Outsourced too much
“Management focus has to be much more cost-driven by investing to cut the broken delivery chain, removing duplication, manual processes and silo structures,” says Gubert. “The paradox is that the bulk of fees in custody still come from transaction fees and ad valorem ones, despite all the talk of the industry being innovative.
“New products have traditionally been seen as the panacea to counter fee erosion but have usually only had a minor effect on total revenues.”
Given the tidal wave of regulation facing banks right now there has been a reconsidering of certain business areas, whereby less profitable lines are being reconsidered.
In an interview at the World Economic Forum earlier this year, Lara Warner, chief compliance and regulatory affairs officer at Credit Suisse, said regulation has had “a negative impact on innovation and entrepreneurial drive over the last several years”.
“Decisions that are innovative take longer to make and decide, both by regulators but also by managers in areas like compliance,” she added.
Echoing Warner’s view, Deutsche’s Cryan said “as regulation becomes more granular, traditional institutions tend to become less innovative and we’re looking elsewhere for disrupters.”
The search is therefore on for partners, which takes some of the aforementioned costs and complexities out of the process. FinTech firms don’t succumb to the same regulatory constraints as their larger counterparts, while they can also be more flexible and make innovation their core business. FinTechs have much less to lose when it comes to innovation as well.
However, when outsourcing innovation you then somewhat rob yourself of internal expertise.
“The problem is that they have outsourced so much they can’t find the top people anymore,” says O’Hara. “Outsourcing has led to them not having internal expertise anymore.”
There have been many examples of outsourcing through collaboration in the securities services indsutry, such as BNP Paribas and Calypso, Euroclear and Taskize and industry initiatives such as the R3 blockchain project.
Collaborate to innovate
A panel of experts at Global Custodian’s GCSessions event in 2016 concurred that collaboration is crucial for the securities services industry currently faced with mounting challenges and the mammoth task of upgrading legacy systems.
“When you look at the technology underpinning our environment, it is 30 years old,” said Rob Scott, head of market services at Commerzbank.
“The industry is very challenged as volume is static and costs of regulation and technology are rising. Under the theme of collaboration, there is more focus on firms leveraging each others strengths to neutralise the costs, particularly the unknown costs.”
The panel recognised the need to partner with companies to develop new technologies, leaning on the experience and knowledge of some of the emerging start-ups in the FinTech sector.
“Companies that successfully work with FinTechs are able to learn each others trends and this will help them reach new ideas and talents,” said Simon Streule, managing director for strategy and business support at SIX.
“FinTechs helps companies understand business models of the future. There’s a long way to go and the ideas seen are not yet tangible, but most areas can be reachable in time.”
So innovation is tough in a custodian bank. The legacy, regulatory environment and cost pressures are all taking some toll on innovation, even if they aren’t wiping it out entirely. What’s clear is that encouragement is needed from the top, while a motivated and incentivised team that is empowered can be essential to ideas generation.
It might not be an end-to-end operating model innovation, but perhaps just certain aspects of the value chain rather. This can still be valuable in today’s rapidly moving technological age.
“Any 5-10 year strategy must include innovation in the broadest sense of the word which is why it has to be consistently on the agenda. The issue is how much change can you execute over specific timeframes and this will be organisation and leadership driven,” adds Kerns.
“I think it’s absolutely inevitable that custodian banks will buy in talent, capability and even companies themselves to develop their innovation agendas as they see that as the most effective route to demonstrate momentum and industry leadership and to assist in addressing core initiatives such as regulation, risk management, operating efficiency and new client demands.”