November 2018

How is custody using technological innovation and enhanced automation to provide clients with the same positive retail experiences they are used to in their personal lives? flow reports on the main themes from The Network Forum Americas meeting 2018

DB Network forum
Source: The Network Forum Americas 2018

Through the touch screen of a portable smart device, consumers can purchase any number of goods and services; obtain information in real-time from an unquantifiable range of sources; and manage their own personal lives through embedded, user-friendly apps. In a recent article – “Dashboard dynamics” – Deutsche Bank’s Securities Services team paid tribute to some of these digital advancements which have been made in the business-to-consumer world.

The same article highlighted that Deutsche Bank– through technological innovation and enhanced automation - was looking to replicate the positive retail experiences in a B2B environment for institutional and corporate clients. Mike Clarke, product management, Securities Services EMEA at Deutsche Bank, reinforced this message at the Network Forum Americas Conference in New York.

Data and digitalisation in the custody industry

While custodian banks have spent many years automating their business processes and client services, there is a strong consensus that more progress is required if the expectations of the next-generation of customers are to be fulfilled.  “As an industry, we need to provide tailored solutions that evolve just as quickly as the services we use in our daily lives,” highlighted Clarke.
Network Forum
Caption: Mike Clarke on how changing customer expectations are driving the evolution of securities services Source: The Network Forum 2018
“We need to improve the client experience so that users are not waiting for reports until the end of the day, while simultaneously delivering efficiencies by eliminating many of the repetitive processes that take place in the industry,” he added. Most custodians have onboarded this missive and are working tirelessly to digitalise their product offering, by collaborating with traditional competitors, initiating co-creation programmes with core clients and entering strategic partnerships with fintech and regtech companies.

Custodians drive forward with data products

The delivery of information to clients in real-time facilitated through robotics and application programming interfaces (APIs) brings about enhanced customer experiences and helps end users realise efficiencies, highlighted Clarke. However, custodians are going one step further now, aggregating the big data and client metrics held across their businesses and using artificial intelligence (AI) contraptions and machine learning techniques to untangle the unstructured information and provide analysis off it.

This allows providers to spot undiscovered trends, which can then be shared with clients, allowing them to make material improvements to their operating model. “Data insights are very powerful tools and can add value throughout the custody chain. Deutsche Bank is using big data analytics to identify why some customers suffer from settlement fails, the findings of which we then share, enabling clients to fix the problem, and avoid penalties under the EU’s Central Securities Depository Regulation (CSDR), for example,” he said.

Custodians look to expand AI

Robotic process automation (RPA) is one of the simplest AI adaptations, and can be applied to straightforward, high-transactional, repeatable, manual and rules-based 1  back office activities, such as reconciliations and trade matching. This can produce cost savings at custodians and their clients as the technology is significantly faster and more rigorous than the existing operational processes. RPA can therefore allow firms to switch individuals away from cost centres and deploy them in profit engines. With the custody industry facing higher costs as a result of regulation, client fee pressure and testing market conditions, RPA and other AI applications are seen as effective tools to suppress spiralling outlays.

Revolutionising the end-to-end experience through Blockchain

Blockchain or DLT has the potential to reinvigorate the custody lifecycle, condensing the number of manual processes throughout the intermediary chain. Proof of concepts (POCs) are in full throttle, as providers pilot the technology in fields such as proxy voting, corporate actions, settlements and collateral management.  “The custody industry has demonstrated a remarkable innovative streak with Blockchain. We believe the technology could reduce costs, enhance transparency, strengthen security, and augment traceability,” said Clarke.

Blockchain’s success will be heavily dependent on the ability and willingness of competing stakeholders to cooperate with each other, along with regulators to ensure the technology can interoperate off multiple platforms and systems. A failure to collaborate meaningfully could result in different Blockchains developing in isolated silos across organisations, many of which may operate using their own unique standardisation protocols.  Such an outcome would be counterintuitive, increasing inefficiencies and inflating costs in securities markets.

Nonetheless, Blockchain progress is being made. In 2016, Digital Asset was selected by the Australian Securities Exchange (ASX) to develop a working prototype of a post-trade platform for the cash equity market using DLT, in what would replace the current CHESS system 2.  The transition away from the CHESS post-trade platform onto the DLT-enabled infrastructure is expected to take place between 2020 and 2021, and will allow ASX to maintain a real-time, secure immutable record of transactions and settlements.

A framework for successful innovation

Agility and flexibility will be essential if custodians are to properly future-proof themselves and preserve client loyalty. “Focusing on small projects that provide incremental benefits, which can be easily delivered, will be key, and instrumental in helping the industry move forward,” said Clarke. Furthermore, custodians need to begin producing tangible solutions to client problems on expedited timeframes to avoid disintermediation. “The industry needs to speed up service delivery. Positive market changes such as Target2-Securities (T2S) took ten years to shape, but we do not have this luxury of time anymore,” he concluded.

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Sources:
1Deloitte – The Future of asset servicing
2ASX – CHESS Replacement

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