Securities lending: who is it good for?

Has anyone ever stopped to ask who securities lending is built for?

It’s not a rhetorical question. In fact, it cuts to the heart of how we design and deliver services in our industry.

The knee-jerk reaction is that it is designed for lenders, borrowers and beneficial owners. But actions speak louder than words. If you look at the industry today, it’s been built for the benefit of global banks and large financial institutions.

If you opt in to a custodial lending programme, your experience will be dictated by the custodian’s processes, risk management and IT requirements. Securities lending languishes as a middle or back-office process, impenetrable for those who are supposed to benefit from the service. Everything is focused on optimising legacy processes and trying to squeeze a few more years out of ageing technology. Scalability and overall service quality don’t even feature.

Need proof? Try changing your lending terms. You’ll have to make changes to your SLAA, collect a round of confirmatory signatures and then get the custodian’s IT team involved to input the new terms into the system.

The net result: asset owners are side-lined by design.

It’s easy to point the finger here at the underlying technology. But technology alone isn’t the issue. What’s been missing in the securities lending industry is a lack of user-centric design.

Truly user-centric securities lending starts with a simple idea: every owner of listed securities has the right to participate in our industry.

From there, it’s just a matter of finding a solution that is appropriate for every type of user – the personas that underpin our product design decisions.

In 2020, this shouldn’t be controversial. It’s one of the hallmarks of successful fintech firms that they have put user experience at the centre of their product design. B2C firms like TransferWise aren’t successful because of their technology. Their success comes from solving real customer problems (like sending money abroad without excessive fees). Subsequent design decisions are the result of that mindset.

Shifting to this user-centric approach will have huge ramifications for the way we design and build securities lending solutions. It’s the only way to address the issues that have held our industry back from its true potential.

Give the people what they need

To give you a sense of how we can bring the user into securities lending product design, I’ll give an overview of our approach at Sharegain. We set out to design a solution that addresses the problems of the largest possible pool of users. For example:

You’re a portfolio manager at an asset management firm, so you need transparency and control over your lending activity, as well as access to lending data that can guide your investment decisions.

You’re the operations manager responsible for a securities lending programme at a custodian, so you need visibility and oversight of all your lending activity, in one place, in order to better service your custodial clients.

You’re a retail investor with an online broker or wealth manager, so you need a seamless onboarding process, transparency and flexibility on which assets you choose to lend out.

You’re a trader on the securities lending desk at a prime brokerage, so you need liquidity, advanced filtering, seamless execution and access to data that can uncover new trading opportunities.

Designing a system around these needs, rather than simply automating legacy processes, hasn’t been easy. It’s taken us a lot of effort and thinking to get it right, but we’re seeing the results.

We chose this road because no amount of tinkering with the old way of doing things can ever truly address these user problems. We need to make a step-change in our approach. But when we get that right, we’ll be well on the way to transforming our industry.

User experience is just the beginning

Putting the user at the centre of our service design is the pointy end of a very big wedge: the democratisation of securities lending. Getting the user experience right for individuals will transform the entire securities lending ecosystem. It’s a big story, bigger than one article. If you want to know what I think that transformation will look like, then look out for my next article.

 

Amnon Cohen is Head of Product at Sharegain. This article originally appeared on his LinkedIn.