The world's largest custodian bank now allows its clients to make payments in euro (EUR), pound sterling (GBP) and Australian dollar (AUD), too, greatly increasing the scope of its fully automated Payment Decision Service. 

While this service addition will no doubt increase BNY Mellon's hold on the global payments market, the bank also gained entry into China this week when it was named the global custodian for a new qualified domestic institutional investor (QDII) fund in the country.

We maintain a price estimate of $27 for BNY Mellon's stock, which is around 15% above the current market price. We largely attribute this premium to the weak short-term outlook for global custody banking compounded by the deteriorating economic conditions in the eurozone. The bank's foreign-exchange related lawsuits are also a bitter pill for investors to swallow.

More choice for clients = more business for BNY Mellon

BNY Mellon's Payment Decision Service automatically executes cross-border payments on behalf of clients based on various standing instructions, which are pre-agreed upon by the bank and its clients. This allows the clients to complete payments across the globe in an efficient and reliable manner. Until recently, however, BNY Mellon's service was restricted to payments in the U.S. dollar. Hence, clients who needed to make payments to their vendors/business associates in other currencies were forced to either shoulder additional foreign exchange costs, or go through other payment service providers.

With BNY Mellon enabling payments in three more currencies -- EUR, GBP and AUD -- the bank essentially supports payments in currencies that account for more than four-fifths of all global payments.

It must be mentioned here that BNY Mellon has been working hard to make good the loss in reputation it suffered, and continues to suffer, for its alleged misrepresentation of foreign exchange rates to its clients over years in order to pocket more profits. Even as the bank faces a series of lawsuits concerning these issues, it has recently taken some steps to address some of the biggest concerns regarding exchange-rate transparency raised in these lawsuits. We believe that the new payment options should complement these concrete steps taken by BNY Mellon to help grow its foreign exchange business in the years to come.

And this is just the beginning of what China has to offer

China, the world's second largest economy, is looking for ways to promote the use of the yuan globally -- something that is seen as a necessity to ensure continued growth in local businesses for the export-driven economy. Consequently, it has opened its doors to international financial institutions in the recent past -- like the pilot cross-border yuan transaction carried out by Deutsche Bank (DB) earlier this year.

The appointment of BNY Mellon as the global custodian for a Chinese fund is yet another step in that direction. The S&P 500 index QDII fund was launched in Q2 2012 by Bosera Asset Management and has the Industrial and Commercial Bank of China (ICBC) as its local custodian. The fund will add to BNY Mellon's assets under custody and management of nearly $2.7 trillion.