Recent economic shifts have created significant challenges for the investment banking industry. This report explores how banks will need to adapt their operational frameworks to keep up with the evolving investment landscape and deliver the bank of the future.
The unprecedented public health, economic, and societal impacts of the global COVID-19 (novel coronavirus) pandemic have intensified the forces that are creating challenges and accelerating disruption in the investment banking industry: falling equity prices, liquidity stress, evolving financial regulations, market democratization, pricing pressure, increased client sophistication, shifts to remote working arrangements, and rapid technology advances.
Against this tough backdrop, we anticipate that investment banking will transition from a full-scale service model to a bifurcation of two broker archetypes: “client capturers” that specialize in front-office functions and “flow players” that focus primarily on middle-office functions (figure 1). These archetypes will likely operate within an interconnected, increasingly global—and, potentially, virtual—ecosystem that includes partners collaborations that provide various back-office functions.
Industry realignment should create opportunities for investment banks to drive toward higher levels of return. However, to deliver on this agenda, organizations can no longer tinker around the edges. It is likely that many will need to dramatically retool their current business models and operational platforms to prioritize client-centricity, disruptive technologies, regulatory recalibration, and workforce and workplace evolution. In addition, they should determine which archetype they want and are able to be within the new ecosystem.
Are investment banks willing to rethink, rebuild, and rely on others to improve their future competitiveness? It may be difficult, costly, and time-consuming for some organizations to untangle their existing structures, develop and acquire digital technologies to better engage with customers, secure ecosystem partners (service providers), and harness and commercialize the combined power of internal and partner data. Yet the potential alternative is likely reduced market competitiveness and/or disintermediation.
To understand where to focus and drive change, banks should consider “zoom out” visualizing the future beyond immediate constraints and “zoom in” to translate this vision to prioritized initiatives within a framework of principles that can help steer their journeys (figure 3).
Examples of initiatives to commence the journey include the following:
As long as considerable barriers to market entry remain in place (capital requirements, regulatory scrutiny, conduct risk, and long-standing client relationships), investment banks are unlikely to have their market share challenged by digital disruptors or other non-industry competitors. However, investment banks looking to the future amidst shifting market dynamics should consider relinquishing expensive internal infrastructures and move toward a connected flow model where outside providers offer services for both critical and non-critical functions. In this new environment, the investment bank’s ability to create and harness differential insights from data becomes its new competitive advantage.
The future of banking will look very different from today. Faced with changing consumer expectations, emerging technologies, and new business models, banks will need to start putting strategies in place now to help them prepare for banking in 2030.
How can you drive bold transformation in your organization over the next 10 years?
1 In using the term “investment bank,” we refer to firms’ broker-dealer or “markets” business, not the advisory business.