A common criticism of big banks that claim to be technology companies is that they’re led by bankers, not people from the tech sector.
BNY Mellon has appointed a chairwoman for Asia Pacific who, although steeped in custody banking and operations – notably as Asia COO for State Street – has also notched two years at Algorand, a blockchain company.
Fangfang Chen says she had no intention to return to the formal banking world. “I was having a great time at Algorand,” she told DigFin. But she decided the only way to make meaningful advances in nex-gen fintech such as tokenization was to combine startups with financial institutions.
“To really drive adoption will require a partnership between tech companies and established banks,” she said.
Going for growth
OK, so now she’s got the top seat at the table for BNY Mellon’s securities services business in Asia Pacific. What’s the vision?
First, Chen has inherited a strategy for digitization that the bank is already executing. It amounts to growing the regional business to match Asia’s growth dynamic. APAC only accounts for 7 percent of BNY Mellon’s global revenues. Chen says she needs to double that before the region can have a more influential voice in the decision-making that goes on in New York, London and Boston.
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Natural dynamics will help: she says with capital flows into mainland China this year having topped $1 trillion, there’s a lot of business for global custodians like BNY Mellon – which already has $41 trillion of assets under custody or administration, as of March 2021, on behalf of asset owners and asset managers.
The bank also has a range of client types that includes corporate, private and investment banks, providing treasury services, collateral services, and other businesses beyond clearance, settlement, and data analytics.
Digitizing asset services
But to embed faster growth will require a tech strategy to deliver a better customer experience, such as pushing out suites of APIs so clients can pull data in close to real time. This is not unique to BNY Mellon, and Chen says there remain parts of the business that are still stuck with faxes and wet signatures. She doubts straight-through-processing will reach 100 percent, but efficiency is one priority – with BNY Mellon’s emphasis on open architecture its differentiator.
Another strategy that was put in place before Chen’s arrival was a partnership with Google Cloud to help players in the U.S. Treasury market predict daily settlement failures. Using Google Cloud’s data analytics and the bank’s machine learning tools, the idea is to help banks and brokers save capital and liquidity by giving them time to catch errors before trades clear.
The initiative was announced in February, and Chen says by the end of March the bank could predict 40 percent of trades likely to fail.
Another pillar of the bank’s growth strategy is to use analytics to create new products. Some of these are ongoing; others the bank is still developing. Examples include reconciliation, ESG solutions, and other services that make better use of data.
The thread unifying these is the open-architecture approach. For example, BNY Mellon integrates with several order-management systems from the likes of Aladdin, Amundi Technology, Bloomberg and SimCorp. The front-office data can then flow freely into BNY Mellon’s custody and accounting systems.
Separately, the bank is now rolling out APIs to connect to sub-custodians, using technology to make information available faster to clients. The goal is to look to users like an onshore custodian without investing in licenses and infrastructure on the ground.
“Others can replicate the same business strategy, but we have a two-year lead time in open architecture,” Chen said.
The most intriguing hints about what’s to come, of course, stem from Chen’s experience working at a blockchain startup. Earlier this year, BNY Mellon announced it would provide digital asset servicing, which will be manifested through multiple business units.
Nothing tangible has rolled out yet, although Chen expects to have a service live in the U.S. by the end of the year. The bank took a stake in Fireblocks for its infrastructure and security protocols, and it’s now working on how to integrate that to the bank’s custody and accounting systems. This will enable it to offer its clients a holistic look at portfolios, such as net asset values, that include digital assets.
What value does putting this on a blockchain bring to asset owners?Fangfang Chen, BNY Mellon
The allure for BNY Mellon is not cryptocurrency – “Most of them are trash,” Chen said – but tokenization.
“The tech is there,” Chen said. So are the benefits of tokens that are programmable (for example, automating dividends, to create an instant, super-efficient market) and can be used as collateral to generate returns.
There are two big holdups, however. One is regulation and the other is liquidity.
Regulation is a bank problem. It’s not clear what regulators will assume what powers for tokenizing assets, and the bank isn’t going to launch something without some regulatory guardrails in place.
Liquidity is an operator problem. When Chen worked at Algorand, the company worked on projects to tokenize real estate. “The challenge is the lack of liquidity,” Chen said. “What value does putting this on a blockchain bring to asset owners? Because after the token is issued, there is no secondary trading.” Real estate is also a licensed activity, so operators must have a way to vet accredited investors.
The road to tokenization
Chen suggests solving these issues will require partnership between financial institutions and tech companies.
For example, she suggests an institution the size of BNY Mellon could liaise with many market makers to bring them into the ecosystem together. “If we had twenty market participants, that would create a big market,” she said, including opportunities to collateralize the underlying real bonds to generate new sources of liquidity in their tokenized versions.
The one drawback that a bank can’t solve, at least not today, is the fact that tokenization is capital-intensive. The first tokenization projects are likely to be stablecoins: one-to-one digital twins that mirror a real underlying asset. These tokens must therefore be 100 percent backed, for them to be acceptable to banks and regulators.
Tokens that go into lending and borrowing pools must be even more heavily collateralized, to compensate for the lack of KYC within DeFi environments, even if those arrangements have some kind of identity validation on the on-ramps from fiat currency.
Nonetheless, Chen is determined that BNY Mellon be at the forefront of these developments. “We have to partner and learn,” she said. Despite the issues around regulation and liquidity, she can see how these models will become attractive: it’s easy now to convert in and out of fiat to crypto, the infrastructure is way more efficient, and users can generate healthy yields, versus earning zero on deposits held at a commercial bank.
Chen argues banks have one edge over fintech service providers: trust. Digital assets ultimately involve self-custody. The tech may work, but most institutional investors pay custodians to provide that kind of protection. (They are also legally required to do so in most places.)
“Once the regulations allow, this won’t be a technology competition,” Chen said. “It will be a reputation competition.”