Technology executives at large custody banks know the industry's future lies with the development of financial technology, but putting fintech into practice means changing behavior — both by bank executives and their clients — and that is not easy.
Custodians like Bank of New York Mellon Corp., State Street Corp. and Northern Trust Corp. “can't just draw a ring around some people internally and say, "You're developing technology for us,'” said Jon Rushman, CEO of Ryedale, a London-based investment software developer that created an asset allocation system for the $303.6 billion California Public Employees' Retirement System, Sacramento, in 2015. “They'd be subsumed by the culture at the bank.”
That culture is exemplified by custody bank infrastructure that hasn't changed in years. And, some sources said, the lack of change is because custodial clients like pension funds, endowments, foundations and money managers are comfortable with how that infrastructure has worked for them.
Still, watching the technological transformation of retail banking, representatives of institutional custodians know change will come.
“The cornerstone (for asset owners) is transparency,” said Edwina Easton, Chicago-based director-North America at Amaces, a custodial consultant to institutional investors. “It's, "How do I get transparency,' and "How will I use technology to get transparency into risk, liquidity, exposures, compliance.' It's about knowing what's happening at the total level of assets.”
Said Barbara O'Malley, senior vice president at Northern Trust, Chicago: “Custody services have awakened to the fact that technology is a necessary component of their operations. That's a big "Aha!' that we've all come to.”
Added Hu Liang, senior managing director, emerging technologies center in Palo Alto, Calif., for State Street: “Technology could have a large impact on what State Street provides, and to banking in general. Would you be able to get more efficiencies with a new system? Yes. It's the infrastructure that's holding you back.”
Mr. Liang, who joined State Street from foreign exchange technology development company Currenex when it was acquired by the bank in 2007, said the sheer volume of assets handled by custodians makes it imperative to take a slower approach on introducing technology. “We're holding so much money for so many clients, there's a risk to rushing into changes in an industry that's been around for so long,” he said. “It's a different environment in retail, where change can be quicker because of the customers being served. ... Custody has such large volumes of capital. We don't want to treat that lightly. But technology is coming and we want to apply that technology in a safe, measured way.”