The future of investment banking

Top takeaways

• Investment banks¹ face significant challenges driven by COVID-19 impacts, evolving financial regulations, market democratization, increased client sophistication, a shift to remote working arrangements, and rapid technology advances. There are opportunities for banks to drive toward higher levels of return; however, to achieve this, they likely will need to retool certain business models and operational platforms.
• The investment banking industry will likely undergo a bifurcation of broker archetypes: “flow players” that focus on middle- and back-office functions and “client capturers” that specialize in front-office functions. This bifurcation will result in an interconnected ecosystem of various players.
• Banks likely will need to determine which role they want and, depending on internal and external factors, are able to play within the ecosystem. They also will likely need to redesign their service delivery around a connected flow model—moving capacity and processes to the ecosystem of market providers—and optimize the use of financial technology, data, and analytics to generate differentiated insight and added value.

The changing investment banking landscape

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.

What is a connected flow model?

Connected flow consists of a simplified, agile, client-centric operating model that augments a financial institution’s capabilities with those of a partner ecosystem, creating cost efficiencies by standardizing and centralizing provision of non-differentiated services across the industry. Leveraging internal and partner data generates insight to optimize performance across revenue and cost drivers and targets financial resource use on the most valuable activities and clients.

Adopting the connected flow model will allow investment banks to reimagine their business along four broad themes of technology modernization, workforce of the future, client-centricity, and regulatory recalibration. Ultimately, the model will increase efficiency, addressing cost challenges through increased automation and enhanced tooling and deliver results with reduced inventory and revenue leakage.

Connected flow model

The future will likely require that investment banks shed non-core assets and redesign their service delivery around a connected flow model—moving capacity and processes among various geographies and ecosystem partners—and optimize the use of financial technology, data, and analytics to generate differentiated insight and added value. The investment bank becomes a data-centric organization focusing on the client journey, moving middle- and back-office functionality into market utilities or to financial technology (fintech). A rich data set will allow the bank to model client behavior and use artificial intelligence, machine learning, and natural language processing to predict their client trading activities and risk appetite.

The investment bank is now an agile participant in a sophisticated ecosystem addressing today’s market trends and focused on differentiators such as risk models and customer experience.

Ultimately, only a few value-add functions would need to be implemented in an investment bank’s internal systems: risk management, payments, internal and external data processing (such as client data and regulatory reporting data), and general ledger.

The technology exists today to deliver this vision:

• Distributed ledger technology provides the basis for a shared ledger that minimizes reconciliations.
• Open-source technologies enable data lakes that store the vast quantities of data the business generates.
• Advanced analytics and cognitive technology can derive value from this data.

Archetype considerations

When deciding whether it would be more advantageous to become a client capturer or a flow player, investment banks should consider how their existing structure, technology architecture, capital availability, product portfolio, and talent pool map to each archetype’s projected core competencies (figure 2) and, if necessary, how to bridge any capability gaps:

How to build the investment bank of the future

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).