Suddenly, it is exciting times for Transfer Agencies (TAs) as this historically vendor-change-resistant, deadline and accuracy driven space is shifting for asset managers. Increasingly, we are seeing nimble vendors and disruptors entering the market with cloud-native solutions, managed-services and BPaaS (Business Process as a Service) offerings that are threatening the dominance that legacy players have enjoyed until now.

A transfer agent, or transfer agency, is a company, bank or institution assigned to maintain investor’s financial records and each investor’s account balance. The transfer agent records each transaction cancels and issues certificates, processes investor mailings, and deals with all investor issues, including reissuing lost or stolen certificates. They ensure investors receive interest and dividend payments as well as monthly statements. Transfer agency is sometimes seen as a critical investment record-keeping function bundled with custody services.

One United States transfer agency solution provider we spoke with recently mentioned being “inundated” by the number of RFPs they are seeing across financial services firms, observing that there have been more than a dozen significant vendor changes in the past few years, where previously there would have been one or two a year over the past few decades.

Operational teams continue to chase fund cut-off timelines; in EMEA, some work close to 24 hours per day and have limited time to invest in longer-term plans that may not yield results in business process efficiency and reduction of manual workarounds for your asset classes.

What’s behind the change?

Until recently, there has been little to differentiate between the various transfer agency vendor solutions and support models. As a result, there has rarely been a good enough business case to justify the time, cost and headache to change for only a marginally better solution. That is changing due to limited longer-term investment in the last five years. In recent years the existing vendors have been focused on the existing customer and regulatory change demand with little investment in future solutions and architecture to drive technological advancements. Mostly these legacy vendors are still using technology that is 15-20 years old with little investment in cloud and cloud-native solutions. This means we see stagnant roadmaps with little consideration for SaaS and cloud.

In previous years most large, registered transfer agents have invested in company websites for front-end investor portals and agent portal capabilities for clients; however, with only targeted investment, core processing engines are very old (20+ years) and have little investment.

As these back-end solutions near end of life, and both the technology and people supporting this technology are reaching retirement, we see the following happening in the coming years.

What are the transfer agency market trends?

In Europe, across Elgin White’s transfer agency valuation and target operating model projects, we are noticing:

• With a significant increase in BPaaS offerings, smaller newcomers are forcing more prominent established vendors to discount their offerings to maintain market share and delay client’s decisions to invest in upgrades and the future.
• Around 44% of key vendors we have spoken to are now offering BPaaS models, where the software is part of the offering. This moves the transfer agency market closer to the pay-per-use models’ cloud providers offer.
• It is better for transfer agency vendors to offer both BPaaS and (real) SaaS options as standard in their new product sales pitches to provide options for clients.
• SaaS solutions are continuing to mature, which will help transfer agents to build competitive advantage when leveraging these solutions. Around one in five solution providers are walking the talk with a SaaS/cloud-native offering that will transform fund administration capabilities.
• SaaS selection is more complex now and out-of-the-box compliance standards like ISO and SOC certifications help accelerate selection. Vendors are starting to offer these as standard; however, levels are still maturing. For example, ISO27017 covers Cloud Security controls and ISO270018 covers Personal Information and Personally Identifiable Information (PII) data, and these will be critical for transfer agents to protect this type of data in the cloud. Most vendors have not even started to think about the compliance of these ISOs, and this means more due diligence and complexity when selecting the right transfer agency solution provider.
• Larger banks do not want the hassle of multiple cloud models (mix of IaaS, PaaS and SaaS), due to the high degree of risk this poses to them in terms of regulation and accountability. They have become more cloud-biased, procuring SaaS first before looking at BPaaS options. The SaaS approach gets them closer to BPaaS but will likely depend on the business circumstances, and current operating models offered to clients.
• Understandably if service providers do not take this cloud-biased approach, they end up in the same position as today, maintaining large sets of applications and infrastructure to run their business. This creates challenges in terms of cost as it is harder to determine the true cost of a transaction as one needs to include the costs of the underlying systems and people to work this out. Transfer agency is generally offered to clients at close to cost price rather than seen as a profit center, making the cost even more important. Profits are generally made from services like Custody with which the Transfer Agency is bundled. Regulation keeps driving more transparency on these costs for investors leading to internal and external cost challenges.

Big drivers are advancements in digital and cloud-native solutions, as well as the desire for investment managers to offload “commodity-like” functions to a quality partner who understands the needs of their investors. Add in cost pressures and expensive and time-consuming manual processes, including data reconciliation (despite an industry with approximately 90% straight-through processing rates in regions like North America), and stressful exception processing remains the norm.

This is good news for the Funds environment, which is often fluid, with Investment Managers trying to maximize advantages in regulatory change while managing the impact of these changes. As a result, Investment Managers expect their transfer agency provider to be agile and adapt quickly using digital technologies to the change required to support their investor base – sometimes with little lead time. The registered transfer agent needs the same level of agility and adaptability as their transfer agency vendors. Using cloud-native solutions provides that springboard to accelerate the process and drive better agility and speed.

Like-for-like platform changes are getting little to no traction. This is creating a challenge for more prominent long-established transfer agency vendors who have become complacent or support large and complex legacy transfer agency registers on end-of-life technologies that are expensive and time-consuming to transform. The focus for these platforms is generally on patching the hardware, leaving the software as-is. This creates manual workaround processes around the side of the core platforms, leading to higher fund operations running costs, which in turn increases fees and charges.

What should asset managers consider?

To see real change, we need to evaluate the investment approach as a whole across fund managers and fund domiciles, have a gradual transformation process over time and move away from tactical investment focused primarily on keeping the lights on. Consolidation and replacement will remove the stress out of day-to-day transfer agency operations by picking solutions that work for the users rather than users having to work in a way that fits the system.

Key drivers for change

1. Cost. Total revenue and cost transparency are key, and the era of hiding fees is long gone. Regulatory agencies are driving regulation focused on transparency of the underlying cost that must be published and publicly available in the fund prospectus, annual reports, and financial statements. As the market demands lower costs and better returns, and dividend payments on mutual funds, we will start seeing the switch from manual processing, and people cost to digital processing investment for asset management. This will play a vital role for transfer agents creating a longer, more sustainable investment plan and looking for new cloud-native vendors that are more agile and can provide greater transparency.
2. Technology. End-of-life technology and tech people retiring continue to drive a high-risk profile in this area. Some core systems have been around for more than 20+ years, and finding people interested in learning legacy languages and technologies is difficult. There are four major transfer agency technology providers still using platforms that have limited risk mitigation plans around end-of-life technology and people. For these financial institutions, you can’t kick that can down the road for long before losing your competitive edge in providing transfer agent services. This will create an opportunity for disruption in the short term as these providers look for ways to unpick the complex technology landscape and complexity in the transfer agency service models offered to Investment Managers to improve asset management and record keeping.
3. Pay-per-use models. The emergence of SaaS and BPaaS models creates options for selection and outsourcing. However, these need to be carefully reviewed before jumping ship. This will lead to greater competition in the long term, but transfer agencies will need to pick vendors that have a long-term cloud-centric plan in place and partner early to maximize results. In doing so, they can start switching services out to the pay-per-use model, drive cost transparency, and look for opportunities to reduce costs. There are already good examples of this in Anti Money Laundering (AML) and Know Your Client (KYC). The portability of services will lead to plug-and-play options emerging that will be more aligned with the Cloud/SaaS approach.
4. Innovative Technology. Only now are we seeing some vendors introducing Innovative technologies around artificial intelligence (AI) and machine learning (ML), including some virtual assistance in the transfer agency space, but this is still not the norm and will allow for growth in the market. The aim here would be to optimize the distribution channels and servicing costs by introducing these technologies. We would also predict that regulatory agency work can become more proactive by using these technologies.

Based on Elgin White’s findings we have developed a range of accelerators to help you transition to these new services and models, including rating cloud suitability.

Further insights for asset managers (available on request)

• Cloud Heat Map for Transfer Agency Solutions
• Transfer Agency Technology: Reference Business Models to Aid Vendor Selection
• Transfer Agency Cloud Integration Considerations
• SaaS Compliance for Transfer Agency Solutions

To access these insights, get more information on how Elgin White is working with Transfer Agency clients, or to connect with our consultants, please contact us.

By Stanley Drasky

Contributors: Johnny Smit, Lorraine Dunbar, Lou Quattrucci