Well, good afternoon and welcome to this view from the top session. I'm John Watkins, the publisher of Global Custodian, and I'm delighted to be sitting here alongside Ron O'Hanley, chairman and CEO of State Street for a wide-ranging conversation on AI, digital finance, and some questions that I'm very excited to ask. So, Ron, great to have you here today.
John, it's good to be here and it's good to be at Sibos in the US in Miami. What's not to like?
Exactly. And because as most people here will know, State has a large presence across investment services, markets and financing and investment management. The organization looks after close to 58 trillion dollars in assets under custody and administration which is really quite a meaningful share of the world's investable wealth running through one firm. So Ron a pretty good vantage point to discuss the main topic of the conference this year digital finance for AI-driven economies. From your perspective what does that mean in practical terms for asset managers and the firms that service them?
Well, John, it's an interesting time in the history of our industry because there's these two really very fundamental technology changes that are happening more or less at the same time. This idea of AI which I know we're going to talk about more and how you think about the application of it but also the digitalization of finance which has gone from being almost a science project kind of discussion to real applications. So I think what the industry is facing is how do we deploy this technology, how do we protect ourselves from this technology both there's the whole cyber element to it but it's also how do we as established players protect ourselves from the disruptors how do the disruptors kind of protect themselves from the incumbents and then finally how do we think about it in a way that's going to add real value to our clients going forward. So all of that makes this a particularly opportune time to be having this discussion.
Yeah. And talking about the clients needs there. How does State Street itself evolve your capabilities to meet those needs?
Yeah. So the I mean if you described who we are I mean we're a we focus on the global investor and we either manage money for that investor or we provide services for that investor and those could be you know kind of fundamental custodial kinds of services front office kind of trade order management systems pre-trade post trade and then of course anything that's required carried around that whether it's deposit taking whether it's liquidity management liquidity provision foreign exchange etc. So for us it's recognizing that the pace of financial transactions is accelerating that's going to have real implications both for asset managers and asset owners. Second that it's not going to be at one speed. And this is actually a really important issue for the industry because for certainly all of my career it's been about how do we collapse times? We go from, you know, long settlement periods to shorter settlement periods. Everybody's now kind of quite excited about the prospect of atomic settlement and instantaneous settlement. It's probably not going to get to that. It's probably going to get to something that settlement as necessary. And what does that actually mean? And why do I say that? Because there's actually new risks. I mean, the idea of instantaneous settlement or shorter and shorter settlement periods was to take risk out. You're actually putting risk in the shorter and shorter you get. If you think about liquidity, you're potentially even putting inefficiencies in if you take away the ability to net things. So from us, it's thinking this through and coming up with the right solutions for our clients, ones that make sense for them in their particular situation.
So it's balancing that risk and excitement slightly and not to get too carried away with it. Should we talk about AI?
Where do you see it having the greatest impact? We're talking about operational efficiency, client engagement, and of course product innovation as well.
Well, it depends. If you were talking to the technology providers, they'll say the greatest impact is, you know, whether it's Nvidia or the hyperscalers, the greatest impact or all the capabilities that we're making available to you. Personally, I think that the real value notwithstanding all the value that's been created already will be in those that actually apply it well. And I think that if you think about most of the participants here and the industry and the sub-industries that we're involved in the promise of AI is true operating model transformation. Now that is a very overused term that many of us have been using for 20 years. But if you think about what this enables in terms of end-to-end transformation of actually questioning the way and being able to question the way that we've done things for years and say we're not going to do it that way anymore. We're not going to think about the corporate actions function if you will being sat over in the corner. It'll be part of a continuous flow for example. So for us, we think about it as true end-to-end transformation with an important caveat that end-to-end doesn't end at our walls, right? It goes through our walls to our end-user client and through our other walls to our providers and our partners. I think you'll see very big changes in the ecosystem in terms of how all this works. Maybe providers that had a role will need to take on a different role or their role can be collapsed into what others do. I think as we go through this ourselves, many of the functions that were built out and the departments and everything we found actually really don't need to be there any longer. And I'm not talking about necessarily the elimination of people, but I'm talking about the elimination of steps that used to be there because they can now be collapsed and put into one. For the industry product innovation is actually what's most interesting particularly for asset managers. Their ability to prototype and test products see how they work, kill the ones that aren't working and move on will be able to occur at a very very high pace.
Yeah. Have you seen anything like this before come along and just be so potentially transformational so quickly as well?
I mean it's not just me. The others will point to the your most recent analogy would have been the advent of the internet. Remember what happened there though. You go to the late 90s the internet was going to change everything. And it didn't and we had some difficult times in 99 through 2001 and then it did. And I'm not saying that we're going that's going to happen again. But oftentimes the technology and the hype gets ahead of the actual use cases. But I think what you're finding here amongst most serious players whether they're an incumbent or a disruptor is that they're actually thinking through the use cases and thinking through the end to end. So I'm actually quite optimistic about the technology. I also think though that where it will be most effective is when the whole ecosystem comes together on this and that will be challenging right because ecosystem is a polite way to describe it. I mean there's also competitors in here and there's competitors with profit motives and or there's competitors that want to see we've got you know we've got X amount of TAM and we'd like to get X plus amount of TAM. So we'll see how all that works out but I think the promise this is very very high.
Yeah this is a fairly good sector for collaborating and working together on the whole though. Yeah. So obviously we're also seeing frontier AI challenging the cyber security landscape and I'm interested what will it take for institutions to protect clients strengthen controls and preserve trust while also continuing to innovate at the same time because let's face it clients want protection but they also don't want the innovation side to slow down.
So the frontier models have absolutely changed the game on cyber and I would liken it to when I first learned and got the briefing on what these models could do. This was when we were about to start Project Glasswing with the US Treasury. I walked out of that meeting and said we've been fearing the quantum moment and this is the quantum moment in terms of the capabilities. So I can't overstate enough how serious the problems are that it's creating. And so it's caused all of us to actually have to put a lot more money into this, but more importantly to change the way we go about it. It's collapsed time and the time between when some kind of vulnerability can be exploited or when it's discovered and when it's exploited is actually collapsing here. That's the bad news. The good news is I think that we're all learning now to move at a much faster pace. From the kind of the screening, the detection, the remediation, and the patching that could have been weeks or months in the past, and now it's being collapsed down to hours, maybe days, but usually closer to hours. Number one. Number two, I think we're all learning now how to use the same tools to actually accelerate the remediation. And once you pick that up, you're also learning new skills. So what we found and others will have found this too, there's a massive number of applications that you discovered that you don't actually need any longer in your estate. Some of them may be your own applications that you built in years ago. Some of them may be a vendor application that gee when we do all this, we do this remediation, we really don't need that. That's goodness. I mean, if you're that vendor, you're maybe not happy. But the point being is that you're simplifying the estate, hardening the estate, and doing it at a very fast rate. You're also giving a new lease on life to maybe old software that works well but it might not have, for example, that modernized front-end digital user interface. Everything else works well. Usually in the past, those things were impossible, right? You throw it out, you found something new. I think we're finding now again with these tools and the productivity that it enables that we're able to look at those and say yeah we can overhaul that and bring that into the 21st century. So it has changed the way we think about things. It's also we're finding at the same time more productivity in how we think about our systems developers and I can say we have significant double-digit increase in productivity amongst our development teams. We're not laying off any developers. What we're doing is if our capacity used to be this, now it's this in terms of the things that we can do. So, I'm actually confident that we can do what I know our clients want, what you just articulated. We've got to protect the estate. We've got to do our part to protect the ecosystem and we've got to serve our clients well with real innovation.
That must be refreshing and pleasing for those clients to see that transformation can be sped up now through these new technologies.
Yeah. Now the realities are that many of these clients themselves are facing their own remediation. So part of what we're focused on now is sharing what we can in terms of harnesses and things like that to enable them to accelerate their journey. And I think that's what you're going to have to find in the ecosystem overall is that we really need to enable more sharing on these things. It doesn't help anybody in the ecosystem if it fails as a result of some kind of vulnerability here. So how we think about that what are the mechanisms to do that whether it's kind of industry forums I mean Glasswing is an interesting model for what we might want to think about but what we know what we've learned already about Glasswing is one it's got to go beyond the financial institutions it's got to go from the vendors to the financial institutions to the actual end-user client and two our network doesn't stop at the border Right. It's got to be international, but it's a useful model for how to think about this going forward.
