Slow-to-change bank culture now grapples with technology

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.”

The three largest U.S.-based custodians have varying ways of developing fintech.

State Street and Bank of New York Mellon have emerging technology centers in the San Francisco Bay area and elsewhere to tap into firms developing fintech or to draw the best and brightest from fintech startups or universities.

BNY Mellon has eight innovation centers worldwide, including one in Palo Alto, where technology is developed for all of BNY Mellon's business, including custody, said Lucille Mayer, chief information officer of client experience delivery at BNY Mellon, Jersey City, N.J. “We went to Palo Alto because we saw what others were doing, how the Googles and Ubers and Facebooks work,” Ms. Mayer said. “How they work won't be the way Wall Street traditionally works. We went there to have them teach us how digital platform development works.”

Northern Trust does not have an office in Silicon Valley. “Our model is different,” Ms. O'Malley said. “Our chief technology officer (Scott Murray) and other technology executives go to Silicon Valley several times a year at the behest of our asset management side to reach out to venture capital firms, asking them why we should invest in them but also seeing what they're developing. We've learned things that we can apply to our custody business. So there are two aspects to that — evaluating those firms for our investment business and seeing what kind of technology we can apply.”

Still, said Ryedale's Mr. Rushman, having connections with Silicon Valley isn't enough to change the culture at custodians.

Custodians “are still using technology from a previous age,” Mr. Rushman said. “Their view of scalability is how to crunch more numbers into an old system. That may be a slightly extreme view, but I've never been impressed with custodians' use of technology. It's totally the flip of how Silicon Valley works, where you try something (and) if it doesn't work, you move on. ... It makes sense for them (custodians) to have a technology incubator separate from the custody bank with the autonomy to develop the technology and stay outside the more risk-averse organization that custodian banks have.”

Mr. Liang at State Street said the bank does keep developers at its Currenex business separate from the bank. “It's one of those rare acquisitions where State Street has kept the firm separate from the bank to let its people develop, and to be able to attract people from Berkeley and Stanford,” who might otherwise not want to join a bank, Mr. Liang said.

And it's not just developing the technology, Amaces' Ms. Easton said, it's also having the client-facing people to help asset owners get the most out the technology without scaring them away because of overcomplexity. “There are two facets to the custody relationship: the technology aspect and the people aspect,” she said. “I can show an asset owner some whiz-bang technology and he'll probably say, "Thanks, but how will you help me implement this in my office'?' That's where the people aspect comes in.”

While some say custodians' moves to fintech are slow, sources agreed there are developments that will spur them ahead. For Messrs. Rushman and Liang, blockchain technology will be the driver.

“The link with blockchain is a really interesting technology for custodians,” Mr. Rushman said. “They should be all over that. ... It's a defining change in technology for them, their "Kodak moment,' where they can either innovate or the technology will knock them out of business.”

Mr. Liang said discussions on blockchain will be different in the new year. “I'd say 2015 was the year of rationalization on blockchain, what the technology means; 2016 was the year of experimentation, running prototypes to see if the context is useful,” he said. “2017 will be the year of implementation and action. We have a much better understanding of blockchain right now as an infrastructure as opposed to changing how banking works. That will happen, but not until all people are using that infrastructure. And that won't happen until every single bank is using that technology. So we're rolling blockchain into our own infrastructure.”

For Ms. O'Malley, the driver will be the convergence of asset owners and asset management, with more pension funds, endowments and foundations behaving like money managers because of the increase in internal management. “Historically, custody didn't work in real time,” Ms. O'Malley said. “It wasn't even daily, it was more monthly. But over the years, asset owners started behaving more like asset managers, and they wanted real-time information on trades. We've seen a convergence to more real time, asset-management functionality for asset owners.” n