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Securities Services: no time for complacency

25/07/2019

The custody market is becoming highly commoditised and increasingly saturated, making the entire sector vulnerable to disruption and potential consolidation. Only providers endowed with the best technology infrastructure and cutting edge data are likely to emerge the winners.

Speaking at The Network Forum (TNF) which took place in Athens on June 12, Gildas le Treut, global head of coverage at Societe Generale Securities Services (SGSS), accepted the custody market was highly commoditised and becoming increasingly saturated, making the entire sector vulnerable to disruption and potential consolidation. Even though custodians are competing fiercely on fees, le Treut said it would be the providers endowed with the best technology infrastructure and cutting edge data who are likely to emerge the winners.

The right culture for innovation

Innovation programmes at banks face a number of barriers, not least regulatory compliance, complex approval and procurement processes, and a continued reliance on ageing technologies. However, efforts are being made by providers such as SGSS to create an environment ripe for innovation. While the cultural values and overall business strategy trickles down directly from the top at SGSS, innovation is encouraged throughout the organisation, right from the bottom up.

Leveraging the fin-tech market

Historically, technology upgrades or re-platforming initiatives at banks were implemented within the confines of closed, proprietary networks. Moving forward, this is changing as open source software becomes increasingly ubiquitous and banks are increasingly collaborating with fin-techs to deliver new products to clients.

“It is critical that banks work with fin-techs to give them a competitive edge moving forward. At SGSS, we leverage our incubation platform – Le Plateau – which supports both internal and external innovation programmes. Right now, there are 60 start-ups on Le Plateau, while a further 20 have been embedded within the business. Tangible progress is being made.” For instance, Societe Generale in conjunction with start-up Societe Generale FORGE, recently issued EUR 100 million of covered bonds in token form via the Ethereum blockchain, generating widespread efficiencies in the process, most notably in facilitating better transparency; faster transferability; quicker settlement; and reduced intermediation1.

Data: Using it wisely

As post-trade providers accumulate more data, they are identifying increasingly innovative ways of using it. Through Artificial Intelligence (AI – i.e. machine learning, natural language processing, computer vision) and Robotic Process Automation (RPA), banks are going through data, analysing it, and identifying anomalous trends and patterns in areas such as operational risk (e.g. insider trading, money laundering). Elsewhere, some custodian providers are using AI/RPA to assist with their client or regulatory reporting

While data has many positive uses for banks, there are risks. AI/RPA will only work if the data they are using is reliable. If the data is defective, these technologies will be unable to perform their roles properly. For example, if RPA software is processing incomplete information, it will produce incomplete results, whereas an AI solution performing analytics could be thrown entirely off balance by flawed data, identifying trends which are either incorrect or random. In short, poor data translates into poor results. Data processing must also be conducted in a way that is compliant with rules such as the General Data Protection Regulation, Banking Secrecy rules.

“Our data lakes which host a lot of client data are strictly protected. There are Chinese Walls in place to prevent unauthorised parties accessing the data”.

Creating value

Through effective client co-creation – namely collaborating with clients to create new and dynamic services – custodians can strengthen their value offering. These co-creation exercises are likely to become more prolific across the industry. As post-trade providers continue on a path of digital transformation, it is critical clients’ interests are prioritised. This means innovation needs to have purpose (i.e. delivering value to the customer) so that disruptive technologies actually solve genuine problems.

In compliance with regulatory requirements, SGSS has leveraged Application Programming Interfaces (API's) to accumulate data on fund investors from fund distributors and transfer agents to help give asset manager clients better visibility into their clients’ behaviour.

“By integrating the information into a data lake, we can share a consolidated view on investor data via APIs to fund manager clients. Not only can this help them with MiFID II target market rules, but it can give them a better understanding about client behaviour, enabling them to benchmark this information against their competitors.”

Conscious that the old model is broken and at risk of disintermediation, banks are changing the way in which they work, creating a culture of innovation internally; collaborating with fin-techs externally to deliver a wider range of products to clients, and hiring bright new talent well versed in digitalisation.

“Moving forward, the primary differentiator for custodians will be their technology and data, and very little else”.


1 Societe Generale (April 23, 2019) Societe Generale issued the first covered bond as a security token on a public blockchain