Investment Operations

HIGHER RATES, AUTOMATION AND NEW REVENUE STREAMS IMPROVE OUTLOOK FOR SECURITIES SERVICERS

Global Tax Withholding and Reclamation

Rising interest rates, automation and the emergence of new revenue streams are reenergizing the bottom lines of security servicers who in recent years have experienced flat-lined growth, margin compression and growing competition from non-bank providers, according to new research from Coalition Greenwich.

The securities services industry plays a vital role in the smooth functioning of the capital markets industry. Mutual funds, ETFs and others rely on these providers to ensure that operational processes run smoothly and operational risk is minimized. While securities services firms do not receive the same attention as trading or portfolio management, they remain an integral part of the industry’s infrastructure, said the research firm.

The industry is undergoing significant change and some considerable challenges, including consolidation of providers, fee pressure from asset managers and asset owners, and the emergence of new asset classes that require post trade support, to name a few. While revenue grew 7% in 2017 and 9% in 2018, it has been mostly flat since.

“Asset managers, who themselves are under intense fee pressure, have been renegotiating their back office agreements, asking for lower fees and consolidating providers to achieve deeper discounts,” says Stephen Bruel, Senior Analyst for Coalition Greenwich Market Structure & Technology and author of Securities Servicers Enter Pivotal Year of Change.

Opportunities in the “New Normal”
Recent focus by custodians on automation and straight-through processing are encouraging signs for the industry. Productivity gains should continue as firms incorporate more AI, ML and NLP to handle reconciliations and other operational processes.

In addition, securities servicers are developing new streams of revenue outside traditional custody offered in response to changing asset manager needs around expanded services, data, and new product strategies. 

“Security servicers have an opportunity to diversify their revenue models by supporting asset managers’ new product offerings, providing stickier and more value-added services, and ensuring their clients a seamless experience with their data,” says Stephen Bruel. “The next 12 months will be critical as we enter this next new normal.”

Securities Servicers Enter Pivotal Year of Change analyzes market conditions and the recent performance of security servicers, including trends in assets under custody, revenues and margins. It examines pressures like fee compression, and identifies three key opportunities for the industry in the months and years ahead.