Why beat ’em when you can join’ em.
That philosophy seems to have been a big driver of State Street’s $ 3.5 billion deal to buy Brown Brothers Harriman’s investor-services business.
The tech team at State Street had quietly been trying to figure out how to develop an “Infomediary killer” – or a software package that could outdo the Brown Brothers Harriman unit’s data-integration engine, according to State Street officials.
Instead, the Boston trust bank will get the chance to integrate Brown Brothers’ Infomediary software with its own technology to facilitate custody, accounting, fund administration and other services for institutional clients.
The technology aspects of the merger are critical to State Street’s goals of making its platform work with competing custodians’ systems that its clients also use, hiring top tech talent and expanding overseas.
Brown Brothers Harriman’s Infomediary technology “is going to really propel” State Street’s asset servicing platform, according to Lou Maiuri, chief operating officer of State Street.
The core technology State Street offers its clients is an asset-servicing platform called Alpha. It’s based on software the bank gained through its 2018 acquisition of Charles River Development for $ 2.6 billion. It’s a front-office solution used by portfolio managers, investment analysts and chief investment officers. Competing systems include Bloomberg Buy-Side Solutions and BlackRock’s Aladdin.
When State Street bought Charles River, it began merging Charles River’s software with its own systems. But there are still many third-party platforms clients use, and with which Alpha would need to connect to be the universal solution State Street would like it to be.
State Street is not alone. A holy grail for all trust and custody banks, including Bank of New York Mellon, Northern Trust and others, is data integration, said Robert Wildhack, payments and financial technology analyst at Autonomous Research.
“They’ll say ‘integration’ 50 times on conference calls, and ‘front-to-back’ is the buzzword,” he said.
State Street’s clients, such as asset managers and pension funds, typically work with several trust and custodian banks with different systems.
“It’s rare to have them integrated to the point where they talk to each other,” Wildhack said. “One system might book a trade in the back office and there will be a lengthy, manual process before that shows up in the investment team’s book of record.”
When asset managers first began using software for their trades, “the industry didn’t have a handbook on what tech to use, the platform to use or how to do it,” said Lou Maiuri, chief operating officer of State Street. “People created their environments in the last 30 years based on where they’re located, what asset classes they traffic in. And so they created this complexity. ”
Customers have to deal with multiple custodians and their trading, compliance, collateral and risk systems, Maiuri said.
“That connectivity and gluing everything together from the buy side and the sell side is hugely complex,” he said. “Every technology is different. The data is different. But that data needs to move in real time. “
This is where the Infomediary software should be useful. It’s a set of data-connectivity tools. “Infomediary insulates you from the distractions of multiplying data sources, new data formats, counterparty changes and SWIFT compliance,” Brown Brothers states on its website. “We also facilitate [application programming interface]-enabled data transmission across your operating model. “
Infomediary has an architecture and a methodology that can combine and connect to different custodians’ endpoints, Maiuri said.
The Infomediary technology “is going to really propel Alpha,” he said.
Wildhack said he’s heard positive things about Infomediary. “It’s a well-received and well-regarded product among investment managers,” he said. “The goal of Infomediary is very much in line with what State Street’s Alpha is doing. The idea is to have all this data and all of these trades and investment decisions much more integrated than they have been in the past. “
Other plusses to State Street’s acquisition of BBH Investor Services include Brown Brothers’ “people that are long tenured, that understand the nuances, that understand customer needs, that have experience in solving customer needs through technology and innovation,” Maiuri said.
And the merger will help State Street broaden its geographic reach. Brown Brothers has a much bigger presence than State Street in key markets like Japan.
“This will jump-start State Street’s efforts to expand in international regions” in Africa, Europe, Latin America and elsewhere, Wildhack said.
Maiuri also gave the Brown Brothers unit props for its “client service ethos and the excellence that Brown Brothers brought to the table, which we know from competing with these guys. Their service excellence was the bar and we were chasing it. “
Seán Páircéir, head of Brown Brothers Harriman Investor Services, said both firms have been problem-solvers for the industry.
“We’ve spent a lot of time thinking about applied innovation, incremental innovation, and how you would apply technology to solve problems,” said Páircéir, who will be joining State Street.
“We’ve spent a lot of time and effort looking at very particular, narrow problems that are in the industry, and Infomediary was the solution,” he said. “This is an industry ruled by the gods of small things, and you need to be able to pay attention to them. That allows you to scale your business effectively. “
For instance, if a firm makes a mistake, recognizing that mistake, prioritizing it and correcting it is critical, Páircéir said.
“The correction of mistakes is the credibility that you establish in this world where fiduciaries are depending on others for the management of risks,” he said. “The trust banking industry is called that for a reason. And because there’s a contractual exchange of risk, to deploy technology and deploy expertise in a way that understands both the operational and the regulatory needs of that customer base, I think is a very compelling offer. “
He said State Street has built a “formidable” scale. “But there are also other problems sets that we’ve been able to solve for which give us differentiation and competitive advantage. This combination … becomes a very attractive proposition to present to our clients.”
By problem sets, Páircéir was referring to things like the need to comply with European regulations or integrate environmental, social and governance data-mapping into a platform.
That ability to translate unstructured data and plug it into a system properly is a key feature of Infomediary that will be an “absolute accelerant to bringing more capabilities to the market” for State Street’s Alpha, Maiuri said.
State Street also expects the technology side of this merger will result in $ 260 million in cost savings. This will involve the choice of one firm’s platform or the other’s for certain functions. For instance, the combined unit will probably use State Street’s fund accounting platform and discard Brown Brothers’ version.