A little-known three-year-old technology solutions company with dual offices in New York and Madrid has big goals: to offer its software platform to banks – large and small – who currently sell, or would like to sell, their own market-linked certificates of deposit (MLCDs).

Choice Financial Solutions, located in the "Dumbo" (Down Under the Manhattan Bridge Overpass) area of Brooklyn, built its technology which integrates MLCDs into a bank’s own deposit product accounts platform, thereby removing it from its "security wrapper" and the need to then add it to its broker-dealer products platform. The individual products can have tenors of any length, can track performance to any reference asset (such as a basket of stocks), can have minimum guaranteed or contingent coupons and can have special features such as caps and floors.

The company, which is now comprised of about ten people with banking and/or technology backgrounds, came up with the idea after pondering how they could use technology to make MLCDs more accessible downstream to more mass affluent customers, Matthew Lifshotz, business development manager at Choice, tells SRP.

"Our goal in the US is to create a platform to allow banks of all sizes to offer their own MLCDs to fund their balance sheets," he says.

Choice had already deployed its “Rate Guard” interest rate hedging technology for those in Spain and the US using high notional products.

“The goal was to similarly make these products more accessible,” Lifshotz says.

Banking channels
According to Lifshotz the firm’s MLCD technology has been quietly used by a well-known bank (that Choice asked not to have named) for the past two years with great results. “We are currently working with that Top 20 bank, offering the most attractive MLCDs on their banking platform,” says Lifshotz. “Banks can more easily sell to their own banking channels and to their own customers.”

MLCDs can then be offered without marketing and can allow banks to gain market share.

“The benefits are clear,” says Lifshotz. “Not only can banks large and small more easily offer these products on their own banking product system, there is no Cusip security identification number requirement nor the need to settle these through the Depository Trust Company.”

Moreover, said Lifshotz, MLCD fees – which can run between 3% and 7% – and also distribution fees can be cut so that the products are more attractive to both selling reps and clients.

“Such typical fees can really eat into returns which, especially in the current low interest rate environment, make them less attractive and more difficult to sell,” Lifshotz adds.

Lifshotz also said that because MLCDs are considered banking products there is no need to maintain a secondary market. “If clients must redeem early they will only pay a standard early withdrawal fee, and no other often opaque price fees,” he says.

Footprint expansion
The goal now, says Lifshotz, is to introduce the Choice MLCD technology to other large banks and show smaller banks how they can potentially increase their funding by offering MLCDs right alongside other traditional bank products.

According to Lifshotz the flexibility of the firm’s platform should appeal to banks as new monthly offerings can be easily included with various options, payouts and reference underlyings being captured into the system.

“With our software we don’t replace, but rather extend, the capabilities to the core banking system and allow banks to create new [MLCD] products on the fly,” says Lifshotz. “Once a bank decides on a new MLCD product, we can have it ready within a few hours.”

In addition, there is no maximum capacity to the technology, allowing banks to add an unlimited number of MLCDs to their product offerings.

"An added benefit is that a bank can control the amount being sold and can turn off a particular offering at any time," concludes Lifshotz.