How to build a futureproof investment bank now

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How to build a futureproof investment bank now

The future of investment banking

Like most other industries, the banking world is facing various unprecedented impacts of the global COVID-19 virus. This has intensified disruptive forces that were already lurking in the shadows. How will investment banking develop, and how can banking leaders prepare their organisation for the future of investment banking?

The changing investment banking landscape

In the last decade, a number of disruptive forces have entered the investment banking industry, based on new regulation, changing customer expectations, and new technologies and automation. This has led to e.g. the democratisation of markets, value-chain unbundling, buy-side sophistication, and a demand curve shift. The unforeseen economic and societal impacts of the global COVID-19 pandemic have intensified these forces.

The future of investment banking – Transforming service delivery to generate differentiated insight and added value

Flow players and client capturers

As a result, a new industry reality has occurred, consisting of commoditisation of products and services, pricing pressure, and mass customisation for sophisticated investors. The investment banking industry will therefore most likely transition from a full-scale service model into a bifurcation of two broker archetypes. The first is the “flow player” who executes trades on behalf of other industry participants, focuses on highly-liquid commoditised products, and is capital heavy. The second is the “client capturer” who manages all client needs but relies on others for trade execution, and is capital light. The choice for a particular archetype depends on existing structures, technology architecture, capital, product portfolio, and talent.

Part of a sophisticated ecosystem

Both broker archetypes will operate within an interconnected and increasingly global (and probably virtual) ecosystem, with partner collaborations to provide various back-office functions. Within that ecosystem, they will become data-centric organisations focusing on the client journey, shedding non-core assets and redesigning their service delivery around a simplified, agile, client-centric operating model that augments their capabilities with those of the partner ecosystem.

Building the investment bank of the future

To understand where to focus, “zooming out” (visualising the aspired future without constraints) can be very helpful. Once the direction is clear, banks can “zoom in” to translate their vision into initiatives within a framework of principles. There will be obstacles, of course, such as complex local market structures, and uncertainty about the roles of the players within the ecosystem. To overcome these obstacles, three principles are pivotal. First, industry-wide collaboration to collectively resolve industry problems. Second, further standardisation to support innovation and promote the adoption of new technologies. And finally, the ability to design the vision, understand key investments, and continue to simplify. Eventually, these principles will help to create and harness insights from data, which will become the new competitive advantage for investment banks.

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