BNY Mellon recently announced a partnership with Bloomberg, which comes on the heels of another with BlackRock.
The aim, says Singapore-based Mathew Kathayanat, head of product and strategy for Asia Pacific, is to provide value by bringing critical data and insights into the front office, allowing clients using both BNY Mellon and its partners to improve the investment-decision process. “We’re open architecture because we know our clients want flexibility and choice,” he said.
Custody represents the primary revenue generator for the world’s biggest banks. Custodians act as the vault for institutional and corporate accounts, safeguarding assets, collecting and reporting on related information (such as corporate actions), providing accounting, maintaining funds’ registrars, handling foreign exchange, and providing a range of legal, tax and compliance services related to those funds.
Although fees on core custody are ultra low, the volumes that top banks generate still makes custody valuable. Despite low interest rates, custodians still earn a spread on holding customer deposits, and lending out client assets (splitting the gains with the client) is lucrative. During the global financial crisis, custody provided steady revenues at a time when other banking activities were in peril.
But this bulwark is under threat from fintech. Many of the services banks providers are now available from tech companies as modular, plug’n’play software-as-a-service.
Some custody functions may resist being displaced: robots aren’t trusted to cut a fund’s NAV (net asset value) or to handle all middle-office functions such as risk management and compliance. On the other hand, fund accounting and middle-office outsourcing are usually loss leaders for custodians, as these activities do not generate revenues. The lucrative bits, such as core custody, forex and securities lending, are the most at risk.
That’s the background to BNY Mellon’s teaming up with partners, most recently Bloomberg. BNY Mellon will integrate its data, analytics and servicing capabilities with AIM, Bloomberg’s portfolio management system. Buy sides using AIM for trading can now access BNY Mellon’s data tools directly.
This follows a deal announced in April to give similar access to BNY Mellon data to users of Aladdin, the investment and operating management platform offered by BlackRock solutions and used by many buy sides (including by BlackRock itself, which manages nearly $6 trillion in assets).
Alliances versus acquisitions
The partnership approach is different than rival State Street, which has opted to acquire platforms used by clients instead. The capstone of its M&A was last year’s $2.6 billion purchase of Charles River Development, a front-office platform for asset managers – in effect, taking on Aladdin directly. (BNY Mellon has $35.5 trillion of assets under custody or administration; State Street has $32.6 trillion.)
In both cases, the first reaction by the biggest standalone custodians has been to get bigger by adding front-office facing platforms, either through acquisition or partnership. The idea is to make their custody solutions easy and attractive to CRD, Bloomberg or BlackRock customers, either to win their existing clients, or to prevent the banks’ own users from leaving. Winning clients new to any existing players is a third goal.
Data has huge value, but does that mean custodians simply digitize?Mathew Kathayanat, BNY Mellon
What these deals don’t do, however, is address the fundamental changes in client demand regarding data. Banks, especially custodians, have tons of data. They are awash in data. Yet even these institutions, for all their technological might, are struggling to turn it into a business that can safeguard their margins.
Kathayanat acknowledges this. “Data has huge value, but does that mean custodians simply digitize? That’s not a replacement for the custody business. The alliances will bring critical data further up the value chain and give clients a better end-to-end experience.”
Data’s integrity problem
One reason is data integrity. In a nutshell, data is messy. Even asset owners that use a single global custodian hire vendors to sit between them and their bank in order to reconcile data.
Even though in this case the settlement and transaction data is all from the same bank, there are discrepancies. A single bank relies on multiple operational centers, on multiple sources of reference data, and still has to use manual procedures for a lot of work, such as fund accounting. This inevitably leads to errors.
Most asset owners, particularly in Asia, prefer to use multiple custodians. Therefore the problem of data integrity is compounded. That makes it hard for banks to sell, say, services based on artificial intelligence. Instead, banks and vendors have been amassing “data lakes”, to try to pool their data into a single, reconciled format.
In the end, though, this means that clients continue to operate their own books of record and cut their own NAVs. The system works, but it’s inefficient.
The best response to the problem of data integrity has been enabling clients to pull their information directly from the custodian, rather than passively waiting for the bank’s scheduled report.
“APIs have been a great help,” said Kathayanat, who has seen asset owners leapfrog from relying on faxes to A.I.-driven KYC and other functions, supported by the rise of fintechs as well as a desire among institutional clients to have a retail mobile experience, seeing their trades on their phone whenever they wish. “We have to stay relevant.”
That’s where BNY Mellon’s partnerships come in, integrating digital tools directly to order-management systems like Aladdin and AIM to allow real-time settlement data, cash forecasts, corporate actions, and other information be visible to the client’s front office.
These deals are large, but Kathayanat says they won’t be enough. “We have more partnerships in the works,” he said.