Mellon, says custodians are not trying to replicate the investment analysis provided by brokers.
“Our objective is not to tell managers which stock, asset classes or countries they should be investing in. Instead, it is to provide an up-to-date, real-time view of their portfolios’ performance and risk characteristics drawn from quality data pulled from across the globe and including alternative investments. We believe clients will pay a premium to custodians for performance analytics supported by APIs (application programming interfaces) which are higher frequency, instant and more accurate than what they are currently receiving, namely an end of day report,” says Pearce.
Others agree custodians need to tailor their data products properly. “Any custodian looking to generate a meaningful revenue stream through creating stand-alone data products for the broader financial community by applying advanced analytics to their own data exhaust will only be able to do so if their data is truly unique and the analytics off the back of it is also equally impressive. This is a high bar. I believe custodians should absolutely be exploring big data, but the most interesting use cases might not be stand-alone data products for the broader market, but rather value-added products for their existing customers,” explains Matthias Voelkel, partner at McKinsey.
Is mining big data a big regulatory minefield?
Having been lightly – if at all – supervised, the big data policies at technology companies are now firmly under the gaze of regulators following the aftershocks of the Facebook/Cambridge Analytica scandal.
The UK’s Financial Conduct Authority (FCA) has gone further and recently warned banks about data misuse, with its head Charles Randell affirming the topic was a major issue and now top of the regulator’s agenda. Custodians therefore need to tread carefully, particularly as a number of lawyers have advised fund manager clients to be extra diligent when using third-party data analytics.
Prudence around data collection and usage is unconditional following the introduction of the General Data Protection Regulation (GDPR), along with its hefty fines for non-compliance.
“GDPR compliance is a must for all companies, and it is critical that providers ensure data is being used appropriately and there are no breaches of the rules. Data security is also absolutely pivotal, and this can be achieved by having state of the art cyber-security protections in place,” says Voelkel.
Pearce adds data security and data integrity are essential for custodians moving forward. “It is in the industry’s collective interest that we all work together to achieve the highest standards of data integrity and security. We are incredibly careful in terms of the data we access, and how we amalgamate it.”
The big data tightrope
Custodians have a lot of information about clients and markets sitting idle on their desks but finding a way to monetise it is going to be hard. If clients are to purchase big data driven analytics or specially tailored solutions, then the products need to serve a useful purpose and be set apart from the competition. If the custody industry manages this, then data analytics could turn into a nice regular income stream, offsetting some of the declines seen elsewhere in the business, such as in securities lending or FX execution.
Banks do need to be conscious though of the public and political criticism about big data following the abuses revealed at some of the major technology companies. Regulators have forewarned banks that any exploitation or mishandling of data will be investigated, and this guidance should be onboarded entirely by custodians. While banks need to be bold in their big data ambitions, they must also be compliant in the approach they take.