The lifeblood of finance on the cusp of change

The lifeblood of finance on the cusp of change

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By Samir Pandiri, president of Broadridge International and board member at International Securities Services Association

The disruption of capital markets and asset management has now caught up with securities services operations – the essential, often unreported, infrastructure of finance.

Securities servicing represents about $35 billion of the $700bn global revenue pool (BCG) in wholesale capital markets and asset management – about the same share as exchanges.  Moreover, back office operations and processing represents a significant cost element across all of this global revenue pool.  Such activities account for tens of thousands of City jobs – with hundreds of openings on LinkedIn today.

Mutualisation is a key trend through which buy-side and sell-side firms are aligning with key partners to outsource critical but non-differentiated technology and operations – activities which are today done both in-house and through outsourcing.  Cost pressures and business model changes are accelerating this mutualisation transformation for technology and managed services, whereby firms are rationalising the number of critical partners who support their businesses on a global basis.   External mutualised providers should seize this opportunity to expand their product solutions, provide global coverage and more deeply partner with buy-side and sell-side firms for mission critical technology and managed services. 

The backdrop of change and disruption is impacting all firms, but in slightly different ways.  There has been a steady shift in value migration from buy-side to sell-side firms.  Active managers are ceding ground to passive management and higher margin alternatives players.  Traditional banks are losing share to principal trading firms and unregulated players.  Private capital is funding startups and technology disruptors in unprecedented numbers that is fueling disruption across the entire ecosystem of financial services.  This makes the search for efficiencies in capital markets processing close to existential. 

On the sell-side, the biggest US banks are gaining share while mid-tier and international firms are facing massive pressures.  Corporate and investment banking businesses have high fixed costs, legacy technology and capital constraints, which limit their ability to invest in core infrastructure to deal with the massive spikes in volumes, increased regulations and margin compression.  They need to consider outsourcing and mutualisation to external platforms.  For the sell-side it’s not just about cost – it’s about data and actionable insights. Firms need real-time insights to inform business decisions, with bigger and deeper capabilities to navigate the complex infrastructure they use.

There are three critical lessons for the sell-side.  Firstly, firms’ operating models must be asset class agnostic.  They should invest in common trading, investing and decision-making tools that are API-enabled and radically improve their data visualisations.  Secondly, recognise when your technology is “legacy” and find creative solutions to modernise and digitise your ecosystem.  Thirdly, understand that today, “mission critical” is not the same as “adding value”.  Focus on adding value to your clients, while your mission critical applications are mutualised in a tech savvy and cost-efficient manner with a strategic partner.  

On the buy-side, asset managers and securities servicers are faced with persistent fee pressure, legacy technology as well as a more complex regulatory and compliance environment, especially in Europe.  Similarly to the sell-side, big US managers are gaining share, putting additional pressure on firms to innovate, reduce cost, simplify their business models and mutualise solutions.  

This is driving increasing interest in mutualised platforms, such as our wealth management initiative with UBS – the type of model that could be replicated in asset management, with forward-looking asset managers realising that being an early adopter can bring rewards.

External mutualised fintech providers need to absorb all these trends in order to execute sustainable strategies. But it’s not enough just to react to client needs – 20 years ago no one ever said they wanted an iPhone.  Access to strong intellectual property, breadth of client access, and a tech-driven DNA remain central.  Mutualised providers must be willing to disrupt their own business, whether through acquisitions, partnerships or investment.  Key is being able to bundle added-value services, for example around regulation, that securities services firms can offer to the buy-side. 

The general trend to vendor consolidation with partnership models is accelerating, at a time when deals like CACEIS/Santander and APEX Fund Services’ roll-ups are evidencing the ‘flight to scale’ in securities services.

Some smaller fintech providers are seizing the chance to sell narrower offerings to fix specific problems – typically when internal product development is too expensive. To succeed as a broader mutualised provider, you need to engage with disruptors, or disrupt and build to outperform them.

Firms like ours recognise some new rules.  You don’t need to directly deliver across the entire value chain.  We increasingly work with technology partners, and our clients recognise the value of public, private and hybrid cloud provision.  Mutualised providers should also think how to be relevant to the processing required by private markets as they become more mainstream and liquid.

The huge market pull-back is exposing inefficiencies, not least given spikes in volumes.  In the coming months, it will distract management teams, and perhaps put some remodeling projects on hold.  But before very long, such volatile markets will crystalise radical thinking.  Costs for buyers and fees for providers will come down, with the winners continually disrupting themselves to replace those compressed fees with more value-added solutions. 

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