Digital banking beyond retail: the impact on investment banking

Julio Fernández-Sanguino

11 May 2017

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User digitization and the rise of more agile players (fintech) are forcing investment banks to reconsider their range of services with the aim of satisfying clients that are demanding a new way of interacting with products and services.

Digitization’s impact on the financial sector is easily recognizable in the massive effort that financial institutions are making to position themselves in the face of a client increasingly demanding digital solutions.

This digital revolution in banking is unique giving the need of an avid consumer of new components and an innovative high profile relationship model. As a result, most financial institutions have made the digital transformation their central strategic pillar, turning it into a competitive advantage and utilizing it as a key positioning element in the face of a market and investors that value firms’ ability to adapt to the new rules of the game.

Inside the investment banking industry, neither these stimulants nor the competitive pressure exist, which made the development of digital initiatives secondary. Those already present don’t center on the final consumer as much as the internal organization (process efficiency and large information systems), where they are taking on the significant initiatives to make use of the enormous benefits from cost savings, process optimization, data analysis, or artificial intelligence.

Changes to the rules of the game

We can see how some of the traditional parameters in investment banking can consider themselves compromised in the new digital context where we find new rules:

  • The investment volume as a market access factor that could only be guaranteed by investment banks may be displaced by a group of small investors brought into contact through platforms combining critical mass.
  • The available information that’s managed by big banks and research departments see substitutes in the form of collaborative platforms or the analysis of shared, public data.
  • A personalized offer and an elevated level of advisory had led financial institutions to create complex organizations to respond to the needs across the entire investment spectrum. It is now possible to automate many of these services/ functions so that they are available to any investor on the market.
  • Investors could only access more complex markets through institutional investors while today thanks to bank disintermediation, it’s viable to offer these services to retail clients.

We’d also have to add a few elements that condition the competitive context where investment banking moves:

  • The emergence of new players: fintech companies that, thanks to their specificity, agility and technological potential, can become active in a niche.
  • Eliminating barriers to entry: access to select capital markets is now possible thanks to previously described factors, such as collaborative platforms that guarantee a minimum degree of access.
  • Disintermediation: digital platforms that make it more and more possible to put different agents in contact, taking away intermediary processes that third parties carried out.
  • A new regulatory framework is imposing new rules to be followed, implying a separation of assets and internal barriers. A framework that is additionally incapable of giving a full legal answer to players coming from other sectors that, sometimes, makes it too hard for them to enter the market.

We’re heading towards an environment where people will permanently be in touch with technology, and the ease with which it lets them interact with each other will determine the future real value creation framework. The role of investment banking passes through being able to facilitate and integrate these relationships from their current market position. This effort, -done through outsourcing or integration in their platforms- with the aim of being able to compete with these fintech companies that, due to their agility, are capable of offering part of these services in a more efficient manner but not as an overall offer.

Opportunities and initiatives

Many of these initiatives go through strategies that were already successfully tested in a B2C context and present an entirely compatible philosophy with the type of client or the nature of services offered in investment banking:

  • Collaborative platforms: the connection between different agents providing collective knowledge means a new focus in the centralized decision-making process that took hold inside the bank. It involves implementing platforms similar to others that have already revolutionized sectors that are not that far away from investment banking. An example could be the startup Researchfy, a one-stop digital distribution platform for research providers and investors. Founder Jorge González affirms: “Collaborative platforms let small players compete with the big ones in the diversity and breadth of supply, as well as enjoying more data-oriented digital platforms that would otherwise be impossible on their own, joining forces through a neutral platform that lets them adapt to the sector’s new demands for transparency and competition ”.
  • Direct service to the retail client: establishing platforms geared to the final customer means there’s an opportunity to focus on a type of smaller customer that was unprofitable for its scarce margin. Today, this is possible, with the low operating costs associated with self-service platforms that let them focus on a long tail of individual users that collectively guarantee a volume of business and operations. These customers can be people or companies who do not currently see their need for products covered by their regular financial services provider. This situation fostered the emergence of fin tech companies like Kantox or Ebury came about, offering foreign exchange services for enterprises that don’t have access to complex financial products and can provide them due to their specialization and technological versatility.
  • Automated advice: the automation of processes is letting machine learning and big data technology get applied in investment decisions. This not only should be interpreted from diminished operating costs but also related to the previous point, from the opening up of sophisticated services to a smaller customer that previously lacked access to this kind of service. The infinite amount of robo-advisors currently on the market demonstrates the unstoppable rise of this trend.
  • Multiplatform investment in digital environments: providing the investor different interconnected investment platforms that let it manage asset portfolios in real-time, visualizing their performance and knowing the possible risk scenarios, along with short and long-term forecasts. To enable this collaboration, it’s necessary to develop a collaborative environment, with open investments between clients that permit decision-making and predictive analysis linked to customers through their asset portfolios within the same digital platform. In an atmosphere where consumers are less faithful to their bank and are making more use of digital solutions, the perception of transparency and collaborative learning through flexible environments where their value proposition is innovative and focused on the client is fundamental.
  • Optimization and automation of processes: technology is and will keep being a differentiating factor for the future success of investment banks. In a model where people are the differentiating value but where in the future risk-aversion on the part of customers will be more present, their capability will see itself limited. Cost-reduction, the speed of execution, and the quality of service will be the distinguishing aspects of each player. In a technological landscape with older systems, manual processes and where investment budgets are geared towards the regulatory realm, we must not forget the challenges regarding technical architecture through the integration of platforms (through APIs and open web services), system centralization or the entrance of distributed models like blockchain. How they tackle these technological challenges will let firms take control of the market, build more trust and be more efficient in an increasingly more digitized environment.

Trends like these will enable a diversification and activation of business in a market currently undergoing a transformation, that will predictably see their global profits decrease, but where there are opportunities for those players that successfully position themselves in the new services and business yet to come.