Investing in Technology—Opportunities, Risks and Rewards for Investment Bankers

A constant increase in new technology investments and the current COVID-19 crisis has accelerated the need to adopt innovative technologies. However, the adoption comes with associated risks.

The financial institutions are modifying their business structure and making the finance functions more efficient and effective by investing in technology. In 2022, North American banks may spend nearly one-half of their total information technology (IT) budget on new technology. European banks would spend 27 percent higher than the current level. According to a new McKinsey Global Survey of executives, the share of digitally enabled products has accelerated by a shocking seven years.

On the flip-side, some investment banks are facing technology risks. The risks might reverberate on their strategic, operational, regulatory, and reputation. Seventy percent of the business leaders voiced that the speed of change in technology is a major concern, PwC Global survey reports.

The need of the hour is to reevaluate the innovative portfolio to achieve the desired returns. Let’s see how.

Investing in technology: Risks in the Investment banking industry

Technology may offer solutions, but it is tricky too. An increasing necessity for sophisticated risk management, IT resilience and continuity, burgeoning security requirements, and more pressurizes the technological capabilities of banks. Moreover, evolving customer expectations, competitors, and changing regulations add to the risk.

A few of the hurdles while investing in technology includes:

Time constraints

Investment banks are pressurized to provide their customers with various digital access for products and services across the devices and platforms. Businesses may not afford to wait for several months to deploy software. Thus, realizing an effective software delivery pipeline optimized for fast and small releases is a real challenge.

Investment costs

The budget available for technology investment is less most of the time. During the course, the competitors may surpass them by lowering operating costs and buying what they need and as they need.

Cybersecurity

The investment banking industry has been facing information security and technology risks for decades. Unfortunately, many investment banks have not kept pace with evolving information security risks.

Lack of skills

Banks find limited expertise in-house while the market demands newer skills. Thus, investment banks tend to outsource talents which may result in inconsistency, reduced quality, and duplication of efforts.

To overcome these, investment banks have to balance their technological advancement. As an innovator in technology or the late adopter, managing inherent risks is the rule.

Investing in technology: Opportunities and risk management

Understanding the risk in its different forms help investors to grab the right opportunities and manage risks. Let’s understand how investment managers can seize opportunities and avoid unnecessary risks.

Simplify legacy systems

The legacy core systems and its architecture are expensive and complex to modify. Organizations can simplify legacy systems by frequently developing and releasing functionality changes to meet the evolving market needs.

Adopt a SaaS-based model

The cloud-based model helps the organizations to quickly test, adapt, and take innovations to the market at minimum costs.

Deploy AI-based automation

Investment in AI services helps to scale-up and reap the highest returns. So, they can develop stringent governance structures, encourage workforce, and comprehend potential bias in AI-powered algorithms.

Attend to cybersecurity-related issues

Big data analytics helps to monitor hidden threats, identify internal and external risks. Thus, banks can communicate and collaborate with a risk-based framework, design, monitor, measure, and keep their data safe.

Increase business value using big data

Develop the right tools and technologies, iterate rapidly on software development to stay competitive while ensuring regulatory compliance and security. Sophisticated use of predictive analytics will give a more granular view of the marketplace and in turn boost profitability.

Recruit expert talent

Organizations may encourage talent from other fields, implement robust learning modules, improve the skills of the existing employees, encourage ‘talent exchanges’, foster a culture of innovative thinking, and talent development.

Key Takeaways

Risk management has changed substantially in recent years and new effective risk management strategies are critical to a bank’s bottom line. To be successful, investment banks need to start initiatives. Many of these technological innovations when applied early and strikingly will help banks to gain a competitive advantage.

Further, the initiatives should get complemented with a shift in recruiting toward more technology-savvy investment banking professionals and organizational risk culture.