Staid on the outside, innovative on the inside

Northern Trust is as traditional as a bank comes, but behind that stately façade, breakthrough innovations are being developed.

Marc Mallett, Northern Trust’s head of whole office strategy, tells us more about what the bank is doing on the leading edge of change.

A few takeaways from the conversation:

  • One area where Northern Trust sees deep opportunities is in crypto/digital assets and they’re moving in that space.
  • While crypto may be taking a beating now, the bank expects digital assets to be an enduring part of the financial landscape.
  • Another area ripe for innovation involves helping smaller asset managers overcome their scale-based challenges.

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We’re talking innovation on this week’s podcast. Our guest is Marc Mallett, global head of whole office strategy at Northern Trust. Marc joins us to discuss where the innovative mindset fits in at his bank, as well as some aspects of the business where Northern Trust is at or near the leading edge of change. Marc, welcome – we’re happy to have you on the BAI Banking Strategies podcast.

Hey, Terry. Thank you very much. I’m excited to be here.

Marc, we’ll be focusing on the asset management space, given that that’s Northern Trust’s forte. To help frame the conversation that we’ll be having, tell us more about your role at Northern Trust.

I think of myself as a dot connector, a bridge builder, sort of a storyteller, I frame myself. And I think the focus of my role really is that dot connecting. So, we have a lot of great capabilities that on their own are valuable, but when we combine them in novel ways, we can create some incredibly powerful solutions for our clients. Some cases, we might identify gaps in our capabilities, and I work to identify opportunities to close those gaps. It could be through partnerships, strategic investments, it could be internal developments that we do. Sort of in a nutshell, my job is to understand our clients’ current challenges and opportunities and really how to best align our capabilities to support them.

So, when I think of Northern Trust, which is our across-the-street neighbor in the Chicago Loop, I think of it as being in that category of ultra-traditional banks. I know our chat is probably going to open my eyes a bit as we get more into it, but let’s begin with an overview of how Northern Trust thinks about innovation and what you are trying to achieve as innovators.

We’re really proud of our history and tradition as a 130-year-old Midwestern bank, but I also, think it’s important for folks to understand that we are a global financial institution. We’re operating in 20-plus countries across the world. In order to do that and do that well, you certainly have to be innovative. And I think about innovation in a couple of different ways. So, one, there’s just day to day. We refer to fellow employees as partners, and our partners are innovating on how to best do their jobs, perform whatever service or function that they’re performing, and they’re free to make changes to that to best deliver for their clients on a day-in and day-out basis. Then there’s more thoughtful, I would say, or more planned innovation, but we’re very careful to not make that too structured or too much rigor around the process because we think that sort of would stifle the very idea of innovation. But we really set, I would say, targets for areas that we want to explore or get into. I think today, it’s very top of mind, would be crypto and digital assets, so, we’ve just recently announced that we’ve established a new team focused on digital assets, looking at cryptocurrency, crypto custody. What should our role be in crypto and digital assets, and what investment do we need to make to get there? And then in other instances, our clients will help lead us down a path. It may be that they’re getting into new, more complicated asset classes and they need us to come along on that journey. And so, when I think about innovation, those different levels or layers of innovation, day to day, what do we need to do our jobs better? And then our clients’ challenges and opportunities to help them, over time a lot of those things come together. So, we are also mindful that these things can’t happen in isolation or in a vacuum, and ultimately we’ll need to bring them together.

Putting that innovative thinking to work while also being that solid, predictable partner that your client base wants is no doubt a balancing act. What are some examples of where Northern Trust has, say, been out front on new technology or on other types of innovation?

A couple of things come to mind. What most listeners probably don’t know is that Northern Trust was the first bank to bring blockchain technology to market, supporting the private equity business. So, we created what we refer to as a private-markets hub. This is a really good example of how we took this idea… We wanted to learn more about the blockchain. We didn’t just want to do that from an academic perspective or a theoretical perspective. We sought out a particular use case, something that really is a challenge for the market, and then we put a small team around it and said, “Now go see how we can leverage the blockchain to bring these market participants together in the private equity space,” which today is an incredibly analog, document-heavy process. We brought that to market a couple of years ago. We’re also one of the first providers to support and settle trades on a blockchain-based bond exchange in Singapore called BondEvalue, and last year through a partnership with Standard Chartered, we launched a crypto custodian, so, really focusing on developing an institutional-grade, crypto custodian for our large clients. And so, yes, we’re a 130-year-old Midwestern bank, but we also have gotten involved in some pretty leading-edge technologies, things that are net new to the industry, and I’m sure you’ll continue to see us do that.

You’ve mentioned crypto several times in this early conversation so far. Tell us, given all of the rollicking that we’re having in the crypto markets and kind of the first time that crypto is really being tested in a difficult market environment, how do you see crypto playing out? How is Northern Trust planning or envisioning the future of crypto?

We’re going through a particularly challenging drawdown and market cycle. This is something that’s happened over a short period of time. What I would say is that we’re focused on the long term and the expectation that crypto and digital assets are going to be a part of the financial markets for the foreseeable future. Despite the fact that these are challenging times for them, we don’t think that really is indicative of how the products are going to be used over the long term.

I know one of the other things you’ve been involved with is leveraging data science to help investors make better decisions. Data, of course, is a big topic across the various business lines in banking. So, maybe could you share a few details about your initiative as a setup for telling us what makes it innovative?

We’re thinking about data science and the impetus for this really was becoming a service provider or solution provider to the investment professionals within our clients’ organizations. You think about an asset manager, if there’s one thing that they have that nobody else has, it’s their own data. It’s the trades that they’ve made, it’s the positions that they hold, it’s their investment thesis that they might have on a particular stock or bond, and nobody else has that information. What we’re really focused on is, how do we help clients unlock the value of that data? What tools and capabilities can we put in their hands such that they can use that unique data set that they only have and then combine that with other data sets? What is the market telling them about a particular investment? How do we bring those things together? So, we’re looking for ways to use data science, use the capabilities, this idea of democratizing access to these capabilities. There are a lot of things that play in not only in the financial services industry, but, say, technology at large, like the continued growth of cloud computing. And really what that’s done is really enabled the sharing of data to be much less complicated, much less costly, sort of faster time to market. That’s how I would describe the why. We wanted to make this push into data science and how we think we can help our clients leverage that most valuable asset in their own data.

At the heart of innovation, Marc, is a lot of trial and a lot of error, right? And from that iterative sequence comes knowledge and comes insights. What have you learned from this venture into deep data science or into developing blockchain applications that you might be able to apply to future trailblazing projects in other areas of the business?

It’s been about two years now that we’ve been working on our data science capabilities. This is a completely new venture for the bank. So, not only did we bring new products and capabilities to market, but we were looking to engage completely new stakeholders. So, those front-office resources folks at the core of making investment decisions for our clients. It was a lot of new stuff all at once. So, I think a couple of things that come to mind in terms of lessons learned is one, it’s okay to be bold. We can put forward big new ideas and we shouldn’t assume that we’re going to be told no. Internally, my advice to folks out there that think they have a big new idea, don’t assume that you’re going to be told no because it seems radical or something. Push forward and, sure, you might get told no, but you’re never going to know that unless you ask the question. Another lesson is that you don’t need a huge team to be successful. You start with a small, committed team and you can accomplish some pretty big things. I look at what we’ve done in the data science space, and it’s very much that story. We don’t have hundreds of people running around pulling this all together, but what we have is a really committed team that believes in the mission and we’ve been able to be successful so far. And then I think really mission, making sure that everybody understands what the mission is. What is it that you’re trying to achieve with this? Because you’re going to have bumps along the way. It’s not going to be a straight shot from, “Okay, we have this great idea and now we’re automatically going to have this huge success and there’s not going to be any hurdles to jump over.” So, I think it’s important to really solidify the mission and the vision that you have, make sure the team understands that – not only the core team that’s working on it, but the broader team. At an organization like Northern Trust, we rely on a lot of other parts of the organization to bring these capabilities to life. It could be our legal teams, our compliance teams, making sure they understand what that mission is because they might not be involved on a day-to-day basis.

If Northern Trust is pretty much like every other business out there, in banking and outside banking, there are always more projects that seek funding or need funding than there are funds available, and that’s probably also the case within each business line. How does your bank prioritize the projects that it pursues?

We would love for the process to be really linear, in black and white, and all the decisions would be easy, but that’s certainly not the case. And you’re right, we have finite resources and we have to be very thoughtful about how we deploy those resources. A couple of things that we focus on. So, one is, where do we believe the industry is going? What are some of the big key trends in the industry? If you look over the last several years, trends have been certainly in a sense easy to watch, but the continued increasing allocation to alternative investments has been a trend now for quite some years. Well, just that simple trend has some pretty significant implications on how we work as a service provider and on the capabilities that our clients need in order to invest in that asset class well. We look at things like that and say, “Okay, if that trend is going to continue and we see the demands from our clients for capabilities related to alternative assets continue to increase, then that’s a way to prioritize that,” let’s say, over maybe a decreasing asset class. You think of those macro trends. If you think about in turbulent markets like we’re experiencing now, really important to understand what your exposures are, whether it’s on a geographic basis to a particular sector or industry, and that’s hard to do. So, we look at these trends and we try to forecast where we see them continuing to go, and based on that, then allocate our resources accordingly. Now we certainly have things where we have regulatory requirements that we have to meet on an ongoing basis and there’s constant regulatory change. We set aside a certain amount of our budget to deal with those. Then there’s the net new things and that’s where sort of that look ahead, the look forward to where we see the industry going drives a lot of what I would call our future build or future development.

Kind of a follow up to that, how much of your bank’s efforts to make things work faster, make them work easier, make them work better is for internal use, for your internal operations, and how much of it is directed toward the customer?

There’s a key strategy that we have… I can’t say that we’ve been able to put this in place in every instance, but one of the key things that we try to do is to develop solutions, platforms that are used both by our internal teams as well as our clients –that the platform that we might be using to perform certain services and functions on behalf of our clients are the very same solutions that they’re logging into to get information about that service. That provides a couple of really key benefits. So, one is transparency. The clients are literally looking at the very same tools and data that we’re looking at. So, it’s not this idea of having to reconcile, “Wait a minute, what’s the client version of this system showing versus what we’re showing?” And then it comes down to the value that we get for every dollar we spend on those systems. So, when we’re making an investment in a system that’s used by both our internal staff as well as the clients, in a sense it goes twice as far. We’re not having to create different versions of that platform for use of that data. It’s not something that we have in place across the board, but it’s certainly a key part of our strategy on a go-forward basis.

Given that innovation is happening across the financial industry and a lot of it is being driven by fintechs, and the fact that you can’t be working on everything all the time, how do you decide when to build versus when to buy versus when to partner?

There are a number of things that we take into consideration. The first is, is this particular capability we’ve identified, let’s say, a gap in our service offering or capabilities that we have, and if I think about a decision tree, we’re thinking, how strategic is this capability to the bank? If we believe this is core to our infrastructure and core to the services we provide to our clients, we’re likely to take a really hard look at build. Then we start to think about things like speed to market. So, if we’ve identified capabilities that already exist in the market, vendors with their fintechs that have a capability that’s there and potentially ready to use, that becomes a key consideration. And if there isn’t necessarily a fully built-out solution that’s already in the market, but there’s somebody out there, a potential partner, that has a very specific or specialized skill set that maybe we don’t possess at this time – it could be knowledge of a particular area. While we are incredibly well-staffed and have, I think, some of the best engineering talent in the industry, there’s still a finite pool of resources. And so, we start to take that sort of filtering down and think about a funnel, how important is it to us? How available are solutions in the market today? What skill sets are necessary to do it? As we sort of push those thoughts or these ideas down through that funnel, at the end we realize, “Okay, we’re either going to look to build or we’re going to buy, partner, invest,” depending upon how we’ve gone through that though process.

We talked a little bit earlier about the market turmoil that we’re experiencing right now. It’s the ugliest first half of the year for investors in the U.S. since 1970, and the second half isn’t off to such a great start, either. But oftentimes when there are sizable drawdowns like the one that we’re now experiencing, it creates opportunity for innovators. So, what opportunities do you see in the current market environment for innovation in asset management, which is an industry already dealing with a heap of other challenges, including fee compression and growing dominance by a few big players?

Something that is important to me, important to Northern Trust, is providing capabilities to our clients that they might not otherwise have access to themselves. And I think in cycles like we’re in now, the significant drawdown, we believe we’re in a really good position to help our clients through this by being a scale provider for them. I think about an interesting example from another industry where you look at online shopping and you have a retailer who knows the world’s changing around them, they need to get online, and obviously this has now happened to a large extent in that industry. But in order to compete, they’ve needed to potentially leverage the platform of a competitor. And they’ve had a really tough decision to make. Do they continue to invest in capabilities themselves to really create an online presence, or do they work with a competitor’s platform, which may not be the best long-term solution for them? And then you have an organization like Shopify come to market and say, “Look, we’re not going to compete with you, but we can really give you the capabilities and the scale that you need to compete at scale in sort of the online retail space.” And so, we think about ourselves very much in that same vein. We’re not looking to compete with our clients. We’re looking to provide them with scale capabilities. We have solutions today that are focused on things like outsourced trading or outsourced execution. So, rather than having to continue to rely on your own internal trading capability, you can outsource that to a scale provider. And, I think, a key idea from my perspective is scale shouldn’t always win. We have these large trillion-dollar-plus asset managers dominating the market. And it’s a real question, should scale necessarily lead to success? One of the key questions that we ask and that we’re looking to support our clients, why shouldn’t the best ideas win? And that’s really what we’re focused on, is we believe there are clients out there who may not be the largest asset manager or largest hedge fund, but they may have some of the most innovative and successful ideas. We want to help bring those ideas to market. We want to help them successfully execute their business strategy by providing them with the scale that they need. So, they may not have access to the resources to develop all of these capabilities that the larger players in the space have, but we believe we’re well-positioned to bring those capabilities to them. They can leverage them. Think of it much like I mentioned the Shopify example, you can also think about cloud computing. It wasn’t that long ago that if you really wanted to play as a technology firm, you had to invest massive amounts of money in your own data centers, your own infrastructure. Now you can rent that, and you can rent that at scale. And so, we’re very much looking to support the best ideas and hopefully help them win.

You make a good point – why shouldn’t the best ideas win? Along with consolidation, the industry is dealing with other issues, including fee compression. Innovative and cost-saving offerings exist – maybe they’ll get more traction as a result of this rough market. Marc Mallett, global head of whole office strategy at Northern Trust, thanks again for joining us on the BAI Banking Strategies podcast.

Thanks, Terry, I really enjoyed it and look forward to speaking to you again sometime soon.

Terry Badger, CFA, is the managing editor at BAI.