Our joint report with the International Securities Services Association (ISSA) identifies trends in capital markets and concludes that changes in investor behaviour, technology, and technology-enabled competition are likely to have the biggest impact on the industry.
The securities services industry has generated relatively stable revenues driven by accumulation of assets under custody (AUC) or administration (AUA) and underlying trading volumes, even during substantial market swings witnessed over the last decade.
However, the last cycle has also seen continued fee compression and decreasing net interest margins at the core of the industry. Even the introduction of value-adding adjacent services has not sustainably offset fee pressure on core business models, since new services have typically been included in existing service offerings and have thus become subject to the same pricing challenges.
The future of the securities services industry
Looking forward, our report suggests that developments in the broader capital markets ecosystem will create continued top-line pressure for the securities services industry as we know it, which will make it difficult for some players to fund required investments and fend off the threat of potential disruption. For firms that can afford the required investment, there is a significant future growth opportunity arising from the servicing of new (digital) asset classes and leveraging of new technologies within capital markets, with higher margin for associated products and services.
On top of that, global geopolitical uncertainties increase the risk that the global securities services industry becomes regionally fractured. This might disadvantage firms that consequentially need to scale back their global business models. As a counterpoint, the firms that manage to retain global business models or which have a deep regional franchise in growing markets, may be able to increase their business.
With the knowledge that the securities services industry — as we know it — will undergo significant change over the next decade, but given the uncertainty of when and how this change will happen, we have taken a scenario-based approach to identify the drivers of change that are expected to have the largest impact on the industry.
Future trends in capital markets
The analysis of the working group, supplemented by our research and a survey of ISSA member institutions, all conducted for this report, identified trends in capital markets and concludes that changes in investor behaviour, as well as changes in technology and technology-enabled competition, are likely to have the biggest impact on the industry:
Investor behaviour: A continuation of flows into alternative and digital assets, as well as further shifts towards passive/ETF structures combined with further globalisation of the asset flows and higher investor digital service expectations.
Technology and technology-enabled competition: Larger-scale adoption of Artificial Intelligence/Machine Learning/DLT, new business models based on new technologies, as well as new entrants to the industry from the technology sector.
Depending on the business model, scale and geographic footprint, four strategic considerations will be critical for players in the securities services industry:
Cost pressure to the core: Counter continued pressure on top-line revenues by placing additional focus on strategic cost reduction, doubling down on cloud-enabled modular fintech ecosystems to achieve higher levels of efficiency, forcing higher levels of service standardisation across clients, and pursuing strategic participation choices and industry consolidation.
New growth paths: Develop and seize new revenue opportunities by investing in new products and services, possibly built on data and Artificial Intelligence, recalibrating distribution channels and service offerings to reflect the increasing importance of buy-side clients and transforming underlying legacy IT infrastructure to increase flexibility for future innovation.
Industry disruption: Rethink positioning along the current post-trade value chain to ensure preparedness for potential industry disruption, potentially by filling capability gaps with partnerships and acquisitions, and reviewing insourcing and outsourcing decisions.
COVID-19 early lessons learned: Embed lessons learned from operating our businesses during the COVID-19 pandemic into future operating models by reviewing and rethinking existing (digital) transformation programs across the full value chain of activities, critically reviewing costly and manually intensive but non value-adding activities, and adopting new ways of remote and resilient working into business as usual (BAU) capabilities.