Securities Services firms will be transformed by technological change while enjoying better times from new value-add services for clients and higher interest rates, according to McKinsey & Co.
In a new report, ‘A Calm Surface Belies Transformation in Securities Services’: the big management consulting firm is predicting slightly higher revenue growth over the next five years despite continued margin pressure on the core businesses of custody and fund administration.
Asia, which has provided most growth for these firms in recent years compared with the US, which has had marginal growth, and Europe, which has had none, will continue to a driver, the report says. And fintech start-ups and the transition to distributed ledger technology (such as Blockchain) will not pose a disruptive problem, at least in the short-medium term. Other technologies, such as advanced analytics, may give the big incumbents an advantage.
The main growth drivers, the report says, are likely to be:
. rises in asset valuations, offsetting a further decline in fee margins
. assets under admin values also to rise, complemented by a stable outsourcing environment also offsetting margin decline
. interest income to rise in line with interest rates in global markets
. collateral management volumes to rise and FX and cash management to be stable
. bond valuations to remain stable along with corporate trust fees, and
. securities lending volumes to remain stable along with intermediary borrowing fees.
Potential new services include: custody for cryptocurrencies; the monetization of large volumes of data held by securities services firms; and developing new products with fintech firms as partners.
McKinsey says: “We believe there will be four viable strategic archetypes in the securities services sector. These archetypes exist to some degree today; however, firms that are currently stuck in a grey area between these distinct archetypes will need to make definitive choices about how they will compete going forward:
— Global full-service providers, covering all key geographies and offering comprehensive securities services to customers in the major markets.
— Regional leaders with broad offerings, capitalizing on their deep expertise in country markets and their close ties to local customers and regulators.
— Core securities services providers at scale that focus on crucial, but non-differentiated, core services in custody and asset servicing as well as fund administration. Their scale and minimal costs will compensate for low margins on commoditised services.
— Focused boutiques offering tailored services, as well as services in specialised asset classes. They excel at managing complexity and often boast very high margins.”
Greg Bright is publisher of Investor Strategy News (Australia)