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Custodians face formidable implementation challenges. Beyond
their sheer size and operational complexity, the need to maintain
rigorous regulatory compliance creates additional obstacles that
further complicate a technology roll-out. Given these unique
circumstances, it is not surprising that global custodians have
been reluctant to adopt new technologies, even as other, more
nimble market participants have embraced them.
As a result, at a time when distributed ledger technology (DLT),
robotic process automation (RPA) and artificial intelligence (AI)
are transforming the financial markets, the majority of custodians
are still relying on legacy platforms—some of which are now
decades old.
However, the status quo is changing rapidly as market pressures
mount. As revenues have flattened, it has placed new pressure on
internal teams to manage costs through greater efficiency. When the
pandemic struck, it created a new sense of urgency by further
underscoring how fragile and inflexible these legacy systems are,
and how poorly adapted to today's business realities.
Custodians burdened by legacy technologies face three key
challenges: operational inefficiency, poor visibility and elevated
risk.
Delays and inefficiency
With communication still conducted primarily by email between
the buy-side and custodians, agility is an ongoing challenge. When
employees are backlogged or offline, communications sit in their
inboxes, leading to onboarding delays and preventing the buy sides
from deploying their capital in a timely way.
Similarly, asset managers are losing patience with custodians
who issue requests in Excel and PDF formats that take time and
effort to complete. While some custodians initially saw information
portals as a way to expedite the process, this approach ended up
creating extra work for clients who need to remember log-in details
and navigate new interfaces and workflows for multiple portals
across all of their custodians.
Limited visibility
The reliance on email also impacts visibility for the buy-side.
Once the information is sent to the custodian, the custodian's
inbox is no better than a black box. Was the information received?
Did it reach the right person? Is the client's application sitting
with KYC? Is there additional information they could send to
expedite the process? Which markets are opened? Is there a specific
market requirement? Did this need to go to a sub-custodian for
setup? At any given point—over a period that can stretch for
months—clients have no idea how far they have advanced in the
onboarding process or when they are likely to be fully onboarded
and ready to trade.
Elevated risk
A single onboarding process can involve hundreds of data points,
and every time an investment manager or a member of the onboarding
team rekeys that data, there's a risk of introducing human error.
And unless those errors are caught and corrected, the issues can
multiply as the data flows into downstream processing.
There are additional risks associated with legacy processes.
While custodian banks are placing a renewed emphasis on the
security and privacy controls that govern their platforms, email
remains a weak point. When the onboarding process is conducted
primarily across email channels, it exposes some of the most
sensitive client data to unacceptable risk.
Next-generation onboarding technology
As the need to transform the onboarding process becomes more
urgent, custodians are evaluating the relative merits of in-house
portals and vendor platforms—and recognizing that platforms
offer clear advantages.
While portals are more secure than email communications, they
are not client-friendly, requiring clients to remember multiple
links, passwords and protocols without reducing the effort required
on the part of the client to supply the information.
Onboarding platforms, by comparison, not only provide a secure
means of exchanging information but offer a host of additional
capabilities that benefit both custodians and their clients.
For both sides, the ability to replace a mix of portals, emails,
spreadsheets, PDFs and both online and offline processes with a
single platform and standardized workflow streamlines the process
considerably.
A better client experience
For clients, onboarding platforms replace the time-consuming
rekeying of data across multiple custodian engagements with a
"one-and-done" process. The IHS Markit Onboarding Accelerator, for
example, standardizes 70% of onboarding data so that the client
only needs to enter it once to supply multiple custodians and the
full array of custodial functions, including legal, tax, KYC, and
market openings. Platforms also provide clients with full
visibility into the status of their account and markets opened on
the request at all times.
Significant cost savings
For custodians, an onboarding platform standardizes and
automates the workflow and reduces the volume of offline
communication, the number of customer touchpoints and the need for
manual intervention to obtain and maintain records. This level of
efficiency translates into considerable cost savings. Based on data
collected from the Onboarding Accelerator, approximately 40 minutes
is saved per onboarding—a 300% increase in efficiency. Based on
an industry average of 13,200 onboardings per year and an annual
salary average of $55,000 for an onboarding analyst, this
translates into a savings of at least $165,000 per year for
custodians that transition from legacy processes to a platform
solution.
Platform adoption accelerates
After years of reluctance to change the status quo, custodians
are taking a close look at areas of operational inefficiency and
demonstrating a willingness to address them through technological
change. As they reconsider their options, onboarding platforms are
generating considerable interest as custodians begin to recognize
how far they have fallen behind and how much they have to gain by
catching up.
Posted 19 April 2021 by Brittany Garland, Executive Director, Platforms & Regulatory Compliance, IHS Markit
IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.
