Technology is an integral part of the modern business environment. Many incumbents in the financial industry recognise that they need to reinvent themselves – putting themselves alongside startups in the FinTech space. In this digital age, meeting evolving client demands will be key to success.
“We now expect to get services, value, and even expertise, when we need it and wherever we need it - whoever can deliver on this is going to win the marketplace,” said Rajeev Tummala, Director, Digital and Data at HSBC, who was speaking at HSBC’s Securities Services Leadership Festival.
An evolving value chain
Longstanding boundaries in the financial industry are starting to blur. Asset managers, for example, are working more on product distribution, which has traditionally been the domain of wealth managers. Going in the other direction, wealth management companies are developing more of their own products.
“Increasingly, we are seeing players expand up and down the value chain.” said Steffanie Yuen, Managing Director at Value Partners. “I don’t think that it is about both sides encroaching into each other’s space.” The skillsets of wealth managers and asset managers are complementary, she said, and by expanding into new areas, they can work with each other to better serve the end client.
An EY survey of wealth management clients published in 2021 found that customers are looking for service that is more tailor-made to individual needs. They are expecting engagement that is less personal, yet more digital.
When it comes to service, 76 per cent of Asia-Pacific clients said they would be more willing to pay their wealth manager for experience-related features, compared to the global average of 53 per cent1.
Adapting to change
There are a range of considerations that financial firms need to take into account as they reposition themselves along the value chain. One such issue is how to handle non-core responsibilities. If an asset management company for example, plans to start selling funds directly to investors, it will need to conduct Know Your Customer (KYC) and Anti-Money Laundering (AML) checks.
The balance between core and non-core can be addressed via collaboration. In the case of KYC and AML, FinTechs have come to market with outsourcing solutions that conveniently perform the relevant checks.
When assessing what counts as a core business, there is no one-size fits all strategy. A smaller firm might be more willing to outsource and avoid the outlay for in-house capabilities, than a larger company that is confident it can build out a service on its own.
Managing costs is an issue, as clients want a customised solution in the cheapest manner, said Noor Adhami, Head of Securities Services, Singapore. At one end of the value chain is the consumer, and their desire to pay less travels all the way to the other end of the chain to asset servicing, which as a result, has to become more efficient.
The solution will have many parts, said Ms. Adhami. On the hardware side, asset servicing will need to take advantage of technology that allows for data to be used quickly, accurately and safely.
Automation will also be an essential tool in the future, reducing costs associated with manual processes. But people will still have a role in a world where machines do more of the work, and that makes investing in the right talent even more important, she said, especially among the digitally native younger generation.
Are platforms the future?
Looking to the future, custody could transition into a platform business – i.e. one that creates value by facilitating exchange between two parties. The main advantage of a platform business is that it can grow very quickly, as it succeeds by connecting buyers and sellers, rather than producing its own products.
The idea of a platform can be applied to post-trade services. Custodians provide a base layer of client experience and functionality, while generating data for clients. A platform could be built on top of this foundation, increasing the number of services available, while maintaining a consistent experience.
Integrating the platform business model into securities services will require a change in mindset, said Suvir Loomba, Global Head of Direct Custody & Clearing at HSBC. Adapting to the digital age is more than just a technological challenge, but also a psychological one.
“How can we stop thinking about providing all the services ourselves, and start leaving value on the table for third-party developers to come and build on a platform that we provide?” asked Mr. Loomba.
Preparing for transformation
The financial industry’s value chain is on the cusp of a shift that will result in companies expanding their offering beyond their traditional services. The change will be enabled by technology, which allows organisations to rethink what counts as their core business, become more efficient, while at the same time meet client demands for quickly and personalised services.
Data will likely be an essential ingredient for future success, and it is even possible that custody could adopt a platform model where established banks work more with FinTechs. It is still too early to say what models will triumph in the future, but financial institutions can prepare by considering how they will face the risks and opportunities of transformational change.