Bank of New York’s Economic Moat

Bank of New York (ticker: BK) is a custodian bank.

A custodian bank is a specialized financial institution responsible for providing securities services. It safeguards the assets of investors, usually asset managers, insurance companies, and/or hedge funds, and is not engaged in "traditional" commercial or consumer/retail banking like lending money to clients to buy properties.

Being the Biggest with a cost advantage

BK is the world’s largest custodian bank with nearly $47 trillion in assets under custody and/or administration (AUC/A); while the next biggest custodian, State Street, has $43.7 trillion in assets. As one of the largest financial institutions in the world, it has a significant customer base and a strong presence in various markets around the globe. This gives BK the ability to offer a wide range of financial products and services to its clients, which can be difficult for smaller competitors to match.

They also clear about $10 trillion of securities and process over $2 trillion of payments per day, and manage $2.4 trillion of assets on behalf of their Investment and Wealth Management clients.

Why do these matter?

This can allow the company to offer competitive pricing to its clients, which can be a barrier to entry for smaller competitors.

High Switching Cost

A high switching-cost moat exists when the customer faces significant costs in the process of switching from one service provider to another. The costs may be in the form of cash, time, and the discomfort of using the new service provider.

For a financial institution like BK, switching costs can be a significant barrier to entry for competitors and can help to protect the bank's market share and profitability. Some of the potential switching costs for customers of BK may include:

·         Fees for closing accounts or transferring funds: Customers may incur fees if they want to close their accounts or transfer their funds to a different bank. These fees can be a deterrent for customers considering a switch.

·         The inconvenience of switching: Switching banks can be a time-consuming and inconvenient process, especially for customers with multiple accounts or a large number of transactions. This can make it less likely for customers to switch banks, even if they are unhappy with the service they are receiving.

·         Loss of rewards or benefits: Some customers may be hesitant to switch banks if they have built up rewards or benefits, such as points or cash back, through their current bank. These rewards and benefits can be significant incentives for customers to stay with their current bank.

Overall, the switching costs for customers of BK may be a factor that helps to protect the bank's market share and profitability, as it can make it more difficult for customers to switch to a different financial institution.

Economies of Scale

As this bank serves 35 countries and more than 100 markets, it can act as a single point of contact for clients who may be looking to trade, manage funds, make transactions, or restructure investments.

This gives BK the ability to serve a diverse range of clients, including corporations, governments, and financial institutions.

BK’s global presence allows the bank to offer a wide range of financial products and services to its clients, including investment management, asset servicing, and securities lending. The bank's international network also allows it to provide clients with access to a range of currencies and financial markets, which can be particularly beneficial for clients with cross-border needs.

In addition to its global reach, BK also has a long history and a strong reputation for stability and reliability. This can give the bank an advantage in attracting and retaining customers, as well as in attracting and retaining top talent.

Overall, BK’s presence in so many countries and markets is a significant advantage that helps to differentiate the bank from its competitors and allows it to serve a diverse range of clients around the world.

Summary

The Bank of New York is a large financial institution with several competitive advantages that help it to protect its market share and profitability. These advantages include a cost advantage due to its size and scale, high switching costs for customers, and economies of scale that allow BK to benefit from lower costs and more efficient operations.

Together, these factors contribute to BK’s economic moat in the financial services industry and help to protect its market share and profitability over time.

 

Here is a quick glance at the Bank of New York's financials.

December is the month of Reflection 2022

Crypto Winter

Crypto, stocks & α lot of asset prices dropped since the start of the year. The main culprit is USA's interest rates. It creates a negative spiral effect across the markets & capital flight to the reserve currency's bonds.

If it is just the crypto prices drop, that's fine. As the customers can cut their losses and withdraw their reminding money. As it turns out there are a lot of cans of worms opened... As these exchanges use their clients’ money or crypto for their own speculative or investment purposes. When their clients want to withdraw their money or crypto, these exchanges can't do so. They freeze the withdrawal function & shortly these exchanges declare bankruptcy. While their clients have nothing left.

I admit not all exchanges have the same problems. However, they did not live up to their promise, allowing the clients to trade & withdraw their money/crypto.

To add, some of these exchanges use this money, to buy luxury assets (Good Class Bungalow, yachts, etc)!  I can't be sure what money they use to buy but when the exchange bankrupt, the liquidators also take these assets. So I guess they are using companies’ assets to buy these luxury assets.

Reflecting on this, without regulation, will we humans do anything right? Or is regulation really necessary so that people like these will not abuse these privileges?

Even if there are such self-disciplined people in Management roles, how many will there be?

To prevent such things from happening regulations will be in place. But when this happens, Taxation will & will be no different from a normal financial market. Something the crypto surely doesn't want.

Interest rate is the gravity

When Warren Buffett said interest rate is gravity. I have yet to fully understand what he means by Until now… (I think)

When interest rates are low, the market is willing to buy more risky assets for better returns than near-zero interest-rate bonds, which are nearly risk-free. When these safest assets become more profitable, everything else drops in price and keeps chasing & people the safest assets. REITs aren’t spared as investors are worried the cost of debt increases which may cause REITS to produce lesser dividends.

Maybe I put it this way. The interest rate is similar to a planet’s gravity. And the asset’s price is like a rocket that is trying to reach to the moon. The stronger (higher) the gravity (interest rate), the harder the rocket (asset’s price) to take off. And vice versa. The weaker (lower) the gravity (interest rate) is, the easier for the rocket (asset’s price) to soar.

Thus, the interest rate is like gravity! I guess it took a war and untold suffering in other countries for me to realize this. And I hope I got it somewhat right.

Regulations too strict backfired too!

China was the first to discover Covid 19. Their Swift response helped them save as many lives as possible back then. As time passed, medical science managed to make the covid 19 vaccine in the shortest possible time. This is a great achievement! This allows other nations to lower their covid restriction earlier, while china insists only to use their homemade vaccines. However, for some reasons that elude me, China is not able to achieve the ideal vaccination rates & infection rates plus death work are soaring.

Thus, this leaves China to carry on imposing strict Covid measures. Although their intent is truly wished to protect their citizens, this comes with a lot of negative effects. Supply chain disruption, causes inflation to rise. The elderly were suffering great inconvenience. And lastly, the one that trigger the latest protest, was a fire that broke out which killed everyone in a building when they can't escape due to the covid restrictions.

Yes, protests happened. Now the China government is willing to relax the restriction.

Regulations are necessary. Yet, if the regulations are too strict... It doesn't benefit anyone either. Making the balance is a tough thing to do.

My take here isn’t a criticism of the China Government’s policy. But I am reflecting that regulations are important, but being too strict with them will create tragedy too.

Portfolio Management

Risk is always present in any investment. No matter how sure I am in my investment. Of course, certain investments are so safe that I don't mind allocating a big bet in my portfolio.

Even Warren Buffett can get it wrong sometimes. And on the recent local example, Temasek Holdings write off F1X investment.

Despite the amount of money, they invested in FTX in terms of millions that amount is less than 1% of their total portfolio. Plus they look 8 months to do their due diligence.

8 months! Temasek Holdings should be able to have Superior data, tools & connections to make a better-informed decision.

Yet they can still make a loss. What are my odds? I have to respect the risk. Sooner or later this will happen to me. And if since it is going to happen, I believe that I should invest conservatively.

December is the Month of Reflection.

I believe this year has a lot of suffering and a lot of losses.

But I am still grateful for my situation now. Still grateful that I still have a roof, am well-fed & have a simple job. No one is shooting at me; the one who wants to take away my home.

Something this money can't buy. Peace of mind is truly priceless.

You’re Humility

Manferd