4 Ways Technology is Changing How Global Custody Really Works

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A strange thing is happening in finance: while new technology makes it nearly free to handle one more transaction, banks need to spend billions just to get started. If you work in or around financial markets, you've probably felt this tension. Even if you don't, it affects how your retirement savings are managed and how your investments are protected.

Think about Uber. They made it cheap and easy to connect riders with drivers. Their technology means serving one more customer costs almost nothing. Netflix works the same way - one more person streaming hardly costs them anything. So why aren't we seeing similar revolutionary changes in how banks handle investments? The answer tells us something fascinating about how modern financial markets actually work - and why some changes that seem obvious just aren't that simple.

I'll show you why the future of finance isn't just about cool new tech - it's about who can turn heavy regulation from a headache into an advantage. And this matters whether you're a banker, an investor, or just someone trying to understand where financial markets are heading.

The Big Banking Puzzle

Starting a new bank today is like building a spacecraft. Your day-to-day running costs might be tiny, but first you need to spend years and millions on safety systems, legal requirements, and connecting to ancient but essential financial networks.

It's like wanting to build a modern hotel but first having to construct your own power plant. Sure, once it's running, adding one more guest is cheap. But the initial investment is enormous. This creates a fascinating problem: the same technology that makes it cheap to serve customers also raises the bar for getting started.

Let's put this in perspective. A modern global custodian (these are the banks that keep your investments safe and handle all the behind-the-scenes work) needs:

• Compliance systems that cost hundreds of millions to build

• Connections to every major financial market in the world

• Teams of experts in every country they operate in

• Risk management systems that can handle trillions of dollars

• Insurance and capital reserves that would make your head spin

And all this before they earn their first dollar.

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Why Big Banks Aren't Always Winning

You might think this means the big banks have it made. But here's the twist: many of them are stuck with computer systems older than their youngest employees, spending most of their IT budget just keeping these aging systems running.

It's like trying to compete in Formula 1 while also maintaining a classic car collection. The old cars (legacy systems) need constant attention, expensive parts, and specialized mechanics. Meanwhile, your competitors are building brand new racecars from scratch.

The numbers are staggering. Major banks often spend 70-80% of their technology budgets just maintaining old systems. Imagine trying to innovate when most of your resources are tied up keeping the lights on. This creates what experts call "technical debt" - the cost of choosing quick fixes over proper solutions, which compounds over time like financial debt.

Four Big Shifts Happening Now

1. Size Really Matters

Being able to handle one more transaction for free is great, but first you need enough customers to cover your massive startup costs. It's "go big or go home" - there's no room for small players anymore.

This explains why we're seeing fewer, larger players in financial markets. But it's not just about being big. You need to be big AND efficient. Think of it like an airline - you need lots of passengers to pay for the plane, but you also need to run those flights efficiently to make any money.

For global custodians, this means trillions of dollars in assets under custody and trillions of dollars in payment, settlement and clearing volumes on their platforms are required to justify the investment in their complex operating models.

2. Old Tech Holds Banks Back

Big banks have the money and customers, but their old computer systems are like anchors holding them back. This creates opportunities for newcomers who can start fresh - if they can afford to. This also helps explain the rapid rise of digital assets.

Some banks are still running systems from the 1980s. Written in languages few programmers know today like COBOL. Running on hardware that's no longer manufactured. It's like trying to run a modern business on Windows 95 - possible, but painful.

3. Finding Your Sweet Spot

Instead of trying to do everything, successful companies are focusing on doing one thing really well. Some handle crypto assets, others focus on sustainable investing - but nobody's trying to do it all anymore.

This specialization is creating a new kind of financial ecosystem. Instead of a few giants doing everything, we're seeing networks of specialists working together. Each focuses on what they do best, while partnering for everything else.

4. Turning Rules into Advantages

Smart companies are turning banking regulations from a burden into a shield that protects them from competition. If you can automate all the complex rules, you've built yourself a moat.

The trick is turning compliance from a cost center into a competitive advantage. The best players aren't just following the rules - they're building technology that makes following the rules automatic and efficient.

Why This Matters to Everyone

This isn't just about banks. We're seeing the same pattern everywhere in finance: amazing new technology possibilities crashing into the brick wall of regulations and old systems.

It affects how your pension is managed, how your investments are protected, and ultimately, how much you pay for financial services. When banks spend billions on compliance and old systems, those costs eventually find their way to customers.

But it's not all bad news. This pressure is forcing innovation in unexpected ways. Banks are finding clever ways to modernize their old systems without replacing them entirely. New companies are building specialized services that work alongside traditional banks rather than trying to replace them.

The Future Taking Shape

What we're seeing is not a revolution but an evolution. The financial system is too important to disrupt completely, but too inefficient to leave unchanged. The changes are happening in stages:

1. First, banks automate their existing processes

2. Then, they modernize their core systems piece by piece

3. Finally, they can start offering truly new services

The most successful players are those who understand this isn't a technology race - it's a transformation marathon. There are enormous risks and compliance obligations to be managed, but a more efficient future is achievable.

Key Takeaways

• New tech makes each transaction nearly free - but only after you've spent billions getting started

• Following all the rules is expensive, but it protects you from competition once you're in

• Old computer systems are often a bigger problem than regulations

• You need lots of customers to cover your basic costs

• Winners will be those who can automate both their operations AND their rule-following

• Specialization and partnerships are replacing the "do everything" approach

• Change is happening gradually but fundamentally

The big question isn't whether technology will change the global custody industry - it's whether established banks can modernize before new companies can grow large enough to compete. The winners will be those who can master both new technology and complex regulations while keeping enough customers happy along the way.

What do you think will happen to the competitive landscape in the future? Who will win - the big banks or the challengers? Why? Reply to this email with your opinion.