The Bank of New York Mellon Corporation (BNY) Earnings Call Transcript & Summary

Okay. Good afternoon. So we are back on the stage again. My next speaker here is BNY Mellon, and we're joined by CFO, Mike Santomassimo; and for the first time in a public forum, I've got Lester Owens, Bank of New York's Head of Operations. Lester joined the bank in February of 2019 from JPMorgan, where he had run wholesale banking operations. So yes, for those who understand where Mike came from, Mike and Lester worked together in prior lives and are back together again at BNY Mellon. So I'm going to run this as a fireside chat. I'm going to focus on Lester in the operations area first a little bit, and then, of course, we're going to put Mike in the hot seat here on the expenses that follow through from that, et cetera.

So why don't we start with a little bit of a lay of the land on the operations side. You manage almost half of the headcount at Bank of -- at BNY Mellon. So let's start with a discussion really just around your organization, and how you really measure and scope out that organization?

Well, we have obviously a number of different functions within the operating division. Just by background, my first 12 months here, there's a number of things that we did when we talk about scoping it out. I probably have gone to 70% of the operating centers, and I've seen well over 100 clients. And part of scoping it out is -- and my reputation is that if I'm in an operating center for 10 hours, I'm probably on the floor for about 8. And I do that, a, is to get to know the people, but what's important is to understand the process. And once you understand the process, then you start to come up with ideas of how you, too, can improve it, but it also helps to change the culture going forward. So I -- so the first 12 months for me it's been quite interesting, and it's a great group of individuals.

And so when we think about kind of your organization and its size and where it's going, you measure by the expenses that you control or do you measure by the headcount that you're controlling and where that's going. And talk a little bit about kind of that -- what's under you in operations versus technology? Because I have to say, I mean those lines blur so completely in terms of what's what and how the 2 of you work together with the businesses?

Yes. So if I just start with the technology, so a woman named Bridget Engle, she runs the technology group, everything from application development, et cetera. Obviously, I complement her on the operations side. Then there's Roman who runs the data, and then there are our business partners. And I can tell you, we work collectively together. And one of the things I've found is, maybe one of the few banks that I've seen this way, is that the -- you can't tell who works for who, like staff-wise. It's -- and the fact that we work so closely together, I think, makes a big difference when it comes to prioritizing programs, looking at the client. And so I think there's a big benefit there. I think the second thing is, since my time, we've spent a lot of time with the business partners in technology looking to develop the right operational efficiency programs. I have a theory that it should benefit 3 ways: efficiencies, risk and the client experience. And so I tend to work very closely with them in prioritizing the programs, developing the right business requirements, understanding what the real benefits are. And I'd probably go to a level that's a little different than most, in that every business program or project has the tech spend, ops spend, and every single year what the benefits are, by release, by quarter, et cetera. And they're just -- and it's that granular because then you'd have some credibility about what you're trying to accomplish.

Okay. Fair enough. So let's talk about what you're trying to accomplish. And everything that the bank aspires to starts with having a state-of-the-art operating infrastructure, and from where I sit, I wrote that it was difficult, I think it's pretty impossible to assess from where we sit, what your operating infrastructure, what it really looks like under the hood, and where you are in the process of evolving that infrastructure. So help us understand, maybe with a comparison to what you saw when you got there, how you compare where you are to where JPMorgan was and what you aspire to?

I think if you look at -- in some cases, we're really picking up from where people left off, in some cases. I think the other point is that when people talk about machine learning, robotics, I would profess a lot of people don't understand what it is, right? And so what we're looking to do is to really leverage the newer technology over the next couple of years, which I believe are game changers and no one else has been doing it yet. And I'll just give you some examples. So when we started, we decided to work with a fintech company in order to develop a tool that allowed us to automate reconciliation. Now if you work for a bank, you realize that there are tens of thousands reconciliation breaks. While the fintech company and our own technology group was able to derive a set of rules that allowed us to automatically close the breaks. So first, classify the breaks to understand what it is and then take 30 days of our data and learn what the human being did to match it off. That project actually went live on February 3, so the first phase. Second phase goes live 2 weeks from now. And the next 2 phase in the next 2 quarters. That payback on that project alone is less than 12 months. It's about a 6-month payback. That's just one project. We have another project where we believe that we will be the best from a client service, multi-product platform. We actually have the vendor in our facility that we will to do a proof-of-concept in mid-March, side-by-side our production to this new platform. This new platform, a, will have machine learning capabilities that will allow us to eliminate 30% to 40% of what the client sends us from an inquiry standpoint. It will allow clients to see end-to-end the status of their inquiries and just makes it easier for us to service the client in general. So we actually met with the vendor in the third quarter of last year. They were building the infrastructure and we will be ready to move forward in March. We just announced another program called contingent NAV. So if you're in the fund accounting space, in fund accounting, one of the things clients want is if your system went down, do you have a secondary way independently of being able to strike the NAV. Well, in Q4, we actually signed a contract with a vendor. We will go live in Q2 with the client, with a number different than their funds, which they've helped us to develop it with a new dashboard that they will be able to see on a real-time basis. I'm going to give you one more. We have a project called client transaction capture. If you know this industry, there's still faxes and there's still e-mails. We still talk to clients about migrating off of that and go electronic. So we went one step forward. What we use our data scientists for is to be able to take a fax and e-mail, which you can imagine there are thousands and thousands of these, being able to take them, being able to classify the e-mail, is it a derivative, is it a cash payment, et cetera. Once you're able to classify, which they've been able to do it 97% correctly, now once you understand what type of transaction it is, the system learns to pull the information that it needs to then present it to the back office systems. That is significant in this day and age. So that project today will go live in Q2. We will use it across the firm. And I believe that there will be a significant benefit from an efficiency standpoint and client experience. So those are just some quick examples of some of the things that we're doing at the bank.

And I would just add more broadly. The investments we've been making now for the last couple of years and kind of the underlying operating platforms make what Lester is talking about possible, and make it easier, make it faster. But they've also had a real impact on how efficient we're getting in technology, in operations, but also how efficient we're getting in delivering some of the things we're doing, where we're seeing processing times for a lot of the capabilities that we've sort of launched in sort of some of the new environments, improved by 30%, 40%, 50%, 60%, 70% reduction in processing times. And so there is a big benefit we're seeing across the board in lot of these operating platform adjustments that we've been making.

Which is a good point to make when we think about kind of where you are in the evolution of the operating infrastructure, because I think there's been a lack of understanding maybe or hard to assess, are you fixing something that's very broken or underinvested in? Or are you taking something that's actually now fixed the next step forward?

Yes. I think it's just a normal evolution of what everybody is trying to do with newer technologies. And the things you can do now are very different than you could do 5 years ago, both in how you run your data centers to the tech stock you have in the data center, to the applications you're putting inside those centers, and so I think of it as really that evolution. And we're mostly through the investments that we've been making in those operating platforms and the majority of it will be done this year. And so we're very well advanced in it. And as I said, it's everything from a new data center to completely replumbing existing data centers. And it's not necessarily about catch-up, it's actually about being forward-leaning in terms of being able to deliver capabilities much, much faster in a very highly resilient way for clients.

And I would probably say it's perfect timing for a person like me to come because of the infrastructure that they've been able to build. So all of a sudden, now being able to take now higher development data strategy, put in the right data scientists, use the business to help to make sure we understand what the clients are looking for and then go build it on top of what Mike just talked about, is just perfect timing for the next couple of years.

So let's talk about timing a little. Bit because when people think about operations and the fixed persons then move forward and spending money, there's often this conversation around, "What's your binding constraint?" And as -- everyone always says, "It's not money, it's time, it's people, talent." And you're going to spend a little bit more money this year across the businesses, a little bit more money in technology. And my sense is that you are spending more money because you can spend more money and that you're at this point where spending a little bit more moves you further forward faster as opposed to you're spending it because you're fixing it.

Yes, I think that's exactly right. I mean the constraints are still the same constraints, right? It first starts with do you have the subject matter experts you need to deliver the change in the way that you want and then you have 52 weekends a year to deliver change, and so that's how time matters. As you're delivering change over a weekend in most cases when you're talking about technology and you have 52 shots. And then you start taking into account holiday. There are some things that start to constrain some of that, so you have less than that. But those 2 things are still the constraint. And we feel good about the team and that's why we brought in people like Lester. We've had a tremendous talent upgrade across his team and across technology, across many of the businesses. And so we feel good about this -- our ability to execute and increase the rate of change.

So then as you increase the rate of change, you go through this broad-based process reengineering, which -- it's hard to understand what that really means. How do you measure the efficacy of your efforts and kind of where you're going at the end game? Is it the number of people, the number of apps, the speed to market? What are the major markers that we can use rather than just looking at your expense guide in any given quarter or year to say, yes, they are getting more efficient?

I would tell you, one is the people. I think you're absolutely right. I think just number two is the overall operating expenses and is it going down the way you expect it. But I think number three is, when you build it right, right, you -- the growth will come as well. Because one of the things I always profess is that what clients want a great service and you're a partner in how they're growing as well. So I think all those make a difference. I think the other thing that I measure is the operating efficiency. Meaning, as we bring on new business, how is my cost relative to that business? And so I spend a lot of time looking at -- I think it should be nominal, right? And so I can -- and I have so much data in front of me that I can tell you what it cost last year, what it cost for the month of January, where we're tracking for February based on these programs. So all those factors make a difference in how you should be gauging us.

And across the different businesses, are there businesses that are more or less scalable or more or less right to have the unit operating cost reduction affected?

Of course. Of course. You're going to have varying degrees of sort of where you go from here in the businesses. But I think it's fair to say every single business we have has opportunity to become more efficient. There isn't one I would single out that doesn't have some opportunity. Some bigger than others. Some take longer to get up than others. There's no silver bullet where you finish one project and you see costs plummet next quarter, so they'll sort of build over time, but I think every single business. And the list of things -- the active list is probably 30 right now in Lester's world. The list that we're sort of prioritizing and sort of thinking about how we're going to execute is probably closer to 100 different initiatives, and that grows over time.

And to complement what Mike said is, we actually took every function, broke it down to its finest level, understood the cost by function and understood if we automated those functions, what would be the benefit short and long term.

Okay. So how do you decide how you're prioritizing?

A lot of it is based on return on investment. I'm a big proponent that the return on investment should be within the next year -- 1 to 2 years. And because you also build a sense of urgency and commitment, and I live by it and I think we've been very successful with it.

But I would just add, where the conversation starts most times is actually how do we make the quality of what we do better, and it leads you 9 times out of 10 to that efficiency conversation, which says if you automate X, Y and Z, you're going to increase the quality and then you're prioritizing from there. But you're first starting with how do I make the quality of the delivery better and then you -- by the way, you save some cost as a result when you do that.

And so let's go back to your comment and picking up on this quality of delivery being better. When you think about your success, part of it is reducing the unit operating cost, but part of it is also improving the client experience which means reducing client attrition. Where are you on the -- are you at the point with the service-level improvements that you're seeing a material impact on client attrition or the willingness of clients to do more with you?

Yes. I think we're starting to see it. And I think we've been on this journey now for the last couple of years. And I think as you sort of look at client satisfaction scores that they give us, we get report cards from our clients, pretty detailed ones in a lot of cases. We obviously have a lot of interaction with them, in terms of how they feel about what we're doing. And we can see the benefit of the efforts coming through in those scores and starting to come through in lower attrition rates. And we see it -- the biggest impact we're seeing is actually in the Asset Servicing business, where we're starting to see that come through.

Okay. And how much time do you spend with the clients to actually understand where their biggest friction points are?

Every week.

Okay.

I don't know. I think I lost count. I probably have seen 130 clients so far. And a lot of it is about not just technology but just trying to gauge how we're doing, what can we be doing differently. Mike told a story about this report card. I mean this a particular client, for 3 consecutive quarters, we've been rated #1. But it's interesting. The mindset though is how do you stay there, right? And so I actually picked up their document and read word for word what they said, which was 15 pages. And there were still a couple of areas that I thought we could improve on. And last month, in that area, we were #1. So I just think it's understanding what the clients are looking for, what's their buying behavior, what's considered to be great versus good and then trying to build around that and make it sustainable for the long term.

And 18 months ago, I think we were like 3 or 4 out of 5 in some of those categories. And so that focus is really paying off.

So do you want to put numbers around client attrition and where it has come from and gone to?

No. But I think you'll see it in the results. And look, our business is not something where like you turn a dime -- you turn on the dime and the quarter is like all of a sudden changes. And so you're going to see it as you sort of look at the fee line and the overall revenue in the Asset Servicing business. And we'll find ways to sort of make it clear as sort of time goes on. But it's -- but we've been -- and it's something -- it's a very granular conversation in terms of client by client. So the data is -- it's like real data, and we're seeing benefits as we come into this year.

But was their consistency, if we dial back 12 months ago when you came to BNY Melon. Is there consistency in terms of where the friction points were and how those have been addressed? Or it's really client by client?

I think it's really...