Since around 2010, the term ‘fintech‘ has become ubiquitous, used to describe almost any application of technology to financial services. Its attraction is simple. Fintech companies and technologies promise greater inclusion, efficiency, transparency, automation and dis-intermediation across value chains, delivering reduced risks and costs, improved client experiences and ultimately revenue growth.
Unsurprisingly, given its potential to transform financial services, fintech attracts attention from consumers, incumbent firms, governments, investors and regulators alike.
But the devil is in the detail. How are leading firms really responding to fintech challenges and opportunities? Is the focus purely on cost-savings and service enhancements – and which matters most?
To find out, we undertook a major study into how third-party administrator banks view fintech, where they are deploying fintech solutions, and to what effect.
Our investigations included desk research, questionnaires and interviews with leading global asset servicers. We estimate our review covered at least 80% of the market, based on total assets under administration.
In particular we explored where, why and how leading custodian banks are developing and deploying fintech across their business and operating models and investigated how fintech initiatives are being deployed by, and are impacting, the asset servicing industry. Outlined below, the results are illuminating.
Fintech in focus
We focused on four underlying technologies/initiatives that we believe are most relevant and applicable to the sector:
- Artificial Intelligence (AI) including machine learning, deep learning and Natural Language Processing (NLP)
- Robotics Process Automation (RPA)
- Distributed Ledger Technology (DLT) aka blockchain
- Popular fintech initiatives – typically part of firms’ innovation agenda, including labs, consortiums and partnerships.
The (beneficial) shock of the new
As with all things new, fintech promises can be perceived as threats, set to disrupt and challenge the status quo by redefining existing business and operating models across financial service segments. Even so, the opportunities are clear. For example:
- investor services rely heavily on driving cost efficiencies to achieve profitability – as revenue growth can be scarce – while expenses continue to grow;
- most asset servicers have a legacy of fragmented, inefficient technology with prohibitive total replacement costs, encouraging wrap-around solutions to aggregate data and diversify client delivery channels. Their core activities (custody and funds administration) retain high degrees of manual process, escalating expenses and the potential for error;
- for over twenty years, asset servicers have insisted theirs is ‘an information business’. Now, the fintech revolution and increasing digitization may finally enable them to achieve this goal.
Importantly, disruption will undoubtedly include the deployment of blockchain and distributed ledger technology. Indeed over the next decade, we expect this to transform asset servicers’ core business: how securities are traded and how the the investment lifecycle is administered.
Data and digitalisation
- State Street’s Beacon initiative and development of DataGX
- Citibank’s Velocity Clarity
- BNYM’s Nexen platform
We also found that all TPAs are seeking to automate manual processes and fundamentally reduce costs, especially through the use of robotics and deployment of ‘bots’ (RPA). We predict that this may well change the shape of global operating models and reduce reliance on cheaper near/off-shore locations.
In addition, the investments industry as a whole is considering how blockchain and distributed ledger technology can fundamentally streamline and simplify the multiple securities records (at least seven) of the trading cycle. Already, for example:
- Northern Trust has initiated a private equity transaction life cycle;
- both Citibank and HSBC are prototyping proxy voting.
In fact we discovered a consistent view that, ten years from now, a broad deployment of DLT across investments and securities industries, supported by industry consortia, will mean asset servicers’ role and responsibilities will be significantly different from today. Through digitalisation and better construct of data lakes and accessibility, via APIs, asset servicers are already encouraging more and more client ‘self-service’ for both client benefit and service efficiency.
Having said that, from an asset servicer’s perspective, the application of and benefit from artificial intelligence is likely to be more limited. AI tends to align better with opportunity identification and decision making and seen more as a ‘front office’ toolkit, whereas asset servicers are predominantly involved in delivering middle and back office services. Nevertheless, several asset servicers are actively investigating if, how and where AI and cognitive computing could be deployed across their businesses.
Collaboration = innovation
A strong theme emerging from our research – and one common to fintech as a whole – is the collaborative, tech-savvy nature of identifying and developing applications. Collaboration is almost universally regarded as being essential to innovation and to creating a more entrepreneurial ‘new tech’ environment through which to attract, retain and motive a millennial workforce.
The key trends we observed among those we studied include:
- cross-industry collaboration, including blockchain consortia
- university-industry collaboration
- collaboration with tech companies, particularly with new tech companies and the creation of innovation labs
Across the industry, data and information privacy is of paramount importance and cyber security remains a very necessary area of focus for all asset servicers. In fact this is increasingly so as their businesses trend toward data and information businesses, as opposed to processing and banking businesses.
While the custodian bank landscape is nuanced, without any ‘one size fits all’ approach to fintech, four consistent findings emerge from our research:
- asset servicers see fintech as a key enabler for lower cost operating and service models, with robots increasingly deployed to drive cost efficiencies;
- digitalisation is key to deliver consistent client data consistently;
- collaboration is essential to attract the people who will deliver progress – particularly millennials – as well as to drive innovation itself;
- longer term, blockchain is set fundamentally to disrupt business models.
Overall, we can conclude that banks are investing in fintech to streamline their operations, reap cost efficiencies and enhance the service and data they deliver to their clients.
If you would like to discuss our findings and its relevance to your business, or find out more about any aspect of our work, please contact us.