With digital transformation disrupting the banking industry and creating new competitors in the fintech space, banks have been heavily pressured to develop a solution of their own across their value chain. Investment banking is one of the more obscure sectors that have received less attention than its counterparts for widescale digitalization. Despite digital technologies already being an integral part of every capital markets professional and having transformed the sales and trading business, corporate and investment banks have shown mixed and often disappointing results in regard to digital solutions. However, exploring the different approaches, priorities, and risks that involve digital transformation is crucial given the potential value that such solutions can provide.
Investment banks have experienced setbacks due to two overarching reasons in the past: volatile revenues, and increased competition. According to a report from Accenture, “despite significant cost-cutting measures, quarterly revenues in investment banking have been stagnating” (Accenture). The main aspects of the value chain that are driving weak returns are volatility in trading volumes, competitive advisory fees, falling revenues in merger and acquisition activities, and stringent capital and liquidity requirements. Furthermore, the increased regulatory measures have added to the burdens of investment banks and driven more costs. In addition to these trends, the competition in the capital markets industry has been ever-growing with the introduction of FinTechs. Financing through crowdfunding and peer-to-peer lending has eliminated the need for existing investment banking services and brokers, and more and more FinTechs are entering the market and providing alternative services that replicate and improve the services of traditional investment banks. Both of these challenges call for a revamped business model that is driven by digital that can cut costs and also keep up with new trends in the Fintech space.
Digital transformation provides great potential in optimizing the business to boost weak returns. The problem around volatile revenues encompasses inefficiencies in the value chain that can be addressed through the implementation of technologies like robotic process automation (RPA), machine learning, artificial intelligence, and data analytics. Ralf Bemman and Bhuvana Karthik from Accenture believe that these solutions alongside other disruptive technologies such as blockchain, virtual customer assistants, and advanced analytics will play a key role in “streamlining and simplifying processes, eliminating redundant ones, and curtailing investments in monotonous and repetitive internal processes” (Accenture). When looking into a traditional investment bank’s value chain, the client onboarding process in front-office operations was determined to show the highest potential and urgency for automation that can reduce the team size and time required for processing client onboarding. Bemman and Karthik also emphasize that new competition should be tackled through both competition and collaboration, allowing banks to improve existing services and tap into innovative ideas, while also developing innovative solutions through digital channels and interactive technologies that retain their existing clients base. Upgrading legacy applications through blockchain and RegTech collaborations is one way that investment banks can upgrade their value chain to address larger clearing volumes, ensure regulatory compliance, consolidate reporting, and provide customized reports.
However, despite the advantages of going digital in investment banking, investing heavily in digital is not a clear cookie-cutter answer for all banks. In McKinsey’s report on Digital Success in Capital Markets, analysts outlined that there were two different routes for success in digitalization for investment banks: the all-in route and the targeted route. Determining which route a bank should take depends entirely on its positioning. Banks that have a substantial portion of revenues coming from clients who are focused on executing at low cost and capital markets divisions facilitating adjacent businesses that are going digital, such as wealth management units, transaction banking, and retail banking will require highly digitized service models. However, banks that serve clients with highly customized needs such as pension and insurance funds seeking complex asset-liability management solutions will find digital services less urgent in many aspects of the value chain. Furthermore, banks should evaluate their track record with digital initiatives; those who are “late entrants, that have struggled to deliver historically, or that are constrained by funding” may find it better to explore limited digitization, to begin with (McKinsey).
Investment banking may see new opportunities going forward with digital and centering business models around disruptive technologies, but challenges have and always will be present. Assessing previous hiccups in the introduction of digital is key to developing a focused and successful migration path that is set up for success. Previously, banks “have misread the economics of electronic trading, failed to anticipate market structure changes or engaged in expensive ‘me too’ initiatives that were not sufficiently differentiated” (Mckinsey). Alongside these missteps, they have also underestimated the capabilities required for digital transformation to succeed. Moving forward, McKinsey has identified four immediate priorities that address many of these mistakes: clearly defining digital strategy for each sector, building digital capabilities and operating models, implementing “no regret” digital transformations and end-to-end automation, and fueling the innovation pipeline.
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Bemmann, Ralf, and Bhuvana Karthik. “Charting the Digital Journey for Investment Banking: Part 1 .” Accenture, 2018, https://www.accenture.com/_acnmedia/pdf-83/accenture-charting-digital-journey-investment-banking-part-1.pdf.
Bemmann, Ralf, and Bhuvana Karthik. “Charting the Digital Journey for Investment Banking: Part 2.” Accenture, 2018, https://www.accenture.com/_acnmedia/pdf-89/accenture-charting-digital-journey-investment-banking-part-2-pov.pdf.
Buehler, Kevin, et al. Two Routes to Digital Success in Capital Markets. McKinsey, Oct. 2015, https://www.mckinsey.com/~/media/McKinsey/Industries/Financial%20Services/Our%20Insights/Two%20routes%20to%20digital%20success%20in%20capital%20markets/Two-routes-to-digital-success-in-capital-markets.ashx.
Franklin, Joshua. “Investment Banks Accelerate Efforts to Automate Junior 'Grunt Work'.” FT, Financial Times, 14 Sept. 2021, https://www.ft.com/content/06b0a82d-b0fa-437f-b640-57bdaa508e59.
Springfield, Cary. “Can Investment Banking Successfully Embrace Digitalisation?” International Banker, 24 Mar. 2021, https://internationalbanker.com/banking/can-investment-banking-successfully-embrace-digitalisation/.
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Buehler, Kevin, et al. Two Routes to Digital Success in Capital Markets. McKinsey, Oct. 2015, https://www.mckinsey.com/~/media/McKinsey/Industries/Financial%20Services/Our%20Insights/Two%20routes%20to%20digital%20success%20in%20capital%20markets/Two-routes-to-digital-success-in-capital-markets.ashx.
Franklin, Joshua. “Investment Banks Accelerate Efforts to Automate Junior 'Grunt Work'.” FT, Financial Times, 14 Sept. 2021, https://www.ft.com/content/06b0a82d-b0fa-437f-b640-57bdaa508e59.
Springfield, Cary. “Can Investment Banking Successfully Embrace Digitalisation?” International Banker, 24 Mar. 2021, https://internationalbanker.com/banking/can-investment-banking-successfully-embrace-digitalisation/.