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Sunday, February 5, 2023

How Bank of New York Mellon Makes Money: Investment Services and Management

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Founded in 2007, Bank of New York Mellon (BK) is the culmination of a merger of two of America’s most venerable banks. The Bank of New York was founded in 1784, Mellon Financial in 1869. The former was primarily a short-term business lender, the latter a wealth management firm. The resultant firm services more assets than any company on Earth, a total of $37.1 trillion under custody as of Dec. 31, 2019.

With $1.9 trillion of assets under management, Bank of New York Mellon is one of the largest asset managers in the world. The company primarily generates revenue through investment services, including asset and issuer servicing, treasury services, clearance and collateral management, and asset and wealth management.

Key Takeaways

  • Bank of New York Mellon generates revenue through investment services, as well as wealth and asset management.
  • The bank had $37.1 trillion in assets under custody as of the end of 2019.
  • BNY Mellon operates in 35 countries around the world.

Bank of New York Mellon’s Earnings

Throughout Bank of New York Mellon’s brief existence in its current form, earnings have been uncommonly consistent. Over the last five years, in reverse chronological order, the firm has earned revenue of $16.5 billion (2019), $16.4 billion (2018), $15.5 billion, $15.2 billion, and $15.2 billion. According to the bank’s most recent annual report, net income for 2019 was approximately $4.4 billion. As of Dec. 31, 2019, return on common equity was 11.4% and pre-tax operating margin was 34%.

Fast Fact

BNY Mellon was established (as Bank of New York) in 1784 by Alexander Hamilton and later became the first company to be listed on the New York Stock Exchange.

Bank of New York Mellon Business Model

True to the history of its predecessors, Bank of New York Mellon has two distinct business reporting segments: investment management and investment services. This can be confusing; the former falls under one subsidiary, named The Bank of New York Mellon. Meanwhile, the company’s wealth management business falls under a subsidiary named BNY Mellon.

Smaller subsidiaries, most of them concentrating on trusts, include BNY Mellon Investment Servicing Trust Company, BNY Mellon Trust Company of Illinois, BNY Mellon Trust of Delaware, and The Bank of New York Mellon Trust Company.

No one has ever accused Bank of New York Mellon management of being overly creative when naming its subsidiaries. These have included the firm’s main European operation, The Bank of New York Mellon SA/NV. The company has dozens of subsidiaries in total, with the largest majority of them incorporated either in the United States or the British Isles. (The outliers are based in Belgium and Luxembourg.) All told, Bank of New York Mellon operates in roughly three dozen countries.

Bank of New York Mellon’s Investment Services Business

Of Bank of New York Mellon’s two major businesses, Investment Services is the biggest, accounting for about 71.9% of the company’s noninterest expense. This division provides a variety of business and technology services to financial institutions, corporations, endowments, and public agencies. Within the Investment Services division, Bank of New York Mellon has a variety of lines of business, including Asset Servicing, Pershing (providing clearing, custody, and other business services), Issuer Services, Treasury Services, and Clearance and Collateral Management.

If you happen to be the executive tasked with figuring out what to do with your large company’s cash pile, chances are good that you’re going to contact Bank of New York Mellon at some point. The firm does business with approximately 400 of its counterparts on the Fortune 500 list, along with three-quarters of America’s 100 largest foundations and two-thirds of its 1,000 largest pension funds. Hence, the enormous amount of money under the Bank of New York Mellon’s administration.

In 2019, Bank of New York Mellon’s Investment Services division generated about $11.9 billion in revenue.

Fast Fact

The Bank of New York and Mellon Financial Corporation merged in July of 2007, resulting in the bank’s current form and name.

Bank of New York Mellon’s Investment Management Business

While Bank of New York Mellon indeed deals in the exclusive province of wealth beyond most people’s comprehension, that’s not the firm’s specialty. Rather, hundreds of thousands of middle-class people rely on Bank of New York Mellon’s investment services expertise to keep their retirement plans solvent and their stock investments promising.

The $3.7 billion in total revenue accounted for by investment management operations are nothing to dismiss, either. The segment includes estate planning and private banking for extremely rich people. This, again, is small compared to the investment services Bank of New York Mellon sells to the managers of large capital reserves. The indirect beneficiaries of those investment services—ordinary employees and retirees—have a far greater impact on Bank of New York Mellon’s fortunes than do the firm’s necessarily fewer wealthy clients.

The remainder of the firm’s investment management operations include global equities, currency management, and fixed income strategies. Bank of New York Mellon’s investment management is conducted through many (relatively) small and independently marketed subsidiaries, such as Alcentra, Siguler Guff, and more, the majority of which were bought by Bank of New York Mellon (or one of its predecessors) rather than being created in-house. The firm’s acquisitiveness hasn’t subsided, either; it continues to buy up smaller “boutique” houses periodically.

As of the end of 2019, the Investment Management division, consisting of both Investment Management and Wealth Management lines of business, held assets under management of $1.9 trillion, making Bank of New York Mellon the 9th-largest global asset manager.

Future Plans

According to its 2019 annual report, the Bank of New York Mellon is focused on building a technology-driven and digital culture. The company is working on automating end-to-end processes using machine learning and artificial intelligence (AI) to improve quality and reduce structural costs. They’ve updated their data centers and are collaborating with fintech companies and other financial institutions to find and implement technology solutions.

Thus, Bank of New York Mellon is likely to continue to pour more money into technology developments. In 2019, the bank spent about $3 billion on technology and expects to spend even more in 2020. This investment will not only improve existing infrastructure but will also help the company develop new capabilities as well.

Key Challenges

Risk is an inherent part of investing and Bank of New York Mellon must adequately manage its own risk factors, as well as those of its clients. Beyond the basic unpredictability of investments, however, there are also other challenges that BNY Mellon faces. These include competition from a small but powerful group of similarly-equipped financial institutions around the world, each of which is competing for the same clients and asset pool.

Given the bank’s high volume of daily transactions, it is susceptible to operational risk caused by a breakdown in the system or in information. There are also constant governmental and regulatory challenges to which the company must adapt.

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