Custody Services Myth-Buster: The Hidden Revenue Story
Back-Office in Name Only: Why Your Custody Relationship Is a Capital Decision I’ve seen an expensive mistake that never appears on a risk register. It’s not a loss event. It’s not a failed audit. It’s revenue that simply doesn’t exist because nobody with the authority to ask for it ever did. Custody services are the most persistent example of this in institutional finance. The industry narrative has always been comfortable: a custodian holds your assets, settles your trades, and sends you a report at month-end. Passive. Reliable. Boring. The kind of thing you hand to someone competent and sensible and then stop thinking about. That narrative is wrong. Not partially wrong, structurally wrong. And the cost of believing it is not abstract. It shows up in yield you didn’t earn, capital you didn’t deploy efficiently, and withholding tax you paid and never reclaimed. The custodian wasn’t hiding these opportunities. Most of the time, nobody was asking. — The Founder I Got Wrong Eighteen months ago, I wrote a post that touched on this. It landed reasonably well, which meant people agreed with the surface observation: founders and senior executives often don’t know what revenue they’re leaving inside their custody relationships. Securities lending sitting dormant. Collateral fragmented across trading desks. Tax reclaim processes still manual, still slow, still leaking. I framed it as a discovery problem. Executives weren’t aware. Once they knew, they would act. I was half right. Half right in a way that cost the argument its real point. Last month, I went back to that same founder. Eighteen months on. They had, in fact, renegotiated the custody relationship. Securities lending was activated. Collateral had been consolidated. The withholding tax reclaim process, cross-border dividends, treaty benefits, the entire machinery, was finally automated. Material improvement across all three. I asked what had actually changed internally to make it happen. He said: “We had to stop treating it as the CFO’s problem.” I sat with that for a moment. Because what he meant was not that the CFO had been failing. He meant the relationship had been categorised as operational, handed down the chain to people with competence but without authority, and quietly left there. Nobody at principal level was asking the economics question. So nobody answered it. The custodian wasn’t withholding anything. The client had simply decided, implicitly, without ever actually deciding, that this was a back-office matter. I got it wrong in 2024 because I diagnosed the symptom instead of the condition. Awareness was never the constraint. Ownership was. — What Custody Services Actually Are Let me be precise about what is sitting inside these relationships, because the vocabulary matters. **Securities lending** is the most straightforward and the most underused. When you hold equity positions you’re not actively trading, a custodian can lend those securities to short sellers and other market participants in exchange for collateral and a fee. The asset remains economically yours. The yield is incremental. For funds with meaningful long positions, this is not a rounding error, it’s a deliberate revenue line. Treated as operational, it goes unreviewed. Treated as a capital decision, it gets optimised. **Collateral management** is where the complexity compounds. Firms running multiple trading desks, derivative positions, and financing arrangements are often posting collateral inefficiently, either concentrating high-quality assets where lower-quality ones would satisfy requirements, or failing to recycle collateral across the enterprise in any coherent way. A custodian with tri-party collateral management capability can transform this. But only if someone at the table has both the authority to restructure the arrangement and the mandate to ask whether the current setup is optimal. Most of the time, that person doesn’t exist in the conversation. **Tax reclamation on cross-border dividends** is the least glamorous and possibly the most consistently mismanaged. When a fund receives dividends from foreign equities, withholding tax is typically deducted at source. Many jurisdictions have treaty arrangements that reduce or eliminate that liability, but reclaiming it requires documentation, timing, and process. Automated, this is recoverable value. Manual and deprioritised, it leaks quietly for years. I’ve seen organisations leave meaningful basis points on the table annually, not because the process was complicated, but because no one had made it anyone’s responsibility to care. — The Ownership Problem Is an Organisational Problem Here’s the counter-intuitive part. The custodian almost always knows what is being left unrealised. They have the data. They can see the lending pool, the collateral inefficiency, the unclaimed reclaims. The better custodians will raise it. Some will raise it repeatedly. But a conversation initiated by a service provider and received by an operations team produces a very specific kind of outcome: it produces a note in a file, a polite acknowledgement, and continued inaction. Not because the operations team is incompetent. Because they don’t have the authority to restructure a commercial relationship, and they know it. The decision to activate securities lending, renegotiate collateral terms, or invest in tax reclaim automation is a capital allocation decision. It requires someone who owns the P&L implication, has the authority to engage the custodian at a principal level, and has set aside time to actually review the economics, not just the operational SLAs. Back-office decisions made at back-office levels produce back-office outcomes. This is not a criticism of operations professionals. It’s a structural observation about where certain categories of decision need to live. — What This Means in Practice If your custody relationship doesn’t have a named senior owner reviewing the economics quarterly, you don’t have a custody strategy. You have a contract. Those are genuinely not the same thing. This applies equally to asset managers, fintech platforms with balance sheet exposure, family offices, and corporate treasuries with cross-border holdings. The specifics vary. The pattern doesn’t. And if you’re building or advising on the infrastructure layer, as I’ve written about in the context of cyber risk and human decision-making, the lesson is the same: the technical capability is rarely the constraint. The governance around it usually is. The founder I spoke to
The Hidden Revenue Engine in Custody Banking
Custody Is Not a Warehouse. It Never Was. A category of assumption in financial services never gets challenged because it lives in the wrong part of the conversation. Not strategy. Not risk. Operations. Because it lives there, it quietly costs firms money for years without anyone noticing, or, more precisely, without anyone deciding to notice. Custody is one of those assumptions. Ask most senior executives what their custodian does, and you’ll get some variation of the same answer: they hold the assets, settle the trades, keep everything safe. Which is true. It’s also roughly as complete as saying a CFO’s job is to count the money. Safety and settlement are the entry requirements, not the service ceiling. What sits above them, and what most firms are systematically failing to access, is an entirely different conversation. — The Situation In 2021, I reviewed the cost structure of a mid-tier asset manager. Standard work. The kind of exercise where you expect to find a few contract renewals overdue, some vendor consolidation opportunities, the usual operational drift. Custody appeared in the analysis as a line item under operational overhead. No flag. No red circle. Just another fixed cost being paid on time every quarter, which apparently meant there was nothing to discuss. I pushed to look at the actual relationship, not just the invoice. The operations lead looked mildly confused. “We haven’t had any issues,” he said. That sentence, I’ve learned over the years, is the one that should worry you most. What we found when we looked properly wasn’t a disaster. It was something subtler and, in some ways, worse: a slow, systematic bleed that had been running unexamined for three years. Securities lending revenue was sitting uncollected, the programme existed in theory, but the commercial terms had never been optimised and monitoring had lapsed. Collateral was being posted inefficiently across three trading desks that were operating independently, each solving its own problem without any view of the aggregate drag. And withholding tax reclaims on European dividends, treaty benefits the firm was legally entitled to, had not been filed in eighteen months. The money wasn’t lost. It was just sitting unclaimed inside a process nobody had thought to run. I’ll be honest about what I felt when we quantified it. Not vindicated. Uncomfortable. Because the operations team were competent people who hadn’t been negligent, they’d been under-resourced, under-informed about what was available, and operating inside an unspoken organisational assumption that custody was a settled, closed question. Nobody had told them otherwise. And I’d been in enough boardrooms to know that nobody was going to volunteer that conversation upward unprompted. — What Custody Actually Is **Securities lending is not a passive income stream.** The mechanics are familiar enough: the custodian lends holdings to counterparties in exchange for collateral and a fee. But the difference between a well-run securities lending programme and a poorly managed one isn’t marginal. It depends on the split negotiated with the custodian, the demand profile of the underlying securities, the quality of counterparty selection, and whether the programme is being actively monitored against market benchmarks. Dormant assets, equities held through a long-only strategy, bonds held to maturity, are not dormant from a lending perspective. They are inventory. Whether that inventory earns anything depends entirely on whether someone is paying attention. Most firms I’ve reviewed aren’t. **Collateral management is where capital efficiency lives or dies.** When trading desks operate independently, which they almost always do, collateral decisions get made locally without visibility into the portfolio-wide position. The result is duplication: the same eligible assets being used multiple times across margin calls and counterparty obligations, but not optimised for where they create the least drag. A custodian with proper collateral management infrastructure sees the whole picture and can route assets to minimise capital consumption. The firms using this well have a structural cost advantage over the ones still running the three-spreadsheets-in-parallel model. This isn’t a sophisticated observation. It’s just one that requires someone senior enough to demand the conversation and junior enough to actually sit in the operational detail. That overlap is rarer than it should be. **Tax reclamation is money most firms don’t know they’re owed.** Cross-border dividend payments are subject to withholding tax under domestic rules, but double taxation treaties between countries create entitlement to reclaim the difference. The process is administrative: filings, deadlines, documentation requirements that vary by jurisdiction. It’s also the kind of work that falls between the custodian’s scope and the internal tax team’s awareness if the relationship isn’t actively managed. Eighteen months of uncollected reclaims on a European equity allocation isn’t an edge case. I’ve seen it more than once, in organisations that would describe their tax function as sophisticated. Automation exists. Treaty entitlements exist. The gap is almost always governance, specifically, who owns the question. — What This Means Practically The organisations that treat custody as infrastructure, as something to be reviewed, not just paid, have a measurable advantage that shows up in net returns. This isn’t about switching custodians or renegotiating contracts as an annual performance. It’s about establishing a regular discipline of asking what value is available inside the existing relationship and whether it’s being accessed. That means someone with enough authority to sit outside the operational team’s comfort zone and ask the questions that feel impolite: What is our current split on securities lending? When did we last file a reclaim? What is our aggregate collateral utilisation and who owns it? The relationship with a custodian is not unlike the one I described in [when cyber risk becomes a human failure rather than a technical one](https://lakshvaswani.com/when-firewalls-fail-the-human-side-of-cyber-risk/), the exposure is often not in the event that gets escalated, it’s in the assumption that has never been examined. And as I’ve argued in the context of [regulatory expectations across different jurisdictions](https://lakshvaswani.com/the-trust-deficit-why-transparency-empathy-and-execution-are-the-future-of-compliance-leadership/), the cost of oversight is almost never as high as the cost of its absence. The most expensive service you can buy is one you’re already paying for and not using.