With platforms in play, custodians stock up on third-party services

DEEP LOOK | Platforms are gaining traction in the custody space, although custodians have adopted different approaches to service availability. With asset managers happy to work with specialists across all aspects of their operations, the pressure is on platform providers to find the best external partners. Paul Golden speaks with custodians and fintech leaders about where we’re currently at.

State Street has been at the forefront of the move to platform services through State Street Alpha. When the platform was launched, chief operating officer Lou Maiuri said its value lay in owning the investment software, services and data infrastructure from the inception of an idea straight through to financial reporting, custody clearing and accounting.

But other banks have not been standing still. According to Amit Agarwal, head of custody securities services, Citi is investing around $1.5 billion annually in platform modernisation and functional enhancements to remove latency and retire legacy applications.

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“We have collapsed our global and local custody ledgers so that a global custody client can benefit from service levels traditionally available only to local custody relationships,” he says. “This allows for faster event notifications, elections and process automation.”

Citi’s custody business is delivered to clients through its own platforms. “We have seen an increase in demand for platform-as-a-service, which allows clients who do not want to maintain such platforms to leverage our custody platform as their ‘book of record’,” adds Agarwal.

Microservices investment

Deutsche Bank does not publicly disclose specific investment figures for its custody business. However, Paul Maley, global head of securities services and head of corporate bank Americas says its commitments include a multi-year microservices-driven platform investment.

“Our securities services business runs on both proprietary systems – some of which are shared within the bank or correspond to market infrastructure such as SWIFT – and external platforms,” he explains.

There are multiple options for clients to access their data as shown in the chart below.

“While clients typically prefer best-of-breed providers, the reality is a mix of service partners who can meet their requirements at an acceptable price point whilst maintaining asset safety requirements and guaranteeing resiliency,” says Maley.

He suggests the trend towards larger and more diverse asset pools with less human resources but better technology is fuelling a wave of consolidation that is integrating key front, middle and back office functions into fewer platforms and a smaller number of providers.

“Clients are demanding better visibility across the trade lifecycle and want information to feed directly into their workflow with the help of system integrators,” says Maley. “Some clients want to pilot select use cases with their preferred partners to tailor solutions towards specific pain points such as query management, account opening and document management and tax processes. Our role is to have interoperable technology that allows us to connect and co-create solutions for specific needs.”

For instance, Deutsche Bank has partnered with CIMB to provide Shariah custody service in Malaysia as well as launching new Shariah-compliant custody capabilities in Singapore.

Partnership opportunity

BNP Paribas works with custody partners including Manaos, Broadridge, Proxymity, AccessFintech, Digital Asset and Allfunds. Gary O’Brien, head of bank and broker segment strategy for securities services business acknowledges that this could be seen as a risk but suggests it is more an opportunity to design and define the solutions of the future.

In June, BNP Paribas launched the next generation of its NeoLink client platform, which integrates more than 50 apps, fintech services, artificial intelligence and omnichannel connectivity.

“Our custody business has long been a platform solution,” says O’Brien. “We operate in 27 markets as a local agent through 14 global custody booking centres.”

For specific areas of the market such as proxy voting and class actions services, BNP Paribas outsources to providers focused on building scale across different custodians. Outsourcing broker dealer services allows broker clients to use Dutch software provider SLIB’s E-Xylos platform as their back office technology.

James Harris, chief commercial officer at Zodia Custody says custodians and service providers are collaborating as members of a shared digital ecosystem and working together to create new revenue streams.

“Our partnership with Blockdaemon, for example, enables us to offer secure institutional staking that is compliant with regulatory standards,” he says. “Through our Interchange solution, we offer clients the ability to use their digital assets as trading collateral by working hand-in-hand with exchanges like LMAX and Bitfinex to support off-exchange settlement with bank-grade security.”

Preferences vary

Harris accepts that the use of multiple fund administrators, custodians and sub-custodians varies by client type and market. Web3-mature clients, such as crypto-native firms and innovative fund managers, often engage a diverse range of partners to navigate distinct regulatory and operational demands across individual markets, especially within global and multi-asset portfolios.

“However, as the digital asset market evolves custodians are investing in interoperable platforms and cross-market capabilities to meet clients’ growing preference for streamlined, integrated solutions,” he adds.

More traditional models around white labelling are making way for platformisation according to Frank Talsma, custody/depositary product manager at Caceis.

“We observe a trend where clients – in particular large asset managers – are diversifying their providers to leverage local regulatory expertise or niche services, such as private or digital assets,” he says.

Ying-Ying Tan, global head, custody & funds product at Standard Chartered says the bank has deployed AI in some of its markets with very specific processes that required PDF processing or free format SWIFT messages.

“We see data being a foundational part of our role as a custodian,” she adds. “It is all about the ecosystem that gets built out and how we enable consolidation of – and access to – the data needed for different requirements at scale and at speed. Bringing in technology partners is not new and we have robust systems for evaluating and managing these relationships and integration into our infrastructure.”

Fintech contribution

So where do fintechs fit into the custody platform ecosystem? Jonathan Smalley, co-founder and COO at Proxymity refers to his firm as a vehicle for cross-industry collaboration with connectivity and/or interoperability with issuer agents, vote advisors and pass-through voting providers.

“It is pretty common for all sorts of reasons for custody clients to use a range of providers, but this can present a challenge for day-to-day management and oversight as well as introducing operational complexity where proprietary systems are in use or providers have deviations or variance in service levels,” he says.

Adoption takes time due to headwinds such as regulation, vendor risk management and prioritisation on often vast, ambitious multi-year digital transformation programmes. Being easy to onboard and integrate with (as well as following through on commitments and proof points) is essential for fintechs to continue to grow their business.

“Patience is also key,” adds Smalley. “’Move fast and break things’ is a great motto in the early stages of a fintechs life but at a certain phase of maturity not breaking things is a big reason why you will go faster.”

Naveen TV, head of product at AccessFintech says it is important to distinguish between enablers and challengers. “We do not compete for settlement and asset servicing business but we do see a significant amount of the settlement activity,” he adds.

TV reckons the custody ecosystem of the future will be a blend of proprietary build and collaboration with fintechs and other technology providers such as order management systems and communication platforms developers.

“But it is very important to distinguish the role of the custodian as the asset protector and the fintech as a value creator and innovator,” he continues. “Fintechs will thrive where the value is created by either being a place of mutual interest to share cost, or a place of value creation through a network of providers.”

Infrastructure partners

Standard Chartered is working with fintechs to enable digitisation of client onboarding, workflow management and legal documentation as well as technology providers in the digital asset space, adds Tan. “We already bring fintechs and technology partners into the infrastructure we have built around our core platforms and continue to look at what partners we need to bring in.”

Zodia Custody’s James Harris agrees that fintechs have gained a foothold in settlement and asset servicing, particularly with innovations in tokenised asset settlement, real-time payments and automated reconciliation. “Our Gateway offering demonstrates this collaborative model by connecting clients to digital asset service providers that combine fintech innovations with bank-grade security,” he says.

If we purely look at the market statistics related to settlement activity and assets under custody, agent banks are still the top players.

However, fintechs are able to make a difference in more targeted areas of the market, observes BNP Paribas’ Gary O’Brien. “We use a number of fintechs to facilitate different roles in client servicing, including ensuring successful settlement of client activity, safekeeping their assets (and their data) and the wider servicing of their assets.”

Barriers to entry are high for fintechs and include extensive regulation, the requirement in some cases for banking licenses, and operational complexity, making it difficult for them to compete directly.

“We partner with fintechs to offer specialised services like AI-driven reporting, advanced analytics and ESG dashboards,” explains Samantha Job, head of operations for Caceis. “We are also looking to integrate certain fintech solutions in the core business, for example to facilitate and automate secure payments or institutional grade wallet provision in the context of crypto asset services such as custody where fintechs are the main service providers.”