At Sibos 2023 in Toronto, Gary O’Brien, global head of banks and brokers segment strategy, securities services, BNP Paribas, spoke to Funds Europe about the shift towards banking platform models, emphasising fintech collaboration, challenges with digital securities and balancing innovation with traditional asset safety.
With the markets moving noticeably toward platform models, what unexpected challenges or benefits do you anticipate for banks and brokers in the upcoming decade?
The trend we’ve been discussing is the rise of the platform paradigm that we have called “Custody 2030”. What’s evident is that technology and changing markets are creating a more dynamic landscape. It’s no longer about banks or brokers having one provider who does everything but rather about an intricate web of solutions, some internally developed and others through partnerships with leading providers.
A decade ago, there was a fear that fintechs would replace banks. Now, the focus is on collaboration. We anticipate a shift in the custodian’s role from asset custodian to a broader data custodian, eventually overseeing platforms validating and endorsing potential service providers and collaborators.
The challenge arises with the diversity of digital securities. Currently, every institution is developing its digital securities framework, leading to isolated systems that don’t communicate seamlessly. Today, in the traditional system, institutions connect through centralised platforms like exchanges. If this fragmentation in digital securities continues, it’ll negate the efficiencies of broad interconnectivity.
Interconnectivity will be paramount in the future. For instance, fintechs developing onboarding tools are crucial in streamlining client integration. But if these tools lack uniformity or are not widely used, we risk losing some of their value.
Additionally, there’s a growing concept of a depot bank model for platforms. Given custodians’ oversight, safety and security expertise, we envision them playing a pivotal role in this evolution.
As the lines become less distinct between traditional financial institutions and emerging players like fintechs and BPOs, how do you envision the evolution of collaboration dynamics and rules of engagement?
When observing the fintech landscape, it’s clear many banks, including us, have strategically invested in fintechs. This isn’t just about financial gains; it helps us grasp the drivers behind these fintechs and potentially influence their future trajectory in the ecosystem. In the Post-trade market, partnership stability and long-term assurance are crucial rather than short-lived ventures. As a bank, we ensure alignment and mutual growth by investing in and guiding select fintechs.
Interestingly, fintechs are forming their own industry forums, enabling them to pool resources, share knowledge and collectively engage with traditional financial players. This collaborative model is not exclusive to fintechs; we see it in advisory markets and other sectors. Events like Sibos have transformed into melting pots where diverse players converge to discuss synergies. The era when a securities services provider could cater to all needs is over. Similarly, fintechs usually target specific market segments or services. Collaboration within the fintech community and with traditional entities is essential for future progress.
Considering organisations are at different levels of market evolution preparedness, what are the overlooked indicators of an institution’s adaptability?
The market is evolving rapidly, influenced by technological advancements like artificial intelligence, blockchain and robotics. Parallelly, the profiles of entities, mainly in wealth management, have drastically transformed over the past 3-5 years. We’re also witnessing increased consolidation in the UK broker space and among international banks, as examples.
Regarding adaptability, one often underestimated indicator is an organisation’s long-term vision and strategy. If entities are solely short-term oriented in a rapidly changing environment, there’s uncertainty about their direction in the mid to long-term. We’ve embarked on surveys to ascertain our positioning for 2030, understanding that achieving such a vision involves gradual steps and isn’t an overnight shift. This long-term perspective is crucial.
However, for fintechs, the definition of adaptability might differ. Successful fintechs typically specialise in a specific market niche. They risk losing market value if they deviate substantially from their core expertise. So, adaptability’s traditional markers might not be as relevant in the fintech arena.
There’s a rising trend of best-of-breed providers, yet simultaneously, there’s discussion about a centralised risk management framework for platform custody. How can the industry reconcile these divergent trends?
Looking back around eight years ago, the emergence of blockchain hinted at a future where markets would become decentralised, questioning the need for central counterparties and clearing houses. While the appeal of decentralisation is evident, its excessive application could create unique models for every individual asset or instrument. This would counteract the industry’s goal to reduce costs, risks and potential for mishaps in post-trade operations, achieved mainly through standardisation and centralisation.
These contrasting ideas can indeed seem conflicting. However, the solution might lie in holistically evaluating the available tools and solutions. We need to reimagine the optimal model for post-trade: the digital security framework and DLT open opportunities to re-envision the market’s operations. Still, a wholly decentralised model might not be the most suitable for a market that impacts almost everyone globally.
As asset custody evolves towards a platform mindset, is there a danger of compromising the conventional principles of safety, scalability and expertise? How can the industry address this?
There’s undoubtedly a risk. When new entrants lack the traditional asset safety and protection background that a conventional custodian offers, they might provide solutions that seem to replace traditional asset custodians but without the know-how or structural safety nets behind them. The regulatory environment further complicates this. For instance, the obligations and operations of a bank asset custodian are stringently defined and thoroughly supervised by market authorities, regulators and its clientele. A potential system failure could have profound market implications if entities misrepresent their roles or capabilities. Thus, it’s crucial that regulations persistently emphasise the roles and responsibilities of involved parties. Licenses and obligations concerning asset servicing, safety and oversight must be entrusted to those with substantial expertise in these areas.
Consider the “Depot Bank of Platforms” concept. By leveraging the obligations and responsibilities that a depot bank custodian has historically held for asset oversight, they can extend this to platforms. They become accountable for evaluating and verifying the proficiency of new platform members. It’s almost an endorsement, ensuring the new entity will provide genuine value to customers. This approach is essential because if everyone starts creating their platforms and selecting partners without this vetting process, inevitable mistakes might lead to significant market disruptions.
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