The existence of a financial custodian in the near future is ambivalent. This is because all the traditional processes like safekeeping, settlements, tax services and corporate actions can also be done by the non-traditional and other fintech firms. These were viewed as the determining factor by clients in the past, but now it is merely a basic hygiene factor. Thus, the view that custody has become commoditized is correct to some extent.
The probability that fintech firms can handle the traditional functions of custodian banks much more efficiently is a threat to custodians and they are aware of it. They are trying to counteract these difficulties by adjusting the staff ratio, off-shoring, digitization and encouraging self-service. They have also tried to customize their approach to the clients by having a menu of add-on services and charging minimum annual fees.
The changing technological environment suggests that custodian banks must fundamentally reposition themselves. The transaction-based model is undermined by the continuous advance of artificial intelligence (AI) and robotics. Therefore, an advisory relationship with the client is more suitable in this scenario. Most of the back-office, labor-intensive custody operations like reconciliation can be automated. This is because most of the custody and fund services can easily be automated by the non-traditional firms. Therefore, the transaction model that the custodians currently have in place must be replaced by a model wherein they work with the clients closely to solve their problems.
However, the common belief is that the custodians will evolve along with the digital innovations. It can disrupt the entire investment chain by revolutionizing client service, knowledge provision, data management, liquidity management, and risk management. These areas currently come under the purview of asset managers and wealth managers. This would mean that custodians will need to start a new operating model wherein they will approach the clients in the spirit of partnership and align their end-to-end needs. Thus, with the segmented offerings, custodians can go beyond the services that they are currently offering. Some custodians like BlackRock and Northern Trust are already investing in the digital technology and automating the middle management functions of the asset managers and are expanding their margins.
Although the world keeps changing due to regulatory reforms and other reasons, safekeeping of assets isstill be done by custodians. This is partly because it is a regulated activity and none of the technological firms or specialized providers can compete with the custodian in this space. The vast quantity of data that the custodians automatically generate is therefore an advantage in this area. Applying analytics on these data can add value-added services to the clients.
Therefore, embracing big data analytics, AI and robotics is required for the custodians to exist in the market place which would mean that custodians will have to act more like the tech firms and thus require a different talent-pool for the same
So, will custodians exist in the near future? One certainty is that it will look very different in the future both in terms of altering the shape in the value chain as well as the change in the business model. The custodians will have to embrace the changes and recognize that they are suppliers of technological solutions and not merely transaction processing specialists. It will definitely derive the best outcome for all the stakeholders.
Custody by 2025, Game changers, Future trends in Security Services by HSBCA perfect storm: New frontiers for custodians and asset managers by BCG