McKinsey: Custodians can increase revenue by developing cryptocurrency services

Custodians and other securities services firms could gain new revenue streams by developing cryptocurrency custody services and by increasing data sales, a McKinsey & Co. report suggests.

Also, development of artificial intelligence, machine learning and robotics to make securities services more efficient could lead to $20 billion in cost savings across the industry once fully implemented, according to the report, "A Calm Surface Belies Transformation in Securities Services."

"There's currently about $350 billion in cryptocurrency capital," said Matthias Voelkel, partner at McKinsey and co-author of the report, in an interview. "Those assets lie somewhere. What we're saying is there's a lot of revenue possible in the cybersecurity space. Right now, those assets lie with cryptocurrency exchanges. If custodians expand their business model to take care of cryptocurrencies, the same as with classic securities, there could be quite some space in terms of revenue growth. They can bring the experience and reliability of classic custodian work to this asset class."

Large custodians are looking into this, Mr. Voelkel said, but none has actually begun offering the services.

In terms of data sales, Mr. Voelkel said, "First, so far, all (securities services) are looking at what they can do with data. Second, leading players have large data programs in place, and third, few have been able to monetize data sales to scale and have seen revenues from this."

Neither the report nor Mr. Voelkel identified the firms that are working on cryptocurrency custody or those with large data programs in place.

The issue of security and the potential for misuse of data is "not the key aspect holding (firms) back," Mr. Voelkel said. "It's 'where does the revenue stream for data come from?'; It's 'will data bring me revenue?'"

Mr. Voelkel also said advancements in the use of AI and other technological methods to streamline securities services will depend on how much each firm wants to invest in the processes, and if they're willing to partner with financial technology firms rather than compete with them to develop new systems.

"The investment is low if it's just using robotics here or there," Mr. Voelkel said. "At scale, you need to change your processes. Then we're talking digitizing and streamlining entire systems. Spend to save — it's necessary for all these securities firms and all financial services firms. The cost depends on what kind of sublever you want to pull. To capture $20 billion in cost savings, you're talking investments of billions of dollars in new technology and the cost of system replacement."

The report also recommended that securities services firms establish a strategy for the use of distributed ledger technology, or blockchain, so they don't fall behind in the development of such services; and suggested that technology spending could force some smaller firms to be acquired by larger firms.

For the report, McKinsey interviewed 30 senior executives from worldwide securities services firms and cited discussions at industry events such as the Sibos banking conference in Toronto in October 2017. It also incorporated proprietary research on the industry, such as industry revenue pools, according to the report.

The core elements for securities services studied by McKinsey were custody and asset servicing; fund administration; interest income reporting; additional value-added services such as foreign-exchange trading, and cash and collateral management; corporate trust and prime services.

The full report is available on McKinsey's website.