Banks can avoid the hidden costs of providing custody services by using a ‘hub’ model, but this should be carefully balanced with providing a good service, according to Duncan Smith, senior business development manager at Societe Generale Securities Services.
Smith compared the costs of custody to an iceberg, with the majority hidden below the surface, including costs of communication and travel to see clients, and legal and operational costs. However, “when you start moving to a hub approach, the view changes”, and more costs become clear, or, above the water line.
Smith referred to a survey of 10 large banks, which estimated their below-the-line costs at anything between $10,000 and $40,000, with estimated costs averaging out at about $25,000. But he also stressed that when offering custody, “cost isn’t the only driver”.
It is also important to provide a good service, to stay close to the market, and for clients to be able to reach their custodian easily, said Smith.
He added that, while a hub approach may be more efficient, it might not be able to offer such a personalised service or the appropriate market experience. He said: “People on the ground make a difference.”
While the hub model offers low volumes and an uncomplicated service and operational efficiency, when a firm’s volumes increase it could be beneficial to move to a more sophisticated service.
Firms should make a decision based both on where markets are now an on where they are going to be, noting that “the markets are all moving at a different pace”.
Smith concluded: “The answer is different from one organisation to another.”
He added that firms looking for liquidity and better processes will have different theories and strategies.
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