When it is the number of virtually interchangeable third-party services specializing in helping financial firms meet their know-your customer and other regulatory requirements, acknowledge fund managers and even the providers themselves.
Of course, just how many should be left standing and who that should be is a difficult question given the similar marketing talk and relative infancy of the services offered by Thomson Reuters , Depository Trust & Clearing Corp, a joint venture between Markit and Genpact, and SWIFT. Thomson Reuters was first to market with its Accelus Org ID in March 2014 while DTCC says that its service is in pilot and live with five founding banks. It will be “generally available” in June 2015.
Competition might sound great. After all, it is supposed to promote innovation and fee reductions, But the higher the number of so-called KYC utilities, the higher the costs and administrative burdens may be for paid subscribers, the world’s largest banks and broker-dealers, and even for the asset management firms and corporations, which upload their profiles into the service. and don’t pay for access to the services.
“I think there should be only three utilities at most,” two compliance directors at different fund management shops tell FinOps Report. “Asset managers don’t want that many utilities,” echoes Yasmeen Jaffer, managing director for Markit/Genpact KYC services in London, who suggested two as the ideal figure. So did Arin Ray, a New York-based analyst with research firm Celent who moderated a recent webinar about the growing rivalry among the KYC utility providers.
All four KYC contenders claim they want to reduce customer onboarding and compliance costs, as well as potential errors which could lead to hefty regulatory fines. New tax evasion, anti-money laundering, trading or risk management regimes have caused different business lines in financial firms rely on their own applications, workflow procedures and different data elements to fulfill onboarding requirements. Add to that the growing number of buy-side firms and other customers, whose profiles they must continually refresh and there is little wonder that some of the world’s largest banks were so eager to create a better mousetrap.
Outsourcing the entire onboarding process reportedly could save 30 to 60 percent of the annual costs by eliminating redundant work in collecting, verifying and updating the customer data. Of course, it stands to reason that consistent rules and policies of a utility could also significantly reduce errors.
Among the foursome, SWIFT, the La Hulpe, Belgium-based network provider well-known for transmitting bank payments, appears to have a free pass. Only correspondent banks contribute their data to the SWIFT KYC Registry and so far SWIFT has not indicated a desire to penetrate other categories of users or subscribers. That leaves the field open to either DTCC’s Clarient Global LLC, Markit/Genpact and Thomson Reuters to become one of the potential remaining survivors. “Clarient, Markit/Genpact and Thomson Reuters are the most similar in providing the necessary data profiles on traditional asset managers, hedge fund managers and corporations who input the information to be used by the banks and broker-dealers,” says Ray.
Among those three players, the Clarient and the Markit/Genpact ventures have been the most vocal in announcing their backing from some of the world’s largest banks. The hype suggests there will ultimately be a dogfight between these two with Thomson Reuters taking a third-wheel role at best.
Fund managers who spoke with FinOps think that DTCC opted to leverage its business model as a US market-owned infrastructure to its competitive advantage and DTCC itself appears to validate that stance. “We agree that a single utility would be ideal to reduce overall industry costs, deliver greater efficiencies and improve overall client experience,” asserts Matthew Stauffer, chief executive officer for Clarient, the DTCC utility backed by six of the world’s largest banks with their asset management entourage. “We believe that Clarient is best placed to be this utility, with established industry ownership and industry governance.”
Anything is an Improvement
Fund managers say that whether they input their data profiles to Clarient, Markit/Genpact or Thomson Reuter’s service, they are still ahead of the game in gaining some operational efficiency. “At least, we don’t have to provide the data to multiple banks and broker-dealers separately with each having its own data formats and requirements for developing client profiles,” says the compliance manager for a US fund management shop.
What about banks who subscribe to the services? So far, there is no apparent overlap in subscribers between DTCC and Markit-Genpact’s services, but that may not last for long. “Banks might decide to align themselves with a particular utility, only to discover that their fund managers and corporations may want to input data to another. So they will have to subscribe to that one as well,’ says Ray.
Positioned in Clarient’s corner are BNY Mellon, Barclays, Credit Suisse, Goldman Sachs, JP Morgan and State Street. The Markit-Genpact service came to market in May 2014 with four development partners: Citibank, Deutsche Bank, HSBC and Morgan Stanley. Since then it has added BNP Paribas and UBS as publicly announced committed subscribers. Although Thomson Reuters says it worked with over 100 financial firms to launch its service, no banks have publicly disclosed their backing.
So just what will motivate the next set of banks to join a particular provider? New clients will gravitate to the utility which achieves a critical mass of users, predicts Ray. That critical mass won’t develop because of differences in fees or even data quality, but rather the scope and geographic reach of the utility. That translates into just which of the providers can address the most requirements beyond the simple basic KYC, and which can fulfill the regulatory and legal mandates of the largest number of countries.
Are there potential advantages in data management among the utilities? Clarient takes in trade-related client data and documentation from asset managers, standing settlement instructions from another DTCC unit — Omgeo’s Alert database — as well as legal entity identifiers from its LEI unit, co-run with SWIFT, and client reference data.”Clarient uniquely brings together a broad-cross section of data to ensure a smoother client experience with the ultimate goal of not just onboarding and compliance KYC requirements, but also the readiness to trade and the ability to settle transactions,” says Stauffer.
Markit /Genpact’s Jaffer says that Markit collects vetted data from public sources as well as the asset managers and corporations themselves to create detailed client profiles with more than 200 data fields each. Thomson Reuters, which markets its offering as a managed service rather than a utility, says it will leverage its established data resources, including World-Check which monitors 240 countries, over 400 sanction, watch and regulatory lists and 100,000 media sources to identify high risk individuals to produce a complete KYC profile and risk alerts.
Fund managers tell FinOps that they aren’t concerned about workflow management when it comes to inputting profiles into any of the utilities, but there could be differences in how quickly the data can ultimately be accessed by paid subscribers after contracts are signed. Given the multitude of data sources and similar publicly touted abilities to meet the requirements of the Dodd-Frank Wall Street Reform Act, EMIR, tax reporting rules and trade contract management, it is hard to come up with clear differentiators when it comes to compliance needs.
While it could not be officially confirmed just which player has signed up the most fund management firms, some European fund managers tell FinOps that they prefer to send their data profiles to the Markit-Genpact utility instead of DTCC’s because of its global reach. Now servicing the US, UK and Australia, Markit/Genpact says it will expand to Canada, Hong Kong, Singapore and Germany by year-end. Clarient did not provide FinOps with a list of the specific markets it services and could be viewed as being “too American-centric” by some European fund managers. DTCC would only say that clients of Clarient Entity Hub, as the service is called, “trade in all corners of the globe.”
If either DTCC, Markit-Genpact or even Thomson Reuters wins far more bank subscribers , does that automatically mean the others will shut down? Not necessarily, says Ray. They could end up being interoperable allowing fund managers to simply input their data into one utility and have that data transferred to others. However, Stauffer balks at such a suggestion. “Owners of the data see little value in interoperability at the utility level,” he says.”Instead, we see substantial value in integration with a number of software and service providers.” Those firms support onboarding, workflow management, data aggregation, compliance, screening and risk management.
Regardless of how the battle between the KYC utilities pans out, one thing is certain. The choice has given financial firms plenty to think about. “Compliance departments probably have the greatest say in which service is used, and we expect to see some deep investigation into comparative data quality, ease of use, and even potential cost savings,” one bank compliance manager tells FinOps.