The Future of Investment Banking: What Does it Look Like?

COVID-19 has brought unprecedented changes in the investment banking industry. Banks will need to adapt to their operational frameworks to keep up with the evolving investment landscape and progress toward a new future.

A Deloitte report highlights:

– Investment banks are facing significant challenges due to COVID-19. In the wake of the outbreak, financial regulations are evolving, the market is democratizing, clients are becoming more sophisticated, work settings are changing, and technology is advancing. While this has opened opportunities for investment banks to drive toward higher returns. This, however, requires banks to retool their business models and operations.

– The investment banking industry will bifurcate between “flow players” that focus on middle- and back-office function and “client captures” that specialize in front-office functions.

The changing investment banking industry

The impact of the pandemic can be felt in the investment banking industry. Public health, economic, and societal impacts due to the outbreak of COVID-19 have intensified forces that are creating challenges and accelerating disruption in the industry.

The following signs mark a shift in investment banking –

– Falling equity prices

– Liquidity stress

– Evolving financial regulation

– Market democratization

– Shift to remote work arrangement

-Rapid advancement in financial technology

In the light of these advancements, investment banks will transition from a full-scale service model to a bifurcated broker archetype –

Client Captures: Banks that specialize in the front-office specialization
Flow players: Banks that focus on middle – and back-office functions

These archetypes will operate in an interconnected, increasingly global—and, potentially, virtual—ecosystem that includes partner’s collaborations that provide various back-office functions.

This realignment may create opportunities for investment banks to drive toward higher levels of return. To deliver on this agenda, banks will not have the flexibility to make modifications to the edges. Banks will likely retool their existing business models to prioritize client relations, disruptive technologies, regulatory changes, and the evolution of the workforce. Additionally, they will decide between client capture and flow players they want to be within the new ecosystem.

Moving towards connected flow model

Future investment banks will require to drop their non-core assets and re-design their service delivery like in a connected flow model, which would require them to move their capacity and processes among various geographies and partners in the ecosystem. This will optimize the use of financial technology, data, and analytics to generate differentiated insight and added value.

Investment banks will become a data-centric organization that focuses on client journey and move middle-and back-office functionality into market utilities or to financial technology. Further, data set available with banks will help them to predict their client trading activities and risk appetite using artificial intelligence, machine learning, and natural language processing.

This will dramatically change the way investment banking jobs are seen.

An investment bank will evolve into an agile participant in a sophisticated ecosystem that addresses market trends and focuses on differentiating factors such as risk and customer experience.

In the end, a few functions would be carried out at an investment bank’s internal teams: risk management, payments, data processing (client data and regulatory reports), and ledger. The technology to deliver these functions already exists today:

Distributed Ledger Technology (DLT) based on the blockchain provides a basis for a shared ledger which minimizes reconciliations.

Existing open-source technologies can build data lakes that store vast quantities of data generated by the business.

Advanced analytics and cognitive technology can extract valuable insight from data.

Choosing the archetype

It would come down to deciding whether it would be more advantageous to become a client capturer or a flow player. To do so, investment banks will need to consider their existing infrastructure, technology infrastructure, capital availability, portfolio of products, and talent pool. Mapping the archetype’s projected core competencies is the next step for investment banks in recognizing the archetype, followed by understanding how to bridge the capability gap if there’s a need to do so.

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Building the investment bank of the future

To advance toward the future and evolve, banks need to rethink, rebuild, and rely on others to become future-read. It will be difficult, money – and time –consuming for banks to overturn their existing structure, develop, and acquire new-age technologies to better engage their customers, get partners on board, and harness the power of data. As a result of these efforts, market competition will reduce and/or lead to intermediation.

For banks to focus and drive change, banks should consider looking at the bigger and visualizing the future beyond immediate constraints. A few initiatives that banks can take to move forward in this direction are –
Identify the utilities that can be either outsourced or developed internally, bank-wide shared services functions. Data management and Know Your Customer compliance are primary examples of utilities.
Consolidate operations processes and activities across asset classes (such as single post-trade processing).
Centralize data management and invest in application programming interfaces (APIs) to develop 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 emerging technologies such as AI, blockchain, and advanced data analytics to automate processes and improve efficiency of operations.
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.

Future banks

The banks in the future will look very different from today. Some of the reasons that are driving this change are changing consumer expectations, new technologies, and new business models. Banks, however, need to start now to prepare for the future.