After BBH, who’s next?
State Street’s decision to fork out US$3.5 billion to absorb an erstwhile competitor is yet another sign of industry consolidation underway
8 Sep 2021 | Bayani S. Cruz and Daniel Yu

With cost pressures, an industry undergoing unprecedented changes, and regulatory compliance on the rise, State Street’s takeover of the investor services business of Brown Brothers Harriman (BBH) announced on September 7th could herald more to come.

For smaller players such as BBH, which has assets under custody an eighth of State Street’s US$42.6 trillion at the end of 2020, it has become more obvious that unless they are prepared to invest heavily in technology and other resources, their business will remain under pressure and may not be sustainable in the long term.

Digitalization is the biggest driver of the technological change sweeping the asset servicing industry. From robotics process automation, to machine learning, data analytics, and blockchain, the world’s biggest asset managers and institutional clients are demanding from their service providers greater visibility and control over their portfolio while expecting these services to be delivered at a lower price point.

The next target for consolidation would be niche asset service providers, who are focused on servicing a particular industry, asset class, or client base. While their current business models may be sustainable in the short term, the constant question for these firms is their ability to scale and right-size their offering. Their clients similarly are growing in size and the ones unable to grow with them could end up with cost, efficiency and profitability mismatches.

Fragmented market

It is true, however, that the investing markets are expanding especially in the Asia-Pacific region with rising affluence, a growing middle class, demands for institutional investment services, and appetite to explore cross-border markets enabling a fragmented asset servicing market to continue.

But with the long-term reality of fee compression and rising costs colliding with the pressure to increase revenue, asset servicing providers in the region will need to examine their business offerings and to tweak their models for the long term, including venturing into new asset classes.

DBS, for example, is investing heavily in technology for servicing digital assets with the launch of its digital exchange in June 2021. Deutsche Bank is partnering with other service providers, particularly Northern Trust, which has a broader technology and digital capability. Standard Chartered is expanding its capability into the frontier markets of Africa and is positioning itself with longstanding Asian clients that are starting to diversify beyond the domestic markets.

It has been evident for some time that the asset servicing industry is where bigger is better and the pressures brought on by Covid-19 have validated this business model. The result is that smaller asset servicing providers like BBH, which has a minimal presence in Asia when compared to players like BNY Mellon and J.P. Morgan, are increasingly being marginalized or will be in the long term.

A 2018 study by McKinsey is proving prophetic. It says: “While global asset prices and trading volumes have soared in the years since the financial crisis, the securities services industry since 2010 has been stable, although unexciting, with average annual revenue growth of 3%. Firms have responded to the recovery by controlling costs and making changes to their business models, but only in small ways. (But) firms are feeling [the] pressure on their revenues from tighter regulation, and on costs, due to asset manager clients’ concerns over their own bottom lines and profitability.”

Built-in efficiencies

The Covid-19 crisis has magnified the pressure on the industry as asset servicing providers shouldered the burden for their clients in terms of added costs related to the pandemic. Although the bull market beginning in the second half of 2020 has resulted in increased revenues all around, it is the big players with their built-in cost efficiencies who are benefiting.

Major players like State Street are well-positioned to take full advantage of the situation. In the digital space, which is the new battleground for asset servicing, State Street has been investing heavily in technology with its acquisition of Charles Rivers in 2017 and its recent partnership with Aladdin, the most widely used technology platform in the asset management industry, moves that enhance its efficiency while contributing to controlling costs.

It has also strengthened its presence in Asia with a new management team under Mostapha Tahiri, who has been instrumental in strengthening BNP Paribas’s securities services business in the region when he headed that business until the end of August 2020.

Similarly, at BNY Mellon, the appointment Fang Fang Chen to become the chair of the Asia-Pacific unit at the beginning of the year telegraphs its ambitions to become a technology-led organization. Although Chen spent 12 years at State Street previously, including as chief operating officer, she was a founding partner at Algorand Foundation, a fintech startup involved in the development of blockchain technology, as chief operating officer, immediately prior to taking the helm at BNY Mellon.

Consolidation in the industry is taking its time but it is definitely not over yet.  

Wealth Management
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