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.