A Sunset Unlike All Others — Charlie Scharf, CEO BNY Mellon

The Industrialist’s Dilemma — March 14, 2019

This post first appeared on March 24, 2019 in The Industrialist’s Dilemma.

What a difference four years can make. As our study of The Industrialist’s Dilemma completed this academic quarter, we’ve watched as the course’s narrative has changed from one where upstarts were attacking and taking commanding positions while pushing incumbents to the defensive, to one where the slower-changing nature of some markets has bought time for the industrial giants to react and get more aggressive in their transformations. While not all of the incumbents we have studied will make successful transitions to a new world which blends digital and physical products and solutions, we have gained renewed appreciation for the efforts and recent successes of some of those whom we’ve studied — especially this year.

And then there is BNY Mellon — a company unlike anything we’ve seen in any of our prior classroom sessions.

Sure, we previously had the bank’s CEO, Charlie Scharf, as a guest in a prior session, but that was when he was running Visa. In that role he was leading the transformation of a once slow-moving, closed-technology company to one that was learning to behave more openly and to partner with companies while incorporating innovative technologies and modern architectures. But, at BNY Mellon, Scharf is now running a custodial bank with a history dating back to its founding by Alexander Hamilton in 1784, and one which has a legacy set of systems that they are working to simplify, fortify and replace with newer technologies.

Yet, Scharf told an optimistic story of innovation based on a plan of execution on low-hanging fruit while simultaneously investing in the long-run of the future.

When Opportunities Abound in the Core

It has become axiomatic that the leaders of the industrial incumbents in our course have all stressed the importance of executing on their core businesses to keep existing customers happy. But in the case of BNY Mellon, which holds over $33 trillion in investable assets on behalf of their customers, mistakes in the core business can impact not only BNY Mellon and its customers, but potentially global financial markets as well. And while the company still receives over 20,000 faxes a day and has legacy IT systems that are decades old, Scharf painted a picture of abundant opportunities where investing in the existing business will yield efficiencies not only for BNY Mellon, but perhaps more importantly, also for the bank’s customers. Having recently hired its first Chief Digital Officer, the bank and Scharf have embarked on transforming the company at its most basic levels, and are doing so in a company that generates excess capital and currently has profit margins (34% in 2018) that would be the envy of many high technology corporations.

Scharf has pushed back on telling Wall Street a growth story in the near-term as he sees a plethora of opportunities in the current business for fundamental improvements which will lead to growth in the mid- and long-term. In fact, Scharf spent a fair amount of time in our class talking about the importance of valuing the existing culture and personnel of BNY Mellon, and of bringing his team along for the transformational journey by focusing on “the why” of many of the changes he is driving. And for Scharf, “the why” repeatedly came back to customers.

Customers Don’t Want to Do BNY’s Job

BNY Mellon performs functions that its clients do not want to do themselves, or cannot execute as effectively or efficiently on their own. Sure, the company has competitors who range from other custodial banks to the potential of existing full-service banks that may attempt to move onto BNY Mellon’s turf as they seek growth and additional profit margins. But given its role in servicing and managing assets for may of the world’s most sophisticated players, BNY Mellon has the ability to work with them as it invests in and designs technological improvements, which should lead to better solutions and improved financial performance for BNY Mellon’s clients.

Said differently, Scharf and the BNY Mellon leadership team have the ability to focus on investing in their customers’ outcomes, thus creating a deeper and more positive relationship over time. The challenge for the bank will be that the same dated systems which BNY Mellon is looking to upgrade will also require changes from others in its value chain. And, while these changes should benefit both BNY Mellon and their clients, the bigger challenge will not be resistance due to fear of BNY Mellon encroaching on their customers’ businesses, but rather others’ comfort with the status quo. However, as Scharf pointed out, many of the bank’s clients are under margin pressures on their businesses (e.g. compression of management fees), so BNY Mellon’s investments in operational efficiencies that reduce costs should help BNY Mellon’s clients with their own pressure points.

New Technologies + Time = The Incumbent’s Advantage

Having been embedded in Silicon Valley while he was running Visa, Scharf has a keen understanding of the power of new technologies when applied to existing markets. So, while many of BNY Mellon’s clients consistently reiterate the need for the bank to “keep doing what they do every single day and don’t get it wrong,” Scharf and the BNY Team are actively working on technologies such as blockchain while exploring how data on their over $33 trillion dollars in asset holdings can lead to business opportunities for both BNY Mellon and its customer base.

As long as the bank continues to execute on its core business, and as it continues to make operational improvements, BNY Mellon has the chance to invest in newer generation capabilities and software that could be a virtual treasure trove of new opportunities. In this instance, the relatively slower-moving nature of the company’s business is enabling BNY Mellon to simultaneously take advantage of its unique data assets and market position, and do so in a way that no new entrant could do regardless the nature of a new technological breakthrough.

In some ways, BNY Mellon was the perfect end to a quarter of guests that showed us huge changes in big retail (The Home Depot, Instacart and Best Buy), evolving dynamics in telecommunications and media (AT&T), and new opportunities in financial services (Robinhood and Tulco), healthcare (23andMe) and consulting/IT services (Accenture).

As BNY Mellon demonstrated, even big, staid custodial banks are being disrupted by The Industrialist’s Dilemma, but with the proper strategies and actions, they have a chance to survive and thrive for the future — maybe even for another 235 years.