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The Ever-Changing Landscape The Future Of Investment Banking

Nov 12, 2021| Article

The Investment Banking Industry will become data-driven, focusing on the customer journey by transferring back-office and middle-office functions into market utilities or financial tech.

The unprecedented health, economic, societal, and social effects of the COVID-19 pandemic have accelerated the forces that create problems and instigated a rapid disruption within the world of investment banking: declining equity prices, liquidity pressure, and evolving financial regulations market democratization, price pressure and increased sophistication of clients, shifts to remote working and rapid technological advancements. 

With this in the background, it is expected that the world of investment banking is set to move from a fully-scaled service model to the bifurcation of two types of the broker: "client capturers" that specialize in front-office tasks & "flow players" that focus predominantly on middle-office operations. 

They will likely function in an increasingly interconnected, global, and, possibly, a virtual ecosystem that will collaborate with partners, which perform various back-office functions. 

Industry reforms should provide an opportunity for investment banking institutions to move towards greater returns. To achieve this plan, businesses cannot continue to play around the edges. Most likely, they will have to drastically alter their existing operating and business models to focus on client-centricity & innovative technologies. This also includes regulator reform and the evolution of workplaces and workforces. Additionally, they must choose the type of archetype they would like to be in the new environment. 

The future may require investment banks to shed non-core assets and redesign their service offerings through a connected flow model, which involves moving capacity and processes across different regions and ecosystem partners. They will also optimize the utilization of data, technology, financial technology, and analytics to provide unique insights and add value. 

What exactly is the connected flow model? 

It is an agile, simplified, and client-centric operating model that improves the capabilities of financial institutions in conjunction with the capabilities of an ecosystem of partners, resulting in efficiency in costs through the centralization and standardization of services that are not differentiated across the entire industry. 

By leveraging data from partners and internal sources, it yields insights to optimize the performance of revenue and cost drivers and focus financial resources on the most profitable tasks and clients. Adopting the model of connected flow will enable investment banks to redefine their business around four major topics: modernization of technology, the workforce in the future, customer-centricity, and the need for regulatory calibration. In the end, the model will enhance efficiency while addressing the challenges to cost reduction through greater automation and improved tooling and result in higher revenues and adequate inventory. 

The Investment Banking Industry will become data-driven, focusing on the customer journey by transferring back-office and middle-office functions into market utilities or financial tech (fintech). A large data set will enable the bank to understand clients' behavior and employ machine learning, artificial intelligence, and natural language processing to forecast the trading habits of their clients. 

The Increasing Role Of Technology In Investment Banking 

Technology isn't just the key in determining the differentiating factors between players, however, It is also crucial to clients, as they expect solid execution. 

Investment Bankers, especially those located in the US, are the "winners'' due to their scale of revenue. They can invest the absolute amount of tech dollars compared to other subscale European players, where pressure from shareholders to increase RoE is a factor in these decisions. 

As demonstrated by their advanced trading activities, IBS is extremely agile and far ahead of retail banks in adapting the role of technology in investment banking. 

The Global IB of the future will be built around an integrated ecosystem consisting of: 

  • A captive client model of business that is global in scope; 

  • An alternative client business typically hedge funds providing the possibility of recycling risk; 

  • A well-diversified, large-scale, and liquid sales and trading franchise, which operates in all types of products, and globally to minimize risk of revenue correlation. 

  • A global, top-of-the-line "Tencent-type" ecosystem business model that offers significant unexplored business opportunities to develop. 

How to create the investment banks of the future  

Are investment banks prepared to think about the redesign and rely on other institutions to enhance their competitiveness? It might be challenging in investment banking to find the time, money, and resources for some companies to deconstruct their current structures, create and adopt digital technologies that allow them to better communicate with their customers, protect their ecosystem of partners (service providers) as well as utilize and market the potential of partner and internal data. However, the alternative will likely be a decrease in market competitiveness or the disintermediation of customers. 

Obstacles to bring about the future investment bank 

  • Local market structures are complex that an industry solution for the near future will require a lot of collaboration. 

  • Uncertainty about the roles that market participants and incumbent service providers, financial technology, and utilities. 

  • Ability to construct a convincing business strategy that will result in incremental benefits within the first few years of investing. 

  • Uncertainty regarding the optimal structures for ownership and operation of the services offered within the ecosystem. 

Principles to create the future investment bank 

To overcome these obstacles, investment banks need to follow three basic guidelines: 

Industry-wide collaboration 

Continue to work with market participants to jointly solve industry issues, including new partnerships with fintech utility companies and traditional companies. 

Additional standardization 

The opportunity is there to develop standards that promote technological innovation and encourage the latest technologies. 

Create the vision, comprehend the most important investments, and work to streamline 

Companies should invest continuously in their journey to reap advantages regularly and avoid falling into an investment trap. 

Here are a few examples of how to initiate the process:

  • Identify the utilities to either outsource or develop internal, bank-wide shared services functions (data management and Know Your Customer compliance).

  • Consider the governance arrangements required for a utility-based model to be successful. 

  • Consider industry-led standardization and the effect it will have on the ecosystem.  

  • Activities across asset classes such as single post-trade processing and other operations processes should be consolidated.  

  • Centralized data management and investment in application programming interfaces. This will allow flexibility and create seamless connectivity. 

  • Consider using a scalable, cloud-based infrastructure to improve overall efficiency, achieve faster time to market, and reduce the cost of ownership.

  • Explore the possible art with emerging technologies such as AI, blockchain, and advanced data analytics. 

  • Evaluate workforce and workplace practices through a post-pandemic lens and the shift from traditional, office-oriented employment to more flexible workspaces supported by technology innovations. 

What's next? 

Many entry barriers remain in the market (capital requirements and regulatory scrutiny conduct risk, and long-standing relationships with clients). Investment banks will not see their market share eroded by digital disruptors or non-industry competitors. However, investment banks looking toward the future amid shifting market dynamics must consider shedding costly internal infrastructures and moving towards a connected flow model that allows outside vendors to provide services that cover critical and non-critical services. In this changing environment, the ability of investment banks to develop and leverage differentiating information from data will become the new competitive advantage.

Key Takeaways: 

1.) Investment banks are facing significant problems caused by COVID-19's impact and evolving financial regulations, market democratization, increasing customer sophistication, a shift towards remote working arrangements, as well as rapid advancements in technology. There are numerous opportunities for banks to push towards greater returns; however, to do this, they'll likely require a re-engineering of specific business models and operational platforms. 

2.) The industry of investment banking is likely to undergo a split of broker archetypes, "flow players" that focus on back-office and middle-office tasks and "client capturers" that specialize in front-office operations. This split will create an interconnected network of players. 

3.) Banks will likely be required to consider which function they wish to play and participate in the ecosystem based on their external and internal circumstances. They will also likely have to redesign their service offerings in a flow-based model that connects capabilities and processes to market providers' ecosystems and improves the utilization of data, technology, financial technology, and analytics to provide unique insights and add value. 

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