Presentation prepared for one of the world's largest custodian banking service providers summarizing macro trends affecting the landscape and how to focus on emerging technology vendors in RegTech as a potential strategic solution to expand their business footprint
3. What Is a Custodian Bank?
https://www.ecb.europa.eu/pub/pdf/scpops/ecbocp68.pdf?cd251dd1ed508e2b2a1b569c07609ede
Institution charged with handling safekeeping,
servicing and settlement related to customer
securities
Settlement: When securities are bought and sold, the
custodian takes care of the delivery and receipt of
securities against the agreed upon cash
Asset Servicing: Managing benefits, rights and obligations
related to holding securities, such as dividends, voting,
and other corporate actions
4. Securities Services Overview
Custody services as it fits into a landscape of
securities services provided by broker-dealers,
clearing houses, central securities depositories and
others
5. Role of a Custodian in Securities Settlement
System
http://gendal.me/2014/01/05/a-simple-explanation-of-how-shares-move-around-the-securities-
Buyers and sellers of
securities have their
assets safeguarded and
serviced from the
operations of the broker.
Central Securities
Depositories hold all of
electronic securities on
behalf of issuers, and
facilitate the transfer of
securities between
custodians when a trade
is cleared
6. Drivers of Custody Sector Growth
http://www.institutionalinvestor.com/article/3481359/asset-management-hedge-funds-and-
alternatives/cautious-hedge-funds-spell-big-business-for-custody-banks.html#.Vnr5LcArJD0
2008 Failures
• Lehman Brothers /
Madoff drove asset
managers to
custodian services
to safeguard
assets against
counterparty
failures
Increased
Regulation
• Dodd-Frank and
Europe’s
Alternative
Investment Fund
Managers
Directive require
hedge funds to use
third-party
custodian
Institutional Investor
Requirements
• More rigorous
transparency
requirements and
governance
around asset
allocation at
investor level
forcing hedge
funds to adopt
custodian services
8. Competitive Landscape
Increased competition from market infrastructure services for the
core custody product has negatively impacted pricing pushed
custodians into adjacent fund services to differentiate
9. Declining Margins Affecting Top-Line
Despite AUC increasing at 8% p.a from 2008-2013 for
the largest custodians, fee compression has
significantly impacted revenues of the custodian
market – causing massive consolidation and
concentration of assets in search of operational
efficiency/synergy
10. Big 4 Dominate Market
http://www.trefis.com/stock/bk/articles/310610/q2-2015-u-s-banking-review-custody-banking-
$25.1TR AUC
Avg Fee:
0.0142%
25% of Overall
Revenue
$22.0TR AUC
Avg. Fee:
0.0182%
50% of Overall
Revenue
$20.5TR AUC
Avg. Fee:
0.019%
4% of Overall
Revenue
$15.5TR AUC
Average Fee:
0.015%
3% of Overall
Revenue
AUC of Big 4 represent ~2/3 of Global Custody Industry
11. Custody Market: Conclusion
The commoditization of core custody
services has increased the demand for
adjacent value added services. Providing
these services will allow custodians to
increase AUC and market share v.
competitors.
12. Know Your Customer (KYC) and Foreign
Account Tax Compliance Act (FATCA)
Adjacent service to custody banking creating a massive
market opportunity
13. Twin Regulations Driving a New Market
KYC (2003)
• Regulation requiring
financial services to verify
the identity of its clients
• Mandatory for all US
banks as anti-money
laundering (AML)
compliance, as well as the
prevention of financial
fraud and terrorist
financing
FATCA (2014)
• Regulation requiring US
citizens to report non-US
financial accounts and
requires FFI’s (foreign
financial institutions) to
report assets and identities
of US account holders to
the treasury
• FFIs in agreement with
IRS to search customer
databases to identify
suspected US account
holders information
Estimated Ongoing Cost of Compliance ~$8bn/year (Forbes)
In 2014 – Financial Institutions paid over $12bn in reported AML related fines
14. Challenges to Remaining Compliant
Customer Due Diligence
• Each account holder
needs to be reviewed for
US indicia , not previously
required under KYC/AML
rules
• Periodic reviews to
accounts must be
performed as the holders’
of accounts status is
subject to change
Intergovernmental
Agreements (IGAs)
• Country-by-country
agreements to help
financial institutions
comply with FATCA,
despite legal barriers to
do so (i.e data privacy)
• IGAs provide relief to
allow more types of
documents to be used to
classify if an account
holder is a US person,
increasing the complexity
of customer due diligence
• PWC’s “Quick”
Reference Guide to
Global KYC/AML Laws
is 583 pages…
Process & Technology
Coordination
• All information collected
as a part of KYC/AML
process must be made
available to the IRS, in
order to verify authenticity
of data, complicating the
on-boarding of customers
• Disjointed technology
processes and
technology silos that store
relevant customer data in
front, middle, and back
office operations often do
not rely on the same or
harmonious data sources,
complicating reporting
Failure to uphold compliance and maintain program governance results in a
30% withholding tax on income from the US
15. Global Banking Segments Affected
http://www.mindtree.com/solutions/fatca-compliance-solution
16. Customer Demand is Real
Over 80% of surveyed financial institutions ranked
AML & KYC management overhaul a priority in the
coming years, while over 90% cited the biggest
challenges to management is access to internal data
and expertise
http://www.oracle.com/us/corporate/analystreports/chartis-financial-crime-risk-2541655.pdf (Chartis)
17. Costly / Difficult Implementations
Despite high demand for KYC/AML management,
only 12% of 2015 surveyed respondents felt they
had a fully integrated system
18. Incumbent Vendor Landscape
AML and Transaction
Monitoring KYC and Client Onboarding
http://www.oracle.com/us/corporate/analystreports/chartis-financial-crime-risk-2541655.pdf (Chartis)
Most major consultancy practices (PwC, E+Y, IBM, Mindtree, KPMG to name a
few) offer implementation services for vendors on the above landscape, or
build custom solutions for financial services clients
19. Investment Thesis
Given the tremendous ongoing cost burdens of
maintaining FATCA and KYC compliant, as well as
the fines/withheld income for compliance failures,
financial institutions and investment groups able to
manage compliance efficiently at a low cost will
begin to generate alpha for their customers in the
form of cost-savings, providing excess net returns
over peer groups invested in similar products
21. Company Spotlight
Sector: RegTech
Product: Automated collection,
verification and secure storage of
customer due diligence (CDD) data and
documentation.
Target Market: “SMB” and up
Company Pitch: Viewable Here
Traction: Partnered with Accenture’s
FinTech Lab
Thesis: Automated data refreshing and
auditing deployed in an API protocol that
can be easily integrated (under 1 day) into
an existing KYC/AML compliance
enviornment reduces sales cycle
concerns and lengthy implementations
Passfort
HQ: London, UK
Founded: 2015
Investors: Accenture,
Entrepreneur First
FTE – 15 (LinkedIn)
Capital Raised: [undisclosed
22. Company Spotlight
Sector: RegTech
Product: Customer On-boarding and due
diligence product making KYC processes
more efficient
Target Market: Financial Institutions and
Regulated Entities
Major Customers: KPMG
Traction: Early days
Thesis: Consumer-driven KYC
environment frees up resources at FI/RE
level to generate operational efficiencies
and cost-savings across the KYC/AML
stack
Trunomi
HQ: San Jose, CA
Founded: 2013
Investors: KPMG,
Visionnovation, Saturn
Partners, Persistent Ventures,
SenaHill Partners
FTE – ~10 (LinkedIn)
Capital Raised: $5.3M
23. Company Spotlight
Sector: Fraud Management
Product: Risk management and anti-
fraud services for enterprise
Target Market: E-commerce ecosystem:
Acquiring Banks, Payment Processors
and Gateways, Payment Service
Providers (PSP/ISO/MSP,IPSP), and
Online Merchants
Traction: FinTech Forward Company to
Watch 2015 / CIO 20 Most Promising
Compliance Solutions
Thesis: AML solution helps Money
Service Businesses (MSB’s) including
Money Transmitters and Bitcoin
Exchanges by issuing alerts based on
suspicious activity related to the
movement of funds
IdentityMind Global
HQ: Palo Alto, CA
Founded: 2013
Investors: Benhamou Global,
Cybernaut, SBT Venture
Capital
FTE – 37(LinkedIn)
Capital Raised: $12.6M
24. Company Spotlight
Sector: RegTech
Product: Online identity verification
services, powering fraud and compliance
systems worldwide.
Target Market: Enterprises and Financial
Services
Partners: LexisNexis, Experian, IDology,
CallCredit, Avoka
Market Traction: As of Oct. – KYC/AML
API covers 4 billion identities worldwide
Thesis: Next-gen verification designed for
cross-border transactions to aid
businesses complying with AML and KYC
rules
Trulioo
HQ: Vancouver, BC
Founded: 2010
Investors: Blumberg, BDC
Venture, Amex, Tenfore
FTE – 34 (Linkedin)
Capital Raised: $23.3M
