Other parts of this series:
Many investment banks are still not leveraging the potential of digital technologies in their internal processes and external client interactions.
Until now my blog posts have focused on Insurance topics, but this year I’ll be branching out to tackle topics that span the range of financial services, including Capital Markets and Banking. Let’s start this week with a look at investment banking and the opportunities presented by digital technologies.
The financial services industry has seen the effects of digitalization on the retail side—driven by changing client behaviors and needs—with crowd-funding of ventures, mass-customized services, smartphone banking and new payments technologies emerging over the last few years.
Investment banks have also been significant players in this digital disruption through the advancement of client portals, electronic trading venues and connectivity standards such as FIX. However, investment banks have been uneven in their overall response to potential disruptions by these digital technologies.
Some of this uneven take-up might be due to the smaller numbers of larger (and institutional) clients and a view that “this is all about retail.” Other likely reasons for this hesitancy must include the aftermath of the financial crisis, and an intense focus on risk, regulation and costs over the past five years.
This focus has resulted in investment banks bypassing technological innovation in favor of regulatory compliance work. I think that’s a miscalculation because digitalization has the potential to overturn a number of historically important structural elements within the industry. For example:
- A concentration of resources (as measured by balance sheet, for example) has made large investment banks valuable to large clients, and created barriers to entry for new or small players.
- Aggregation of transactions puts investment banks at the center of client networks, enabling them to derive comparatively high “rents” as intermediaries among principal traders.
- Narrow traditional sales and sourcing channels—meaning significant portions of industry volume concentrated on small numbers of individuals—have meant that investment banks can control sales channels by careful hiring and client relationship management.
- A lack of price and transaction transparency—such as no published market prices for certain instruments—has kept many kinds of transactions bilateral (as opposed to market- or auction-like).
All of these structural elements have been attacked by digital technologies in other industries, changing the way customers buy, upsetting the hierarchies of industry players, and creating and destroying portions of the industry value chain. Which begs the question: How long have investment banks got before they too succumb to disruption by less entrenched players?
In my next post I’ll explore six key themes that we expect to drive digital disruption for investment banks.