“We all know that global financial markets are run on the US model,” explains Hans-Henning Tönsmann, the man charged with managing Deutsche Bank’s global custody business, “but, all other things being equal, Europeans would still prefer to use a European bank ahead of an American one. Our challenge and opportunity is to combine American expertise with European client management skills.”
Tönsmann believes that Deutsche is close to realising the best way of solving this conundrum. “The acquisition of Bankers Trust brings us the creativity and innovation of Wall Street,” he feels. “If you look back at the history of cross-border investing, ERISA (the Employee Retirement Income Security Act of 1974) really set the de facto standards for custodians, and consequently put the American banks ahead of the game. Now we’re catching up, and Bankers Trust has helped us to do that. We’re offering a unique and very powerful combination of American and European expertise, knowledge innovation and experience.”
Having joined Deutsche Bank last year from State Street, Tönsmann knows only too well about the competitive threat from the specialist American custodians. He also detects major shifts in the investment environment in Europe that will, he believes, dramatically influence the future shape of the business. “The Internet is the catalyst for change in Europe,” he says, “although it is still at an early stage of development in the business-to-business market. But our clients are organising themselves to take advantage of what the Internet has to offer, and to ensure that they can compete on a global scale. One obvious effect of the Internet is that it breaks down all artificial barriers and market fragmentation, and clients will not tolerate such inefficiencies in the clearing and settlement infrastructure.” Tönsmann thinks that, ultimately, the Internet will level the playing field in Europe. “The power of the Internet, and technology generally, is already forcing institutional investors to look for economies of scale if they want to remain competitive. They are only going to keep the creative part of the value chain in-house, such as analysis, research and stock selection. Everything else – all the information processing functions and operations – will be outsourced and standardised. What happens after that is that the custodians will differentiate themselves on their brand values and the quality of their service. They must be best of breed, wherever they are located.”
But, if that is the ultimate scenario, what role is there for the banks? “You shouldn’t underestimate the importance of banks in the smooth running of financial markets,” says Tönsmann. “All engines, even the best ones, need oil, and credit is the oil for the securities engine. The banks know their clients, and they know how to manage risk. That’s critical for this business.”
Tönsmann is enthusiastic about cooperation between banks, which he sees as a growing trend. “To compete against the Americans, you need to have a full set of product and service capabilities, but very few custodians have the scope and scale to be able to cover every market, and service every type of investor,” he says. “Most have geographic or product weaknesses in one or more areas, but you cannot simply go out and buy another business to fix that. Alliances could be one answer.” Tönsmann points to the airline industry as a good example. “Look at the Star Alliance,” he says. “It currently has nine members and expects to add more. That’s one option we need to study closely.” Closer to home, Deutsche Bank itself has created Franfurt-based etb, the European Transaction Bank, which is a central processing utility for its financial institution clients that gives them the leverage of Deutsche’s scope and scale, as well as technology resources.
One of the biggest challenges facing Tönsmann and his team is integrating the best of the Bankers Trust and Deutsche Bank products and services. “A lot of progress has been made in a short time, but the end result will take a little time to emerge,” he admits. “We know what each side can deliver and we’re very excited by the potential of the global service offering.”
However, Tönsmann is under no illusions about who holds the real power in the battle for market share. “The winners in this game will be decided by the clients, the institutional investors,” he says categorically. “They are being empowered by the Internet as never before, and that puts them in a very strong position.”