Fidelity Investments' clearing services unit says it will use acquisition, organic growth, and new clients to sustain its rapid growth of the past 15 months and expand share across all its channels as it pursues Pershing, the No. 1 clearing company.
"There are a lot of divestitures occurring and acquisition opportunities in the clearing services industry," said Norman R. Malo, the president of the Fidelity unit, National Financial. "I do think that that leads to the fact that there will probably be five to six players that will be predominant in this business and we will be one of those players."
National Financial increased its assets by 42%, to $351 billion, during the 12 months through June 30 and client accounts by 30%, to 3.8 million. Its revenue grew 85.7%, to $520 million, during 2003.
A survey by Tower Group of revenue generated by clearing services businesses showed National Financial with a 10% market share overall, placing it third behind Pershing BNY, 15%, and Bear Stearns, 11%.
Matthew B. Bienfang, an analyst at Tower Group in Needham, Mass., who prepared the March study of the clearing services business, said more companies will leave the clearing business and large players will get much larger. The top 10 clearing companies manage 70% of the market, and this share is growing.
"There are a lot of firms with anywhere from two and five correspondents clearing through them," Mr. Bienfang said. "A lot of these firms are reevaluating that and looking at the risk. These firms are not squarely in the clearing space, and there is significant risk in this business."
Mr. Malo said National Financial is the dominant player in providing clearing services to banks. Since the end of 2002, National Financial has increased its share of the bank market from 44% to 50% at June 30.
In a typical year, Mr. Malo said, National Financial has added 200,000 accounts; this year so far it has added one million. The company is now providing clearing services for 255 customers, up 73% since June 30, 2003.
In the first six months this year, National Financial has added $34 billion of client assets.
The growth story emerged about 15 months ago when Fidelity announced it was spinning off National Financial, along with investment advisory and capital markets groups, as stand-alone businesses to attract more financial institution customers.
National Financial, which had been a unit of Fidelity Brokerage since 1982, opened as a stand-alone company with $231.1 billion of clearing assets.
Mr. Malo said the growth was jump-started a week after the spinoff when Fidelity announced it had bought UBS PaineWebber's correspondent clearing services unit, Correspondent Services Corp. National Financial added 149 clients in 2003, 100 from its purchase of CSC.
The company also has added large companies like Northern Trust Corp., Washington Mutual Inc., Prudential Equity, Fifth Third Bancorp, and Fleet's Quick & Reilly. By comparison, it had added 16 companies in 2002, its biggest year to that point.
Mr. Malo said National Financial is not satisfied with the new business accumulated so far. He is carefully looking at potential acquisitions, organic growth, and cross-selling opportunities, he said.
"Small players are a potential opportunity [for acquisition] as we start to look in the marketplace," Mr. Malo said. "I can't say we'll buy somebody, but I can say that we are going to look and we will take good strategic steps to clearly take advantage of every opportunity."
The company is looking carefully, too, at institutional firms and full-service brokers, Mr. Malo said.
"Everyone knows us as the dominant clearing firm in the bank market, which we are … but when you look at it in relation to the rest of my clients, it is only 14% of our business," he said. "We want to take a look at the business and develop our market share in other areas."
There is also an opportunity to develop organically by looking closely at companies that self-clear, he said, which is a $27 billion to $30 billion marketplace. But only about $7 billion to $9 billion of those assets would consider outsourcing, he asserted.
In order to develop relationships with new clients, Mr. Malo said, it is essential to develop additional capabilities and services. "Firms want more; they want wrap products and separate accounts," he said. "I am processing checks and providing independent research from 10 different firms. All of this is part of clearing services."
He added, "Clearly we are expanding our footprint because we are expanding our capabilities."
National Financial will spend $51 million on technology this year to help develop its capabilities, up from $38 million in 2003 and $22 million in 2002, Mr. Malo said.
Eventually, he said, he hopes to be able to cross-sell Fidelity services and products like payroll services and benefits outsourcing to National Financial clearing customers.
Analysts said National Financial faces strong competition from large clearing services providers like Pershing, which had $635 billion of assets under custody at March 31, and Bear Stearns. Pershing, a unit of Bank of New York Co., said in a July interview that it is targeting midsize banks, with $5 billion to $50 billion of assets, as sources of new business.
Randy Reynolds, a director for Pershing's bank market segment, said last month that the bank channel is "crucial" to the company's continued expansion.
But Mr. Malo asked, "Why would a bank want to clear with another bank? It is not a good thing." He admitted, though, that discount brokers could have a similar apprehension about clearing with National Financial because of its affiliation with Fidelity.
"Banks don't view me as a threat competitively," Mr. Malo said. "I am not viewed as a competitor in that marketplace. I am not making loans, I am not selling checking accounts, and I don't have a banking facility."
Since being spun off National Financial has won the business of Northern Trust from Pershing and of Washington Mutual from Fiserv.
"Winning in this business means developing volume through as many channels as possible," Mr. Malo said. "This is a business based on volume, and the best players will develop efficiencies through volume."
Jim Crowley, a managing director in charge of national customers at Pershing in Jersey City, said being a part of Bank of New York has strengthened Pershing's commitment to the clearing services business both in the bank channel and beyond.
"We have a very diverse group of clients across all the channels," he said. "We find that clients choose to come to Pershing because we aren't competing with them for the client's end business. There isn't a concern about our connection to the Bank of New York."
"To deliver value to our clients, both financial institutions and the brokers," he added, "we have to have economies of scale. Having an institution like the Bank of New York as our owner and our parent is paramount to being able to invest the way we do in this business to drive these economies and efficiencies."
Tower Group's Mr. Bienfang said National Financial's nabbing customers from Pershing or Pershing's doing the same from National Financial is not a sign of momentum in the industry.
"Fidelity and Pershing trade customers constantly," he said. "For them, I don't see it so much as stealing from Pershing. [National Financial] will gather banking customers themselves and acquire smaller players. I consider this acquisition of customers from one another a natural extension of the competitive nature of these firms."
"The truly telling sign is whether or not they are gathering assets from beyond the core players," he added. That would mean the largest companies are gaining market share, he said.
