The securities services industry has been on a journey of unprecedented change over the past decade, facilitated by rapid technological development.
Clients have also increased their expectations and are asking for services to be provided in new ways.
Even though it has been almost 10 years since the financial crisis, there is still an ongoing lack of macroeconomic and geopolitical certainty.
There is continuous pressure on margins and interest rates are only now starting to show some early signs of change. Several sweeping regulatory, compliance and infrastructure initiatives have required industry participants to review their business models, and often take action.
At Deutsche Bank, we examined the securities transaction chain to identify where we add real value, what clients really want to buy and, crucially, how they want to buy it.
Do they, for example, want bundled or unbundled services? How nimble can we be in terms of how we offer products and capabilities?
INDUSTRY TRENDS – THE JOURNEY SO FAR
We also need to take account of the evolution of the industry and its supporting technologies. Deutsche Bank has been supportive of several initiatives from inception, such as TARGET2-Securities (T2S).
At the same time we need to bear in mind that we serve a dynamic and varied set of clients, which in turn are often reassessing how they serve their own clients.
We studied our business model and thought hard about how we could adopt a more modular or component-based approach to product and service provision, which would allow clients to pick and choose what they want, when they want it.
The reassessment of our business model resulted in the launch of Asset Servicing Only last November.
It is a component-based solution that allows our clients, from banks and broker-dealers to asset managers, to outsource different aspects of their business.
These tasks range from basic asset safekeeping to tax reclamations and corporate action processing.
This modular approach helps them meet the requirements of the changing landscape, while they connect directly to T2S.
The model delivers component-based data, facilitated by component-based products and new business models.
Our solution was only made possible by new technology and a collaborative approach, both internally and externally, for creating these new components.
We are confident that this approach supports the direction the market is headed.
Our industry is at a pivotal point, guided by two major trends. The first trend is that clients want a greater choice of products and services, which are provided seamlessly in a modular fashion and support their ongoing competitiveness.
They want to prioritise their spending in the areas that add the most value, and then go directly to market infrastructures for other transaction-related processing.
The second clear trend is that new technologies, such as artificial intelligence, APIs and blockchain (or DLT) are becoming of central importance.
Our clients are spending increasing amounts of time evaluating them and thinking about how they could boost efficiency and, ultimately, reduce costs.
Within securities services, studying these technologies is not an abstract pursuit; it is focused on the practical potential to enhance the analysis, delivery and security of data. This last point should not be downplayed.
Cyber-security is becoming a huge concern for the industry. We are not only concerned with the safety of our clients’ assets, but also their data. We must meet or exceed their expectations. Addressing all these challenges involves a four-pronged approach:
- Front-to-back collaboration
Deutsche Bank has placed great emphasis on learning from the best practices that exist, from the front to back office, and we are increasingly integrated.
Clients are concerned only about receiving a consistent service at a great price; they do not care how we are configured internally.
However, for us to ensure we can deliver what they want we need to create a vertically-integrated business solution that we can then scale and adapt.
- Embrace cultural change
Securities services are often portrayed as staid and conservative. I believe that the industry is open to change, but it needs to more readily embrace and encourage new technology.
Within Deutsche Bank people don’t describe technology as disruptive – as that already indicates a resistance to change.
We view technology as an enabler, allowing us to rethink our business model.
- Focus on data and digitalisation
Clients no longer only want to know whether their trades have been settled – there is already demand for real-time data correlations and intraday tracking of settlement progress.
The key issue is not the amount of data, but the quality of that data.
More is not necessarily better, offerings should be targeted and useful and measured by what they help clients to achieve.
Data must also help clients find operational improvements in their processes and reveal where failures are occurring so that they can be empowered to create change.
In that respect, developments at the retail level with digital technology demonstrate two aspects of client empowerment.
Firstly, clients can choose to access and manipulate information that previously required the intervention of their service provider.
Secondly, it also allows them to exploit functionality that was simply not available before.
- Create sustainable business models
If we are more efficient, our own clients’ headcount can be impacted.
Every piece of research says that margins are being compressed along the value chain and that this will not be reversed any time soon.
Without adopting and adapting digital opportunities, existing ways of doing things will no longer be attractive from a business perspective.
We need to facilitate a true partnership with our clients so that they can thrive, thereby ensuring that we have a truly sustainable business model.
T2S HARMONISATION UNLOCKS POTENTIAL
The development of T2S was an instructive example of adopting new technology.
The industry mood was partly shaped by the fact that it is just one part of a package of changes, all of which need to be completed before we can enjoy the full benefits.
As T2S takes one component of the securities value chain and puts it onto an integrated platform, it appeared to introduce complexity by de-componentising the flow.
However, this is only superficially true.
People participating in T2S markets may have underestimated how integrated these markets were and the challenges that would result from de-componentising settlement on to a common platform.
The industry harmonisation that preceded the live launch of T2S could not have been achieved without T2S. The preparatory work unlocked opportunities for technological integration based on a common platform.
Attention is now shifting to issues of asset servicing and how the pan-European platform could be used to free up liquidity.
As key regulatory changes such as the Central Securities Depositary Regulation (CSDR), the Markets in Financial Instruments Directive II (MIFID II) and the European Markets Infrastructure Regulation (EMIR) come into effect, the operational changes required to comply with them effectively will make evident the benefits of an integrated settlement platform.
Given the amount of data they hold, securities services providers are strongly positioned to create transparency to ensure compliance with regulations and provide further services that add value and insight to the client.
From a service provider perspective, the process of de-componentising needs to move beyond settlement to other aspects of custody, allowing different combinations of services to be offered to clients and facilitate new forms of collaboration with both clients and other providers of services currently working in their own silos.
The cultural change we’re seeking from a business perspective is about making sure that we pay attention to how our clients and employees are using technology and how they want to buy and deploy it.
We need to ensure that the next generation of leadership in securities services is imbued with an openness to how technology can be used to enable our clients to get data and information.