Global custodians must bolster R&D departments to fend off FinTech threat

Custodians will have to up the ante on their research and development (R&D) programmes to ward off disruptive threats from new entrants.

By Charles Gubert

Global custodians need to earmark more resources to their research and development (R&D) programmes and capabilities if the industry is to effectively adapt to technological changes, according to a panel of experts.

Speaking at the Global Custody Forum in London, panellists also suggested custodians will also have to placate the risk of disruptors – such as FinTech companies – from slicing away at chunks of their businesses.

Rupert Bull, founder of The Disruption House, a benchmarking and data analytics company, stated custodians needed to up the ante on R&D to ward off disruptive threats. “A lot of FinTech companies are operating from a low price point well below what the incumbents are charging, and some of them are gradually deconstructing industries on an end-to-end basis, leaving established providers holding the most expensive parts of their business,” he said.

Payments, he said, were a prime example of this. Many correspondent banks are at serious risk from new challengers, who can provide customers with much faster cross-border payment services. There is also a real fear at the same banks that start-ups – along with some of the FAANG (Facebook, Apple, Amazon, Netflix, Google) companies – could encroach on other areas of the financial services ecosystem such as lending and foreign exchange.

One of the problems facing global custodians is that their businesses operate in multiple silos, meaning that innovation – as and when it occurs – is incremental and small scale focusing predominantly on a handful of tactical initiatives, commented Chris Mills, managing director for the UK and Europe at Stradegi Consulting, a buy-side consultancy. For the industry to really develop, it needs to think about disruption on a more holistic scale.

Some global custodians, however, feel the criticism being levelled against them for not innovating rapidly enough is unfair, pointing out their industry is systemically important and entrusted with safekeeping trillions of dollars of client assets.

As such, poorly executed change programmes can have destabilising consequences for customers and even markets, meaning that product innovation must be well risk managed and pursued patiently. 

Even so, a number of industry hegemons have been ramping up their technology spending. In an interview with Global Custodian earlier this year, Patrick Colle, general manager at BNP Paribas Securities Services, said the bank was allocating €3 billion on a group-wide basis to digital initiatives.