“As far as the client relationship is concerned, the internet is the custody business,” says Anthony Perkins, senior vice president and director of internet technology services for State Street. “That battle is over.”
The battle, as Perkins puts it, didn’t last long. From a very limited offering two years ago, most of the big custodians are now using the internet – and its technology, such as IP and XML – very seriously. But Robert Kay, managing director of Global Securities Consulting Services, which has recently launched a securities services portal (www.gscs.co.uk), suggests that the custodians’ enthusiasm for e-commerce has not come without a struggle: “There’s been a significant reluctance from most custodians to embrace the web because of reliability and security issues,” he says. “Neither issue has gone away, but their clients are now making them do it.”
The approach of the custodians has been rather cautious, reflecting the concerns identified by Kay. The development cycle devised by Brown Brothers Harriman, which is a market leader in its use of the internet, is typical. Custodians begin by using the internet as an advertising medium, then move on to delivering private information on a password-protected basis. The next phase it to add personalised content and, finally, to use the internet as a mission-critical medium where real money is at stake.
Chase Manhattan’s plans are running along similar lines. “We started off with general information, then added client-specific data, and will eventually have full transaction initiation capabilities,” says Kevin O’Neil, a vice president in product management for Chase’s Global Investor Services division in Europe. “We’ve already put payments on the service, and will have securities live by the fourth quarter.” O’Neil agrees with Perkins about the way in which the internet has become a fact of life in the custody industry. “We don’t see it as e-commerce,” he says. “It’s simply commerce.”
Like many of his contemporaries, Jose Placido, head of global securities services for Royal Trust, is paying a lot of attention to e-commerce. “It probably takes about 50% of my time,” he says. “We’re assessing the impact it will have on our clients and our suppliers, and learning from the experience of other parts of the group. Our clients are looking for real-time news updates, and the ability to mine all the data we have more effectively. Some of our larger clients are also keen to send us trade instructions over the net. So our e-commerce strategy will be shaped and developed in tandem with our clients’ requirements.”
At State Street, the medium has to add value. “We need to get information to the users, wherever they are and however they want to receive it,” explains Perkins. “We view the internet as a series of communications channels, of which the browser is only one. There’s the personal digital assistant (PDA), wireless phone, trading platform, and system-to-system links, for example. Effective information delivery is the key. Those who understand that will dominate the industry.”
“Custodians have all but stopped systems development on workstation technology,” says Kay of GSCS. “They’re all working on web-enabled products, building secure sites accessed through proprietary networks or leased lines. Their future technology has to have the same look and feel as what’s on the web – the same accessibility, time-to-market, and flexibility.”
Perkins thinks that the internet will ultimately prove to be a very effective way for clients to judge their service providers: “With the internet, you’re bringing people closer to the information and closer to the process,” he says. “That level of transparency is both an opportunity and a threat. Some custodians may have their limitations exposed.”
What is still unclear is whether the internet will prove to be a transformational medium that mandates an entirely new way of doing business. If experience in the retail financial services sector is anything to go by, then it will change the basic model, even enabling new contenders to move into the custody market. It could also disintermediate the custodians from some of their more lucrative businesses. Securities lending is already under threat, as borrowers seek to standardise data feeds from agent lenders and bring greater transparency to the market. Also, some custodians are considering the automation of some aspects of their business – such as bond repo, which is low margin – via the internet.
But, the future looks good for those custodians that understand the enormous distribution power that the internet delivers.