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F I N T E C H ]
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rguably, the global securities services industry is set to
face more disruption to its traditional business model over
the next five to 10 years than it has ever witnessed before.
This is largely due to the dramatic shift that new entrants and
technologies are causing to an entrenched and slow-moving
industry. There has been an influx of innovative applications and
services brought about by a new generation of FinTech firms
that are agile, fast-moving, and ready to disintermediate.
According to a recent survey of 50 FinTechs in the securities
services industry by global consultancy firm McKinsey, around
two-thirds offer products for custody and asset servicing, while
a massive 87% offer data and information services products.
Furthermore, around a third provide value-added services that
custodians treasure, such as collateral management, cash man-
agement and foreign exchange.
These securities services-orientated FinTechs bring to market
a variety of technologies such as robotics and distributed ledger
technology (DLT) that could disrupt the structure of custodians.
The majority of securities services firms will be at least slightly
concerned how new technologies these FinTechs bring could
leave their out-dated, legacy systems obsolete, particularly with
how DLT could potential disintermediate the custodian from
certain key function.
“Blockchain allows individuals and companies to make finan-
cial transactions directly between each other. There is no need
“FinTech will not compete with the custodian industry,
however they are closely aligning.”
WALTER VERBEKE, GLOBAL HEAD OF STRATEGIC PLANNING, EUROCLEAR
for settlement, reconciliation, securing assets or providing proof
of ownership, all key aspects of the custodial function,” said Fer-
iz Hasani, head of global custody relationship management, UBS
in a white paper in August last year.
“Newer smart contract technology, which allows complex
business logic to be programmed in to blockchains, makes it
possible to automate many asset servicing functions traditionally
performed by custodians, such as reporting, registering transfer
of ownership, or communicating corporate actions.”
First-mover advantage
One prime example of how FinTechs are directly competing
with securities services firms is Nivaura, a UK FinTech start-up
authorised by the Financial Conduct Authority (FCA). In March
this year, it tapped Microsoft’s cloud technology to launch, what
it claims, the world’s first blockchain-based investment product
on a public infrastructure.
Using Ethereum blockchain, Nivaura registered, cleared and
settled two principal protected notes (PPN) linked to the FTSE
100, one through the traditional clearing infrastructure and the
second using an open public blockchain. It stated the technology
helps firms launch investment products and reduces the need
for middle-men in the post-trade process.
Another FinTech making waves is Betterment, the largest
independent robo-advisor managing over $13 billion for 300,000
customers. Not only does it perform investment and retirement
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Global Custodian
Summer 2018
services, but also offers RIA custodial
services through its broker-dealer arm
Betterment Securities.
“We are a custodial firm like Fidelity
or Charles Schwab, which means we are
responsible for handling your funds and
keeping all the records of your assets,”
wrote Eli Broverman, president and
co-founder of Betterment in 2014.
The company has created a robo-custo-
dian business and over the past year has
raised $60 million in venture capital and
over $1 billion in assets under manage-
ment (AUM).
The significance of Nivarua and Better-
man is they can be seen as the first mov-
ers in competing directly with established
custodians and other post-trade provid-
ers. FinTechs in the retail and payments
space have made a number of dents in the
banking sector, but is not until recent-
ly that FinTechs have the potential to
compete with the incumbent securities
services providers. And certain providers
are worried about their potential.
According to research from Pricewater-
houseCoopers (PWC) in 2017, almost 90%
of finance firms fear they will lose reve-
nue to standalone FinTech companies.
However, the report, based on responses
from 1,300 firms globally, stated a mutual
understanding was being developed
between FinTech start-ups and larger
financial firms, driven by start-ups requir-
ing access to capital and clients provided
by the larger institutions.
One year on, has this relationship
emerged between FinTechs and custodi-
ans?
Mutual benefits
Instead of directly c