New Opportunities for Custodians, But Still Might Have to Charge More, Says Finadium

While custodians face challenges to increase revenue while dealing with their own compliance issues, these banks also have some new opportunities to gain more business, and we may be at a “crossroads” in terms of the types of possible outsourcing, says Finadium.

In a recent report, “Understanding the Modern Custodial Bank,” part of the research firm’s new “Finadium for Investors” series, which targets asset owners and asset managers, Finadium notes that there’s “a product gap for investors who desire integrated data analytics across increasingly complex portfolios.”

As a result, custodians have more opportunities to harvest the data they already have in store by nature of safekeeping the assets. These banks can offer more analytics services, allowing clients to make better decisions firm-wide, and custodians will likely have an opportunity to offer real-time data services too.

Custodians can also make up for lost revenue streams by helping clients in areas such as collateral management, tri-party repo and exchange-traded funds (ETFs), as the custodian can help asset managers expand their offerings by providing a comprehensive platform for this asset class that includes custody, accounting, fund administration, online order taking, basket settlement and transfer agency services.

Even with these value-added services, it may not be enough. The fact remains that the price for core custody services had dropped considerably prior to the financial crisis as custodians looked to develop economies of scale and earn money from other revenue streams, and now, with interest rates remaining near zero and revenue from other services falling, custodians may have to charge more for core custody.

“While these negotiations can be difficult, reductions in securities lending or FX volumes have left custodians with a stark choice: either charge more or lose money on each individual client,” says Finadium.