The December announcement that Bank of New York Co. would acquire BankAmerica Corp.'s American depositary receipt business was not in itself especially noteworthy.
Bank of New York, after all, dominates the $278 billion ADR business, and BankAmerica's share had been less than 1%.
But the deal is one example of the continuing consolidation of processing businesses that require economies of scale and costly technological support.
Industry experts say there eventually will be even fewer, bigger players in the securities processing business. Robert Tetenbaum of First Manhattan Consulting Group in New York said that in addition to mergers and acquisitions, there will be an increase in the number of strategic alliances, such as the 1994 joint venture between Chemical Banking Corp. and Mellon Bank Corp. that will handle shareholder services.
And as the securities processing landscape evolves, executives at Bank of New York are making it clear they are in for the long haul. The bank's strength, say executives, is its ability to offer a wide variety of products and services as a low-cost provider.
Thomas Renyi, president and chief operating officer, notes that the securities processing and institutional trust businesses represent about a quarter of the bank's earnings. Moreover, he said, the diversity of the businesses - which include ADRs, stock transfer, master trust, institutional custody, global custody, government securities clearance, and mutual fund processing - produce an income stream that is both stable and highly profitable. Revenues from securities processing have been growing in the double digits.
"This is a business that is bread and butter for us," said Mr. Renyi, who has been designated to become chief executive when J. Carter Bacot retires in 1998.
Bank of New York, of course, is hardly alone in turning what were once regarded as mundane back-office functions into a major profit center, and the bank often bumps up against other major players. Its main competitors in ADRs - it holds about 54% market share - are J.P. Morgan & Co. and Citicorp, each with about 22% of the business. Chemical is Bank of New York's sole competitor in the government securities clearing business. The bank's rivals in custody services include Bankers Trust New York Corp., State Street Boston Corp. and Chase Manhattan Corp.
"The names have really narrowed who can really deliver the product," said Thomas J. Perna, executive vice president, investment company services and operations. "I think that was one of the issues U.S. Trust faced," he continued, referring to the bank which agreed last November to sell its securities processing businesses to New York rival Chase in a $363 million deal. "When (U.S. Trust) looked at their business, they couldn't see multiple revenue streams from a particular customer."
Mr. Perna offered an example of how Bank of New York's variety of products can provide a competitive advantage. Recently, Fidelity Investments was able to offer a money market fund that allowed people to invest money as late as 5 p.m.
"One of the reasons they were able to do that is because we are the custodian of the funds," he said. "The securities are here; the cash sits here. And also because we are the largest clearer of government securities. The dealers, the people who have the need to borrow that money, are here."
After the Fed closes, the money is invested with the dealers that are clearing through Bank of New York.
"We have only one competitor in (government clearance), which is Chemical," he continued. "Chemical is not in the mutual funds (processing) business. State Street is certainly in the mutual funds business but they have no place to put the money late night. So this is the only place that can be done."
Staying competitive, Bank of New York officials said, requires not only a broad mix of products but also technology investments that reap economies of scale.
"If you haven't made the investments in technology you're just not going to be in the business," said Mr. Perna.
Mr. Reyni, who is credited with overseeing the complex consolidation of back-office operations following the bank's 1988 acquisition of Irving Trust Co., noted that Bank of New York has devoted a "significant amount of capital resources to technology."
While he declined to discuss specifics, he said the budget for hardware, networks, and applications was in the $250 million range this year. And, Mr. Renyi added, "We have continued to invest in good times and not so good times."
Richard Pace, executive vice president and chief technologist, said the technology budget has increased at a single digit rate over the past several years, mirroring industry trends. Further, software applications continue to take a bigger piece of the budget.
What Bank of New York's technology dollars have bought, he said, is a factory-like systems infrastructure that is shared by the processing businesses. "For example, the registration portion of the ADR business is carried on the same system that handles the stock transfer," he said. "And it gives us the opportunity to leverage infrastructure and it gives us the confidence that we are managing all aspects of the business for the benefit of multiple product lines."
"There is a large amount of synergy between the businesses, not only from a product standpoint in us being able to meet the needs of our clients, but also from a technology standpoint," said Joseph M. Velli, executive vice president, worldwide securities processing services. "If we build a new system or make an enhancement, it has an impact across all the businesses."
The common platform has long been in place at Bank of New York. "That's what has allowed us to do so many acquisitions . . . and integrate them quickly and efficiently," Mr. Perna.
As the bank has grown, it has been able to keep costs in check and hold down staff levels. Today about 800 people work in the bank's securities operations - fewer than Bank of New York alone employed before it acquired Irving Trust.
The bank's efficiency ratio stood at 54.82% for the first nine months of 1994, second only to Wells Fargo & Co. among banks with assets greater than $50 billion.
In addition to more-efficient technology, the bankers credit a strong cost-conscious culture.
"There is a horrendous process of putting together the capital plan," said Mr. Verna. "But just because the capital plan gets approved doesn't mean we are going to spend it, whether that's PCs, or whatever."
By way of example, he said a new IBM 3890 check sorter might be included in the budget. But then the challenge would be to get through the next year without buying it. (He added that Bank of New York's high-speed sorters now run at volumes higher than those recommended by International Business Machines Corp.)
Further, the executives said that Mr. Renyi himself personally approves the purchase of items such as personal computers. (It's not clear he will continue that level of scrutiny; when he became chief operating officer in December he took on responsibilities that include retail banking.)
While Bank of New York runs a tight ship, it also is faced - like the industry in general - with a great deal of surplus processing capacity. That fact, along with the expected consolidation, helps explain why the bank continues to look for acquisitions.
"These are opportunities that are once in a lifetime deals," said Mr. Perna. "We want to be there."
Said Mr. Renyi: "We've got the technology built, the factory built. We've just got to market the hell out of it."
Last year, the bank made four deals in corporate trust. "A book of business may only be $2 million," said Mr. Renyi, but the back-office savings are immediate. "Corporate trust is a product made up of singles," he added.
Bank of New York also expects to build on its strength in ADRs, a market it expects will grow rapidly. Generally, he said there will be a growing market for non-dollar securities.
To attract new business, Bank of New York also acts as a private labeling agent, or outsourcer.
The advantage to other financial institutions, he said, is a kind of "halfway house."
"It's an awfully difficult decision to exit a business . . . for fear that customers may go to a full-service provider," Mr. Renyi said.
Bank of New York executives also suggested that the private labeling may wind up being a first step toward exiting the business. "It gives them an opportunity to reassess whether they want to stay."
Mr. Perna went further, saying that recent strategic alliances between industry players may be short-lived.
"I think the joint ventures are going to be ways for people getting out of the business gracefully," he said. "Many of them really aren't going to be able to survive, have the credibility, have the capital backing."
Referring to one shareholder services alliance last year, he added, "I wouldn't be surprised if at some point either Chemical or Mellon singly take it back or whether a third party buys the business."
"The market is contracting," he continued. "More and more people are recognizing that you can't make money in these businesses unless you've got the scale."
