Where is change needed?
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Is changing the core system the only solution?
The case for investment in automation: volumes, cost and clients.
“The majority of client complaints, by far, stem from asset servicing.”
(Commercial product lead, leading global custodian)
Fortunately, business managers appear to be very aware of the issues highlighted above in 2024. The case for investing in asset servicing automation is compelling, with three primary drivers accounting for 75% of the overall investment: increasing volumes, reducing costs, and enhancing client experience.
A well-crafted business case addresses all three of these drivers. This was exemplified by a recent initiative undertaken by a major investment bank we spoke with. The firm has multiple business units that require asset servicing announcement data, from core asset servicing teams to fund accounting and the front office. Previously, each of these areas sourced and scrubbed data independently from different vendors. The bank identified excessive spending on separate announcement vendor feeds and operational scrubbing resources, which were only compounded by the increasing securities volumes we've discussed. Added to that, cross-product clients were complaining about receiving conflicting information from the same institution.
By centralizing these functions, the firm achieved significant cost savings and established a unified view of events across the firm. This move also eliminated much of the reconciliation required across departments. The benefits, including a strong ROI from reducing multiple data sources, removing duplicate teams, and improving the client experience, made it an easy investment decision which ultimately saved them several million dollars per year.
20% of investment is attributed to client experience, highlighting the frustration among investors with the current corporate action processes. Disproportionately burdened by the operational inefficiencies highlighted above, the world's investors are increasingly including asset servicing performance in their vendor service reviews - and creating a more explicit link between asset servicing and overall relationship performance.
Yet, as compelling as it is, we appear to be under-estimating the true case for asset servicing automation in many areas. Whilst growth and client considerations are clear and understood, the fact that the cost of errors makes up only 11% of industry business cases is a red flag.
Given these errors can increase the annual cost of operations by up to 10% (even taking into account what gets missed), the exclusion of these costs from our industry business cases means that we are significantly under-estimating the case for change (and also the potential returns on investment from automation).
We are spending a lot of money trying to keep up.
As an industry, we are clearly working hard to build scale into our processes and platforms. Every single investor that participated in our survey has ongoing automation work in the voluntary event space - highlighting a vast, global effort to address the risks and costs outlined above.
As the largest and fastest-growing market, the US appears to be the global hub of asset servicing transformation in 2024, with 60% of respondents driving change projects today - ahead of other leading, developed markets.
Yet every one of the markets where investment is highest has seen a decline in (voluntary) event automation rates in the last year. Custodians, brokers and investors appear to be working hard and investing significantly in order to arrest the decline in automation that they are seeing across their largest investment markets.
In 2024, the world is spending to maintain its automation levels - not to improve them.
Where are we driving change?
System change and data are our core answers.
The majority of this change investment is profound and costly.
With the leading automation option in 2024 being a change in core systems, asset servicing automation appears to be an expensive endeavor that stretches across the enterprise. For every major system change, interfaces need to be replaced and processes changed, causing a multi-year transition management burden that makes only the most pressing and wide-scale projects viable.
But what alternatives are there? Data sourcing solutions make up between 18-28% of ongoing change activity - with the majority running on a managed-services basis. In an effort to avoid costly deployments and system overheads, the appeal of bureau-style solutions for sourcing and event management is clearly growing, particularly as an enabler to cost-efficient scale.
On the process side, machine learning and generative AI are also playing a role, as new pilots increasingly demonstrate the viability of "teachable" technology solutions in reducing manual processing risks over time.
Overall, the asset servicing automation plan appears to be multi-faceted in 2024 - and largely based around a new, empowered, central processing platform.
What are the challenges for financial institutions in automating?
Current solutions are being set up to fail: we need to find a new way to deliver on automation
“The long lead time for corporate actions projects introduces significant risk to business case approval.”
(Transformation lead, Wealth manager)
The core challenge in realising this automation plan today is that it is hard to secure and maintain the organisational commitment to see the project through to conclusion.
Focusing on changing core systems means a slow return on investment, and the risk that solutions won’t meet required STP/error rates introduces significant project risk. Add to this the fact that 36% of brokers see system change as being too slow and 52% of custodians struggle to gain client and counterparty support for their transformation efforts, and you have a very strained case for transformation.
To counter this, many successful organisations are working to drive asset servicing automation as an enterprise priority today. With many universal banks running multiple corporate action units (across retail, wealth, private banking, asset management, investment banking, brokerage and custody divisions), the scope for consolidation is huge. And with many of those different divisions currently servicing each other, this consolidated approach can reduce not only cost duplication but also unnecessary gaps at a data and processing level.
Proxy voting: are we still implementing SRDII?
In Europe, the core driver of proxy voting automation has been and is SRD II. The new compliance obligations were intended to increase transparency between issuers and their shareholders, as well as to encourage investors to engage more actively in shareholder voting activities. However, given that SRD II came into force in 2020, it is important to question why we are still implementing related projects four years later.
There are two considerations here. Firstly, the absence of stringent regulatory sanctions may have resulted in a lack of incentives for quick implementation. Perhaps inserting penalties similar to those experienced under CSDR would give more of an incentive. Secondly, organisations may have initially addressed SRD II compliance through additional resourcing rather than through automation, delaying the broader adoption of automated solutions.
Outside of Europe, the primary driver of proxy voting automation is the significant increase in voting volumes. This growth is fueled by heightened shareholder governance activities among institutional investors, who are taking a more active role in corporate oversight, as well as a growing retail investor segment that is becoming more engaged in the voting process.
Whether driven by regulation or by rapid volume growth, there is little doubt that proxy voting appears to be undergoing significant, end to end change.
Benchmark your own asset servicing today
How do your own asset servicing processes and ambitions compare with those of your peers? Make sure you use this unique opportunity to benchmark your own work with over 270 other specialists today.
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