Custody, with its boring old record-keeping and accounting, has been considered the least exciting sector of the financial services industry, yet it turns out that custodians are the fastest adopters of artificial intelligence and robotics. They have to be.
Last month, State Street launched Quantextual, an artificial-intelligence, web-based client service that uses machine learning to help end users extract information from their data. It’s the latest part of the custodian’s five-year ‘Project Beacon’ plan, which aims to cut costs, speed up services and, ultimately, turn State Street into more of a technology firm than a bank.
The bank is not alone of course. JPMorgan has been rolling out machine-learning systems over the last year, like Coin, which reviews documents, or LOXM, which launches this quarter and uses AI for trading.
The other custodian that makes up the big three – BNY Mellon – hired Charles Scharf to be its new CEO in July, signalling an overhaul toward automation. Scharf formerly spearheaded Visa’s tech operations upgrade.
More than 220 bots have been put in place at BNY Mellon over the last 18 months to carry out human tasks such as checking data.
The shift to technology perhaps makes more sense for custodians than any other financial services company. They have vast amounts of data crying out to be organized and presented to clients in a more digestible manner – a task that would simply take humans far too long (some reports say JPMorgan’s Coin has cut 360,000 man-hours down to seconds).
There is also the argument that custody clients require less human interaction than, say, retail banking. But the cost savings alone are reason enough – BNY Mellon estimates that its funds-transfer bots are saving it $300,000 annually.
In a survey by BNP Paribas of custody clients earlier this year, 80% expect fewer custody service providers within the next three years as the shift from institutional accountant to tech firm takes place.
That consolidation is a reversal of the trend towards multi-custodians that emerged after the financial crisis. Will the big three custodians be the equivalent of Apple, Google and Microsoft, dominating their market? It’s highly likely, because the scale needed to invest and benefit from automation creates a barrier to the predations of smaller new players.