In recent months, State Street in Boston has built an application to deliver mutual fund values to asset managers up to 30 minutes faster. It has also developed a tool that automates compliance with a new securities regulation.
These initiatives are part of State Street’s long-running strategy to improve customer service, and its bottom line, by investing heavily in technology that can speed the flow of information to clients by eliminating manual processing. Though all banks are upgrading their technological capabilities, few are doing so as aggressively as State Street, Bank of New York Mellon and other custody banks for which speed is paramount.
Customer data now “travels all the way through State Street digitally,” Chairman and CEO Jay Hooley said in an interview Wednesday. “It has the obvious effect of decreasing error rates and therefore improving service.”
Hooley said that the advancements are helping State Street attract new customers and win more business from existing ones — big reasons that second-quarter revenue increased 9% to $2.8 billion from the same period a year earlier. The tech investments have also made some processes more efficient, which also contributed to revenue growth.
For now, the cost of the tech initiative, dubbed Beacon, is a bit of a drag on earnings, but State Street said it will ultimately generate yearly savings of about $550 million, largely through job cuts. State Street, which has roughly 31,000 employees, has not said how many positions will be eliminated, but media reports have speculated that it could be as many as 7,000.
“We’ve got over 100 different projects which are designed to eliminate manual processing,” Hooley said. “It’s essentially a trade-off of human labor for technology.”
The Beacon program is designed to transform a broad swath of State Street, from transaction processing to the administration of mutual funds and other investment funds. It has included investments in a wide range of technologies, such as software platform architecture and cloud computing.
Cost savings, however, are only the “appetizer” of Beacon, Hooley said. The “main meal is to take the information we have on behalf of our clients and represent it in a digital format,” he said. “That better informs their ability to manage performance, to manage their risk portfolio and to manage compliance.”
It’s a brand-agnostic process, Hooley said. While it’s easier for a client to bring all of their custody and administration needs over to State Street, the company can offer a single digital presentation of an asset manager’s holdings across all custody banks. That includes not just BNY Mellon and Northern Trust, but also the custody bank offerings from JPMorgan Chase and Citigroup, as well as international competitors like BNP Paribas and HSBC.
Asset managers, who represent a large portion of State Street’s customer base, have begun to buy in. New business contracts propelled State Street’s assets under custody and administration to a record high of $31 trillion in the quarter. The new contracts also helped lift servicing fees 3% compared with the first quarter, to $43 million, Barclays analyst Jason Goldberg wrote in a Wednesday research note.
“What you're seeing us do is, we actually have started to onboard new clients [and] put people against that build out [of] infrastructure and technology to plug them in,” Eric Aboaf, State Street's chief financial officer, said during the company’s earnings conference call.
State Street seems to have persuaded existing clients to shift their subscriptions from legacy services to new product offerings. The percentage of customers who have adopted State Street’s improved tool for measuring the net asset value of mutual funds jumped from 25% in 2015 to 71% this year. And all of State Street’s customers have now adopted its digital compliance tool for new securities regulations, compared with 25% in 2015.
State Street’s net income in the second quarter was $584 million, little changed from a year ago. Earnings per share of $1.53 was 2 cents lower than the mean of analysts’ estimates compiled by FactSet Research Systems.
State Street’s program has contributed both to an improved improvement in its pretax margin, Goldberg wrote in his research note. The pretax margin in the second quarter rose 180 basis points to 33.3% compared with the same quarter last year.
The tech upgrades should further improve margins and returns, Hooley said. And if investors and customers start to view State Street as something different from a bank, that’s actually not a bad thing, he added.
“A global custodian is really just a big technology and operations processing center,” he said.