Invest in technology or die. That’s the clear message from global custody executives. “The technology is core in any aspect in [the] entire custody workflow,” says Christian Hudson, chief information officer of Swiss-American Securities (SASI). “It makes it harder and harder for small and medium-size custodians to survive.”
Jim Flannery, senior vice president and national marketing and sales manager for Mellon Global Securities Services, agrees. “You invest in technology and make sure that you’re either even with or ahead of the curve in terms of technology,” he says. “One of the things that has caused previous custodians in the US to sell their business is that you have to have some scale in order to do it. There are some basic things that you have to do that the industry or regulators require but that are not inexpensive.”
Kevin Galvin, the San Francisco-based vice president of institutional services and asset management at Union Bank of California, agrees. “It’s really been incumbent on us to continue to invest in [technology] or risk losing [our] client base,” he says.
But significant technology investments are not enough. “The challenge will be how to spend investments in technology wisely,” says John Galante, JPMorgan’s chief technology officer for treasury and securities services. “The goal is to aggressively pursue targeted investments in technology and execute in a timely manner. Because of the heavily regulated environment, the changes we’ve implemented are going to ensure transparency and improve reporting to ensure compliance.” JPMorgan recently added new custody technology, including JPMorgan Performance Measurement, JPMorgan E-Tax and electronic distribution of corporate action materials.
One of the key innovations implemented by Mellon’s custody business was to provide its clients with so-called “dashboard” reports, permitting a customized screen inside the regular PC screen. “They’re populated every day with information customers said they want,” Flannery says. “It’s based on two or three things they like to see and don’t have to go into databases and gather.”
Mellon acquired Eagle Investment Systems in 2001 partly in order to be able to have access to high-grade and next-generation technology. “By purchasing Eagle, we purchased state-of-the-art technology,” Flannery says. “We now have a factory that will not only generate next-generation technology, but maybe fill holes where we have a product gap.”
It’s the “C” for communications in “ICT” (information and communications technology) that will be crucial, adds Jon Lloyd, the Paris-based head of clearing, settlement and custody at BNP Paribas Securities Services. “The providers who can most easily and openly integrate themselves with their clients and their clients’ operational processes will have a true competitive advantage,” he says. “Innovative connectivity solutions will therefore be one of the keys to success going forward.”
Further innovation will be key, Lloyd says. “Implications could be considerable, especially as we seek ways to improve client connectivity and STP [straight-through processing],” he says. “Hence developments like ‘XML integrates’ are of considerable interest to us to help simplify the myriad of connections needed, whether with clients, the market infrastructure or internal applications.” XML (Extensible Markup Language) permits the sharing of data across different systems.
BNP Paribas Securities Services is also developing “rich client” front-ends using “.net” to support what it calls power users within corporations, according to Lloyd. “This will help to enhance the overall client service by enabling operational account managers to develop their own queries and workflow tools,” he points out.
Another key challenge is to make sure clients actually use the technology correctly. “It’s amazing how people don’t always understand the technology. Fortunately, we have a dedicated CRM group that is exceptionally active being at clients’ sites,” Hudson says.
More important, incorrect use of technology could lead to lost business. “When you bring a new client—and all technology is new—you end up having to go back every while, just like an annual physical,” Flannery says. “You want to avoid that a competitor shows them something they didn’t realize was available on their PC. That way you make sure you get maximum return on your investment.” And technology without the equivalent service is also a waste. “Once you have technology in place, you have to make sure you back that up with service,” Flannery adds.
Another key issue is security—of greater concern now that custodians are using web-based solutions rather than dedicated lines as in the past, Flannery points out. “Information delivery is a key element of the future state of the custody business,” he says.
In the end, technology will help the bottom line. “The ability to maintain proper accounting controls leads to more efficient and less risky operating environments,” Galvin says. “To the extent that we’re able to develop a more efficient operating environment, that will control our operating overhead and improve our margins.”