BNY Mellon’s Efforts To Expand Forex Payments Should Add Value Across Divisions

Bank of New York Mellon (NYSE:BK) announced notable improvements to its global payments infrastructure earlier this week, with the custody banking giant significantly enhancing its foreign exchange payment capabilities. ^[1] The bank’s branches in Frankfurt and London can now handle payments in more global currencies, and are expected to expand capabilities to 120 currencies in the future. This move should help BNY Mellon attract more clients for its treasury services business (which houses its global payments unit) as potential clients will be able to make forex payments faster, more securely and at better rates.

Additionally, we believe that BNY Mellon’s focus on improving its forex infrastructure will also indirectly help its forex trading unit in the long run. This is because the reputation of the bank’s forex trading unit has suffered considerably over recent years due to its alleged use of unfavorable exchange rates to execute client orders in the past (see BNY Mellon’s Forex Lawsuits Drag On). BNY Mellon’s improving forex payment capabilities should positively impact confidence among clients who have reduced their dealings with the bank’s forex trading unit over recent years.

We maintain a $46 price estimate for BNY Mellon’s stock, which is almost 20% ahead of its current market price. The discrepancy is primarily due to the marked sell-off across sectors over recent weeks in view of weak global economic cues.

See our full analysis for BNY Mellon here

BNY Mellon’s treasury services division includes the custody bank’s cash management solutions, trade finance services, international payment services, global markets, capital markets and liquidity services units. As can be seen from the chart above, the division is not a major revenue driver for the bank, and represents just over 3% of its total value. However, the division is an integral part of the bank’s investment servicing business and allows the bank to provide end-to-end solutions to clients looking for custody banking services. As an important ancillary service offering in an industry where clients use value-added services as a basis for awarding mandates, BNY Mellon cannot neglect its payment infrastructure.

BNY Mellon first announced its intention to enhance its global payment capabilities in 2011, and followed it up with a detailed plan to setup its Enterprise Payment Hub (EPH) in late 2012. ^[2] The system aimed at providing “faster, more efficient, and more data enriched” payment offerings to clients, and became functional in January 2014. Since then, BNY Mellon has gradually expanded the infrastructure, to now allow clients with single currency accounts at its London and Frankfurt offices to make payment in a number of currencies. The platform already provides clients with several payment initiation options, and will support transactions in more than 120 currencies in the near future.

Now, the payment system in itself will not significantly increase BNY Mellon’s revenues in the long run. This is clearly captured in the chart above, which shows our estimate for the bank’s revenues from treasury services. We do not expect these revenues to grow at more than 2% annually over the foreseeable future even after the global payment infrastructure is completely in place. However, the advantages offered by the platform should help BNY Mellon win more mandates from clients for its core asset servicing business. This will positively impact the rate of growth in the bank’s assets under custody and administration (AUC/A) to a great extent over coming years. Also, a successful implementation of the forex payment platform should allow BNY Mellon to build confidence among clients who terminated their relationships with the bank’s forex trading unit to varying degrees over recent years as a direct result of a string of high-profile forex lawsuits. This could, in turn, boost forex trading revenues down the line.

You can see how changes in BNY Mellon’s custody asset base impacts its total value by making changes to the chart below.

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1. BNY Mellon Expands Global Payments Infrastructure by Adding Foreign Exchange Payments, BNY Mellon Press Releases, Sep 9 2015 [↩]
2. BNY Mellon to Provide Innovative Global Payments Platform, BNY Mellon Press Releases, Sep 19 2012 [↩]