How the major custody players differentiate themselves gives banks a clue to which providers might best fit their needs. Even then, the selection process is not uncomplicated.
A large trust client--say, the investment manager for a pension fund of a mid-sized local business--contacts a regional bank with a request to invest some of the fund overseas. Can the regional bank, which already provides other trust services to this client, support such a move?
Usually, not immediately. Lacking ties to securities processors in the foreign markets where the client is interested in investing, the regional bank must quickly seek out such providers--or risk losing the prized trust client to a larger bank that does have such connections.
Because barriers to entry into the global custody business are so overwhelming, most regionals, and even superregionals, will eventually seek the help of larger banks that provide custody and other securities-related information and transaction services.
There, they will find a group of fiercely competitive players offering every service imaginable, with a myriad of pricing schemes. They may choose from the New York-based money center banks like Citibank, Chemical Banking Corp.; Chase Manhattan Corp. and J.P. Morgan & Co. that offer the greatest global reach and the finest in technology--but risk playing second fiddle to those banks' large institutional clients. Bankers Trust New York Corp. and Boston's State Street Bank & Trust Co. specialize in trust businesses, but concentrate on the domestic side of custody.
A bank looking for a global custody provider may contract with a larger bank in its region that might be more attuned to its own culture--but also might find the smaller bank's trust clients appealing. (In fact, most custody agreements between such banks would carry non-compete clauses that somewhat mitigate such concerns.)
Another option is working with a foreign bank with U.S. securities servicing operations that has no trust business here--but also might have a different culture. Examples are Dutch giant ABN Amro Bank, through its subsidiary LaSalle National Bank in Chicago; London-based Barclays Bank PLC, which offers global custody through its New York offices; or Mitsubishi Global Custody, a subsidiary of San Francisco-based Bank of California, which is owned by Mitsubishi Bank in Japan.
Although some of these banks are focused solely on the institutional--or wholesale--market, most offer or plan to offer private-label programs that allow regional banks to offer the services under their own names. Like many other providers, BankAmerica has targeted two tiers of users of its services, one a market that is ripe now and another where interest will build over the next couple of years, says Lee Harvard, senior vice president of the bank's Global Securities Services. The first group is, of course, institutional investors. The second is found "two or three levels down in the banking industry, those regional banks with clients interested in off-shore investing," he says.
What banks looking for global custodian services must consider "is that it's not all that easy to manage someone who doesn't work for you and who lives in another country. Who do you trust to manage those vendors for you?" asks Marcia L. Wallace, senior vice president for First National Bank of Chicago's Investor Securities Services.
The quest for a global custodian--which usually takes about six months--begins with "a consultant leading the bank down the RFP (Request for Proposals) lane," says Mark C. Aprahamian, director of Barclays Bank's global broker/dealer business and former head of the securities services unit in New York.
From detailed RFPs, the bank chooses a short list of potential providers for in-depth presentations at the bank. Finally, bank officers make a visit to the leading candidates to further assess their capabilities, say participants. The global custodians stress that the bank team choosing a global custodian should consist not only of senior management and trust officers but also of members of the bank's marketing and operations staffs.
Chemical Bank's Jeremiah F. O'Leary, senior vice president for Global Securities Services, says banks should consider three basic elements when seeking a provider. First, it should be proficient in custody's core business, which is the settling of trades. "Not every one of those transactions will occur flawlessly, and you need an institution with the ability to straighten out problems quickly," he says.
Another consideration is the provider's technological capabilities, which represent a point of differentiation. Then there's pricing. Of course, the more information the bank seeks for its client, the higher the price of the custodian's services. If the bank chooses to contract with a direct custodian, one that would provide services from a certain region, for instance, the bank would pay less for that service and possibly pass on a lower cost to its customers--as well as less information. The bank does, however, incur more risk under such an arrangement.
Pricing depends largely on the amount of assets involved, with the provider charging a few basis points of the asset value, plus transaction fees. Also, the less mature the foreign market, the higher the charges go.
Private-label providers like First Chicago contend that they can be very flexible in tailoring packages to meet almost any need for other banks. "First Chicago wants to do business specifically with banks," says Wallace, adding that institutional investors, mortgage companies and the U.K.'s building societies are also prime targets. She thinks banks with large trust departments outside the Northeast also are likely candidates for global custody services.
A Plethora of Possibilities
Any bank seeking the services of a global custodian would probably first look to the money center banks, which are the best-known providers. The reach and technological expertise of these banks are impressive indeed, and because they deal in huge volumes, they can often outprice smaller providers.
First and foremost, they are banks that already have a global presence. Other global custodians often use them as subcustodians, in fact. Citibank, which has a subcustodian network in almost 100 foreign markets, "is almost considered a local bank in many markets," says Michael Kingston, project manager for Citi's direct custody services. "That's a unique value we can bring to our clients."
Citi's global custody business, which is marketed on a wholesale basis under the name of Citibanking, the same brand name that applies to its retail electronic transactions business, is growing rapidly. William A. Urban, director of technology for the Worldwide Securities Services unit, says the bank's direct custody business has grown by about 70% each year during the past three years, a growth rate he expects to continue over the next three years.
Chase Manhattan, too, offers a global reach, one that is ultimately channeled through its InfoServ international payments processing unit; this unit has contributed to Chase's reputation as one of the most technically proficient banks in the world. (Most of Chase's custody business is in the domestic market, though Euromoney magazine has ranked Chase the world's number one global custodian for the past three years.) Analysts estimate that InfoServ handles more than $1 trillion a day in volume and contributes well over $100 million a year in revenue.
Chemical Bank, which concentrates on the global side of the business, offers services through its highly regarded Geoserve unit. These and other large banks already have relationships with thousands of correspondent banks that frequently tap their expertise for many services. "The correspondent bank market is extremely important for us," says Chemical's O'Leary.
But the big money centers want to be known for more than their size in the securities processing business. "About a year ago, Citibank committed to really delivering value in all its services, not just a geographic presence," says Bonnie Smithwick, worldwide marketing director for direct custody services. "We intend to be absolutely top-quality all across the board."
Chase, too, has a "commitment to get the skill and scale right," says Francisco D. Valeriano, senior vice president for Chase Global Securities Services. "We began three years ago moving from emphasis on core processing to adding value to our services. That's a big challenge when you do our kind of volume."
These largest players often provide services to each other, which is a contributing factor to an unsettled market. Citibank, for example, was processor for Bank of New York's global custody business until a couple of years ago, when BoNY took the business in-house. Now, BoNY is the seventh-largest custody provider in the world, with its business split almost evenly between domestic and global custody.
These giant custodians will also likely be leading providers to banks just below their level in size, who will in turn provide services to smaller banks. This raises the issue of competition for trust customers at all levels.
One of the biggest trends in the custody business over the past couple of years has been the rise to prominence of foreign banks in the business, including those that own U.S. banking operations. John H. Deutsch, senior vice president of ABN Amro in Chicago, which provides custody services through subsidiary LaSalle National Bank, says that even though ABN Amro is a huge foreign organization, "Most people know we are a conservative organization, not given to wild ways." The former LaSalle executive says long-time relationships help. "For better or worse, we have a lot of institutional memory. Turnover in banking is deadly."
Some of the foreign banks may argue that they are more natural partners for big regionals because they have no designs on their trust customers. Says Barclays' Aprahamian: "We can offer support to clients without competing with them in any way."
"Our number one market distinction is that we're not competitive with other banks in the trust business," echoes Janet E. Potter, vice president and manager of Mitsubishi Global Custody. For that matter, First Chicago, which buys securities services from Morgan Stanley & Co. to sell to other banks, could say the same, as it no longer provides trust investment management services.
Aprahamian notes that while potential U.S. providers to the regional marketplace might be perceived as a competitive threat, that perception has one main basis: They are experienced in the trust business. "To be fair, big banks service master trust accounts of their own, so they know what the customer needs, that they must be willing to bend to tailor their services to meet those needs," Aprahamian says.
In that case, Northern Trust Co. in Chicago, for instance, would appear to have a natural advantage, as it is a trust bank and has long provided trust services to downstream banks. "Non-compete clauses are common with us," says Jennifer Kamp Tretheway, Northern Trust senior vice president. While Northern Trust does not target other banks for its global custody services, Tretheway says the bank has begun to receive calls from smaller banks about the possibility of a private-label-type program.
Then there are those banks that clearly covet more trust business. Paul Maregni, senior vice president of Mellon Trust, the trust business that resulted from the merger of Mellon's trust operations with those of Boston Safe & Trust Co., a large global custody provider, says Mellon Trust is uniquely positioned to offer a huge range of trust services to correspondent banks. "We can go from settlement to custody reporting to helping manage the portfolio," he says.
Morgan Stanley is the only investment banking firm with a significant global custody business, and executives believe that its Wall Street connection is a big advantage. "We have well-developed technology for securities transactions around the world," says managing director Frederick R. Walsh Jr., who says that commercial banks piggyback their securities processing on their cash processing infrastructures. "Banks deal in cash, but we know the securities business."
Each provider is carving out its own large cut or niche in one of the fastest-growing banking businesses around, and fallout is sure to happen. There is a consensus in the industry that many global custodians in the business today won't be around a few years from now.
A World of Options
Banks seeking to offer global custody services may, of course, establish their own global custody networks, involving a group of subcustodians around the world. But Frederick R. Walsh Jr., a Morgan Stanley & Co. managing director who oversees the investment banking firm's global custody business, warns: "This is a volume-driven business that requires critical mass to compete effectively. You have to be a sizable player to be good."
Barriers to entry to the global custody business are almost overwhelming for all but the largest banks. The first consideration is the network itself; even if a regional bank chooses to buy basic custody services directly from another custodian--say Citibank in New Delhi--the regional must still manage its subcustodian relationships in scores of locations.
Another major factor is technology, and without question, this is a very capital-intensive business. Chase, for example, spends about $50 million each year "directly on systems development" for the Global Investor Services unit, says Chase vice president Naomi Solomon. Citibank has $55.3 million in technology expenditures budgeted for 1995 for global securities servicing, with $31.9 million of that earmarked for new or strategic initiatives. Northern Trust Co. in Chicago, which specializes in securities operations, spent $220 million bankwide on technology from 1991 through 1993, $102 million this year, and has another $117 million budgeted for 1995.
Those numbers may stop cold any regional bank from even considering building its own custody business. And these expenditures don't take into account the human capital involved. Most of the big custodians stress that training and personnel development for such highly specialized businesses is one of their top priorities.
The regional bank would also need to offer other services related to the core custody business of settling transactions and safeguarding assets, such as foreign currency exchange and, increasingly, services like securities lending. Though all these services are also available from larger banks, the task of managing a subcustodian network as well as a group of vendors for ancillary services is not a small one.
Still, most of the big custodians today say they believe that superregional and regional banks will first attempt to go directly to the foreign markets. Citibank, for instance, which has a presence in almost 100 foreign markets, is a large provider of direct custody services, meaning that users can buy basic services directly from Citi in those markets, as do many big institutional fund managers.
"As interest in cross-border investing grows, more and more banks will go directly to the countries where they want to trade," says Citibank's Michael Kingston, program manager for direct custody. "They are buying network facilities around the world." But he adds that the global custody business of large providers "tends to offer more value-added services you don't see in direct custody." Adds Bonnie Smithwick, worldwide sales and marketing manager for Citi's direct custody business: "Those who use direct services have built value-added services of their own."
That means regional banks that choose to buy custody services directly, though those transactions may be cheaper on the front end, will have to build other value-added services into the product to meet the client's information needs. "Even the most unsophisticated investor today likes to see good reporting," says Jeremiah F. O'Leary, senior vice president of Chemical's Global Securities Services.