State Street Corp.'s campaign to duplicate its success as a global custodian for U.S. money managers with their counterparts overseas is off to a roaring start in Europe.
The initial step of the campaign has been to follow U.S. investment- management clients to foreign markets where they are taking on pension clients. The next step is to pry the custody of pension assets managed by foreign investment managers from local banks.
Boston-based State Street is in a position to provide four core services-custody, accounting, administration, and transfer agency-to investment managers overseas because foreign retirement markets are taking their cues from the American model.
"What's happened the past two years is, the market and the regulations are changing. The market is coming to us," said Ronald E. Logue, executive vice president of State Street, which has $4.4 trillion of investment assets under custody, $301 billion of which is outside the United States.
"Fortunately, we have such a large infrastructure, and we can export that competence more quickly than a smaller custodian," he added.
As European employers are moving away from defined benefit plans to defined contribution plans-in which the employees put away a portion of their salaries and call more investment shots-U.S. institutions like State Street are positioning themselves for an ensuing demand.
Previously, services such as daily pricing on retirement accounts were not called for in Europe. Now that retirement plans abroad have the potential to look like 401(k) plans in the United States, back office services are in demand at the same pace.
The first foreign markets to catch up with the U.S. model for defined- contribution retirement plans are the most affluent countries, according to Ronald L. Bush, director of product development in the Hartford, Conn., office of Spectrem Group, an investment management consulting firm.
He added that in Europe, defined contribution plans are popping up as supplemental savings programs for employees of large corporations and the primary ones for small companies.
"When participants can make transfers is when you get into a much greater need for technology-based transaction services," Mr. Bush said.
State Street hopes to have those services up and running this summer through Edinburgh, where it recently closed its acquisition of the pension administration business of Bank of Scotland. State Street already has offices in Amsterdam, Brussels, Copenhagen, London, Luxembourg, Munich, Paris, and Zurich.
Its plan is to gain accounts in its four main businesses-accounting, administration, transfer agency, and custody for pension managers-from other vendors, primarily local banks, that offer the services separately.
"There is going to be a cycle of outsourcing," said Gary E. Enos, a State Street senior vice president responsible for building European business.
The advantage of American custodians is the size of their computer systems, which originally were built to service the mature U.S. defined contribution plans.
"We're doing it more efficiently than either they're doing themselves or with two or three vendors," Mr. Logue said. "Today, they can't go to another service provider and get all four. On a bundled basis, I have the opportunity to pass along efficiencies."
Competitors said selling bundled services was not unique. Bank of New York Co., which has $4.2 trillion of assets under custody, and Chase Manhattan Bank Corp., $4.3 trillion, agreed that size has become their most competitive advantage.
All three have spent hundreds of millions of dollars on technology upgrades and maintenance for custody, which is paid for by the immense revenue streams from the related services.
"It's very difficult now because it's a game of scale," said Mark Tennant, managing director of Chase's global funds services in Europe. "If you really have to invest $100 million a year in systems enhancements, how on earth can you do that with a small revenue stream?"
State Street's competitors also proffer the bundled-services concept, noting revenue on custody alone cannot sustain the costly business.
"There are people dropping out of this business. You can't be in the straight custody business," said Thomas J. Perna, executive vice president in charge of custody for Bank of New York, which, among 33 securities processing acquisitions since 1995, picked up the global custody business of J.P. Morgan & Co.
"When you package it with other services, like we do and like State Street does, that's when you can be viable competitors," Mr. Perna said.
Bank of New York cross-sells even more services to custody clients than State Street, citing funds transfer and the processing of American depository receipts, Mr. Perna said.
"They grudgingly lend money. That's a major part of our business," he added. "One of the things we really admire about State Street is, they are great marketing people. They know how to spin better than we do."