In recent years, the investment banking industry has seen a flurry of regulations seeking better control over securities depositories. Investment banks and broker-dealers are seeing their margins erode as they see themselves becoming either large volume players or niche players in select products and markets. Also, on top of investing heavily in optimizing back office operations, investment banks are being forced to invest in front office systems to differentiate themselves from the rapidly commoditizing securities processing services.
Regardless, securities processing is a capital intensive venture requiring significant IT investments with a robust platform and a large flow of trades to keep the cost-per-trade at sustainable levels. Multi-tenant utilities hence emerge as a viable business model to distribute the capital investments over several tenants and ensure a sustainable trade volume to achieve economies of scale.
Multi-tenant utility platforms are not new as a business model. Already, several players offer services such as mid-office and back-office processing, clearing solutions for sell-side brokers, and clearing and settlement services. In addition, an emerging trend is for large banks to offer their own platform services for securities processing, which enhances their own risk of building efficiencies on cost-per-trade metrics over multiple tenants.
A few prevalent utility models that exist are:
- Internal shared services centers of a bank
- Software as a service: A hosted platform – shared by banks and tenants with operations processed in-house
- Platform as a Service (PaaS): Common IT platform and outsourced operations
- Business Process as a Service (BPaaS): Shared IT platform and shared processes for non-proprietary functions
The prevalent model of engagement is to start with an internal utility which is a shared platform for different lines of business within the bank (e.g. Equities and Fixed Income) before approaching external tenants. It’s easier to build utilities for the most liquid markets e.g. the US using standard products such as cash equities.
Needless to say, embarking on a venture to build a platform offering for securities processing is a complex task. And it’s absolutely essential to choose the right service model and partners. Potential utility partners should be kept in mind before embarking on offering a utility service, since in the presence of large banks with their own utility offerings the landscape is already quite competitive.
What are your thoughts around offering your bank’s internal utilities as a service?