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As of Aug 2020, it has been twelve years since the 2008 Financial Crisis happened, yet the global investment banking industry is still struggling to survive as the world’s five largest investment banks witnessed a 3 % decline or USD 26.1 Billion fall in their revenue earnings of 2019.
Investment Banking primarily involves advising firms on mergers and acquisitions and capital-raising strategies. Heavy capital charges, cumbersome regulatory compliances, high structural cost, increasing geopolitical tensions, and market saturation through the entry of fintechs have adversely affected their revenues and returns. Market players need to adopt a better business model and revamp their existing structures to meet the dynamic environment where technological innovations are changing the entire landscape.
As per reports, the twelve largest investment banks in the USA and Europe generated around USD 77.5 Billion in revenue from investment banking. Such growth is primarily accounted to the Asia Pacific region where the demand for wealth management and brokerage services is expected to increase owing to the entry of millennial investors in the financial markets.
Investment banks are slowly shifting to businesses requiring less regulatory capital. Major market participants such as Barclays, and Credit Suisse have already announced that they are shifting from traditional underwriting to fundraising and mergers and acquisitions advisory as compliances have made certain activities expensive than others. The driver of disruption would be technology – a combination of current innovations -machine learning with of quantum computing will help them scale their business but it also engenders new risks.
2. Protectionist policies– As the next decade dawns, most of the countries are aiming to become self-reliant which adversely affects free flow of capital across nations thereby affecting their operations significantly.
2. As we head towards tech-enabled world, it invites threats in the form of cyber security, privacy invasions and phishing attacks that require better structural changes to combat them.
As markets gets saturated due to the emergence of Fin-techs in the industry, the market players must look for alternative avenues for steering their growth ahead. The major factor in favor of such startups is their ability to leverage the use of technology enabling them in providing customized solutions to their clients at lower cost and at a greater speed.
The next decade does not demand for competition but greater integration of Fintech model (business model adopted by startups in finance domain) by these established players. They need to exploit the opportunities offered by digitalization to optimize their performance and achieve results.
Firstly, Investment Banks can make use of cloud solutions along with advanced analytics and artificial intelligence would enable them carry out real time analysis. This would help the firms to understand investor behavior, predict trading patterns and better data visualization thereby providing advantages to both research and marketing departments. Digitalization can also help them reduce their compliance cost such as by providing digital KYC facilities to their customers.
Secondly, banks need to focus on their customers whose trust is slowing eroding away due to their inability to meet customer expectations. Estimates indicate that around 37 % banks in USA only have a customer experience program. As financial markets are heading towards zero based commission trading, the only way to achieve growth is to provide better services and invest in making a business model that puts customers first.
Ultimately, only the participants who would be able to provide a world class digital experience to their clients would only survive in the next decade.
