Custodians on API quest for Holy Grail of scale

Custodian banks think they’ve found their Holy Grail: technology that would let them scale. Like the fabled Knights of the Round Table, they are riding out from Camelot to find the greatest prize.

Of course, custodian banks are already huge, but they must still bow to the needs of the asset managers and asset owners they serve. This clientele is a diverse lot, with their own systems, processes, and – especially in diverse Asia – regulations and reporting requirements. Custody is a reliable but low-fee business that relies on volumes (core custody and fund accounting are often loss leaders). Therefore banks need to make sure their biggest clients’ needs are met, which means expensive customization of reporting and other services.

But what if a new technology came along that could enable banks to magically turn this liability into an asset? What if, instead of having to put up with lots of pesky client requests, they could sit back and tell their client: here’s all the information in the world, now go service yourself?

Not only would this let them save a bundle on client-relationship costs, but it would also, ideally, make for better service: customers could get real-time access to diverse sets of data to let them quickly and effectively manage tasks such as risk management, regulatory reporting and performance measurement.

Gathering for the quest
It’s a win-win – and it’s happening, through the building of banks’ data lakes that institutional investors can connect to via APIs.

“We’re closer to finding something clients and custodians alike have been searching for: one scalable operating model,” said Shaun Parkes, managing director and head of investor service sales for Asia Pacific at J.P. Morgan.

Indeed, being able to create such an infrastructure is now the cutting edge of competition among custodians.

“Over the next three to five years, this is where we’re going to add value,” said C.P. Yap, Hong Kong-based head of custody and fund services for Asia Pacific at Citi.

But it’s happening a lot more slowly than banks like. In fact, some of their clients say uptake is going to be slow and difficult.

“The theory is nice but the practicalities are difficult,” said Dean Chisholm, Asia-Pacific COO at Invesco. “There’s no real standardization in the asset-management industry, so there will still have to be customization.”

Custodians have always served as the source of “truth” in a complex industry of many, many players, each with their own I.T. systems, processes and regulations. Banks spend vast resources on automating processing to eliminate errors and help clients reduce risks.

As technology evolves, so do the means by which banks continue to strive toward this oracle-like status. Today they are harnessing digital tools to overcome decades-old heritage systems, in order to try to cut through traditional silos.

“We’re digitizing the process to develop tools to be that one source of truth,” says Ian Martin, Asia-Pacific head of State Street Global Exchange, a “data as a service” unit of State Street.

The challenges mount
But truth is slippery, because banks remain large, unwieldy organizations with client data stuck in different departments.

The same transaction, involving the same client in the same market, requires information be passed among asset managers, brokers, custodians, administrators, fund registrars, stock exchanges, central counterparties and clearing houses.

“It’s all vertical: they all have their own data models, their own standards, their own reference data,” said John Van Verre, managing director at HSBC Securities Services in Hong Kong and global head of its custody business. “The same piece of data can be interpreted differently.”

This lack of consistency is what custodian banks’ digital development teams are trying to address.

Banks are starting to claim some initial successes with clients in Asia. But APIs – application programming interfaces, bits of code that enable to software apps to communicate – require integration. A client has to invest to connect via an API.

Whether enough clients are willing to do so is an open question.

“Data lakes are certainly a hot topic,” said Mark Konyn, group chief investment officer at AIA in Hong Kong. “I would say take-up is unproven. Institutions are more generally using investment books of record and data-management tools to create dynamic polling and report generation.”

Into the field of battle
Custodians acknowledge it’s early days for this new business model. Philippe Rualt, Paris-based head of digital transformation at BNP Paribas Securities Services, says it will take about three years for APIs to extend throughout the custody business, even for the most basic information, such as NAVs and fund accounts. “Everything needs to be re-documented, and put under a governance framework,” he said.

In some ways, this shift is nothing new: for decades, custodians have been searching for profitable services and more attention from buy sides’ front offices as the business commoditized.

But digitization could realize the “custody Holy Grail” in a more fundamental way, because technology, if allowed, can change client relationships profoundly. It would shift competition among banks further up the value chain, letting them find new sources of revenue derived from providing data insights.

Some players are targeting niches where they think they can add value. For example, RBC is focusing on the registrar function.

“Transfer agency is rich in data,” says Paul, London-based managing director and global head of client experience at RBC Investor and Treasury Services.

Another example: BNY Mellon is developing APIs to help investors get a better picture of their derivatives exposures. Over-the-counter derivatives are a data challenge, as they are “unstructured”. At the same time, however, investors are using them more, as tools for tactical asset allocation as well as to build alpha-seeking portfolios.

By simply sending regular reports, BNY Mellon had only a vague idea of how the information was being used. “We had no insight as to what the client would do with the information,” said Rohan Singh, Singapore-based managing director and head of Asia Pacific for asset servicing. “Now, connecting with them through an API, we can understand how they consume it.”

Quest unfulfilled
Bankers recognize that they have to prove they can create the intelligence to help customers make better decisions, in risk, in product design, and in investing.

But such services don’t come cheap. Building a data lake is an enormous investment, not least because it requires people with data skills (and data scientists are expensive).

The bigger hurdle is on the client side. Only the very biggest asset managers and most sophisticated sovereign wealth funds can afford to employ the small team required to make sense of data.

Invesco’s Chisholm notes that data lakes aren’t the end of the story, either. To really derive value, investment firms need to blend their own information about a given security with third-party sources of data such as indices or market feeds. “A data lake needs meta data, to put it all into context,” he said, adding that this leads to a level of cost and complexity that few institutions can handle.

This suggests custodians aren’t about to grasp the Holy Grail just yet. Digitization will enhance transparency and foster simplicity, which implies more efficient processing but far lower fees. It’s unclear whether the new API-led services will command prices high enough to compensate – or if there will be enough clients ready to pay the price. As King Arthur’s knights found out, the quest is what counts, but Holy Grails are not meant to be possessed.