Outsourcing, while it has been popular with fund managers in the US and Europe for years, is a trend that has just started in Asia. But custodian banks are wasting no time in positioning for the imminent growth of back office business.
Deutsche Bank, for instance, is planning to spend up to $20 million over the next few years on upgrading its technology platform in Asia. Top on the list is a revamp of its internal data input and processing system in preparation for the new generation of SWIFT (Society of Worldwide Interbank Financial Telecommunication), which aims to standardize messaging systems between intermediaries with the introduction of ISO 15022.
"The impact of that change is not only standardizing messaging systems so they'll be in compliance with ISO 15022. More importantly, it will allow messages to be sent via the system as quickly as possible," says Roger Harrold, chief operating officer at Deutsche Banks Global Securities Services Asia. Harrold expects the integration will play a key role in the adoption of the global STP (straight through processing) system in Asia as intermediaries are working towards a T+1 settlement cycle.
As more managers are expected to outsource their fund administration work, another major service custodians need to provide to win business is data warehousing. Data warehousing refers to the storing of data by custodians to allow fund managers to retrieve information to tailor their own reports.
"At Deutsche Bank, we're going to launch dbPortfolio next year to eventually replace our existing front-end system. dbPortfolio will allow us to give all of our clients access to data warehouses," explains Harrold. Clients can build reports using the myriad of data provided. Its a completely new environment. Custodians are moving away from the times when the reports they print out are the reports their clients get. Allowing clients to tailor their own reports is a major move for custodians like us and new internet technology will provide a key entry point into a banks range of products across many divisions.
On the strategic direction side, Deutsche Bank is expanding its client base to include offshore as well as onshore investors.
Custodians historically looked at the markets in Asia from the viewpoint of servicing foreign investors. Previously, major sub-custodian banks such as Standard Chartered, HSBC, Citibank and Deutsche Bank predominantly serviced foreign investors from the US or Switzerland who came to Asia looking for a custodian bank which covered perhaps four or five Asian markets where they intended to make strategic investments. That business was very investor-focused and custodians loved it. The problem is that that source of revenue can no longer be relied on.
"An example is during and after the Asian crisis when the markets were volatile. The income coming from foreign investors is good when the times are good. But when things go shaky, that revenue stream dries up quickly, as we have witnessed post-crisis," says Harrold.
In view of that change, Deutsche Bank has been positioning itself in two major markets, entering into an alliance with a Korean fund administrator, A Brain, and purchasing an Indian custodian, the ITT Groups Custody and Investor Services Business.
"There's only a finite amount of foreign clients. If a custodian bank wants to widen its catchment, it must be realistic and diversified, and start to look at new areas for clients. With onshore clients, business doesn't dry up as quickly as with offshore investors when things go shaky. And as the mutual fund markets in Korea and India are opening up, managers are going in there to set up joint ventures or their own shops. As custodians we should be following that trend," Harrold says.