Scharf pick says everything about BNY Mellon's tech-oriented future

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Bank of New York Mellon may be the nation’s oldest bank, but it’s urgently trying to solidify its status as the essential technological backbone of the financial services industry. Charlie Scharf, the former head of Visa, may be the one to lead it there.

Scharf, 52, was hired on Monday as CEO of the $338 billion-asset custody bank. Scharf replaced Gerald Hassell, 65, in that role and will succeed him as chairman on Jan. 1. Scharf had been a free agent since leaving Visa in December.

Scharf needs to lead BNY Mellon in “continuing the evolution of a custody bank into a processing business, getting past how traditionally you have done that, and with blockchain and digitalization, making this state of the art,” said Marty Mosby, an analyst at Vining Sparks.

Scharf could be a good choice because of certain similarities between Visa and BNY Mellon, Mosby said. As the operator of a payment system, Visa operates a network used by countless banks and other institutions. BNY Mellon’s custody bank business is involved in keeping records of transactions for large financial institutions such as mutual funds and serving as a go-between for such institutions.

“When you look at what Visa is, it’s a processing company, and you have to run a consortium of banks,” Mosby said. “When you look at the trust business, it’s very similar” because BNY Mellon works with institutional investors.

Scharf has apparently already given some thought to the similarities between Visa and BNY Mellon and what changes he could make.

“With the digitization of so much of the world and with what we can build with tech, the opportunity for us to do things differently in the future" is "certainly meaningful,” Scharf said during a conference call Monday afternoon.

“We have to understand the past and the strong market positions we have, but look to the future and say to ourselves, how do we need to evolve and change?” Scharf said. “How do we take the capabilities we have and make them a true technology platform for clients?”

Hassell’s experience with an activist investor group, which started in 2014, could be seen as foreshadowing of the direction BNY Mellon must take.

Trian Fund Management had pushed Hassell to improve BNY Mellon’s profit margins. Hassell eventually worked out an arrangement with Trian — the group got a board seat in December 2014 and Hassell received a vote of confidence. During the same period, Hassell introduced new financial goals that were pinned to some degree on improving the technology that serves as the foundation for BNY’s business.

“Our clients … are turning to us because we’re able to provide those technology platforms on their behalf,” Hassell said during the company’s 2014 investor day. Those initiatives included major investments in electronic trading platforms in BNY Mellon’s Investment Management group.

The focus on technology has continued under Hassell, where the integration of innovation into the company’s everyday culture was akin to a cultural revolution. BNY Mellon became one of the first U.S. banks to make use of robotic process automation in its daily operations, including trade settlement.

But BNY Mellon still needs to do more, and the board may have decided Hassell had directed the company’s reinvention as far as he could, Mosby said. Scharf will need to confront the existential question of which businesses are essential to BNY Mellon, he said.

In addition to his time leading Visa, Scharf’s background includes other work that appears directly applicable to BNY Mellon’s core business and to its goal to become more of a technology company. On the tech front, Scharf sits on the board of Microsoft.

As for BNY Mellon’s role as a custody bank, Scharf spent 13 years at Citigroup, where he was chief financial officer of its global corporate and investment bank, which Visa described in its 2015 proxy statement as “providing securities, transaction processing and banking services to institutional clients.”

In many ways, Scharf is returning to his roots in the banking industry. A protégé of Jamie Dimon, Scharf was hired as the Wall Street icon’s assistant at Commercial Credit, in the late 1980s, after graduating from college.

Scharf then followed Dimon for decades — including his stint at Citigroup; at Bank One, where he led the Chicago firm’s retail banking group; and ultimately at JPMorgan Chase. At JPMorgan, Scharf ran its consumer banking division during the banking crisis, and led its One Equity Partners division.

While much of Scharf’s experience is on the retail side of banking, he’s still a good fit for BNY Mellon, Jeffery Harte, an analyst at Sandler O’Neill, said in a research note Monday.

“Mr. Scharf is a very good manager" who "has proven effective at running large, complex and increasingly digital financial businesses,” Harte said.

Scharf left JPMorgan in 2012 to join Visa, during a period when numerous Dimon lieutenants bolted from JPMorgan to run their own companies, including Frank Bisignano, now CEO of First Data, and Jes Staley, CEO of Barclays.

Now that he has moved to BNY Mellon, Scharf must grapple with major strategic questions for the world’s largest custody bank, Mosby said.

Near the top of the list is whether to exit certain business lines, as BNY Mellon’s past attempts to diversify may have led to unanticipated consequences. BNY Mellon “handcuffed” itself when it tried to combine a treasury-and-cash management business with its custody business, Mosby said. Both of those businesses require massive amounts of capital investments, and Scharf may need to eventually jettison the cash-management business, Mosby said.

The executive recruitment firm Korn Ferry advised BNY Mellon on its search for its new CEO, a company spokeswoman said.

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