Transforming the distribution of services to produce differential insight and added value

For the investment banking sector, recent economic shifts have generated major hurdles. This study examines how banks will have to change their operating systems in order to keep up with the changing investment environment and produce the future bank.

Top Takingaways

  • Investment banks1 face major challenges led by the consequences of COVID-19, changing financial laws, democratization of the industry, increased maturity of consumers, a move to remote working arrangements, and rapid developments in technology. Banks have potential to move towards higher levels of return; however, some business structures and operating platforms are likely to need to be retooled to accomplish this.
  • A bifurcation of broker archetypes is likely to be faced by the investment banking industry: “flow players” focused on middle and back office functions and “client capturers” specialized on front-office functions. This bifurcation would result in an ecosystem of diverse players that is interconnected.
  • Banks would likely need to decide which role they want and are able to play within the environment, based on internal and external influences. They will also need to rethink their service delivery around a related flow paradigm, shifting capacities and processes to business provider environments, and maximizing the use of financial technologies, information, and analytics to produce differentiated insight and added value.

Evolving world of investment banking

The global COVID-19 (novel coronavirus) pandemic’s unparalleled public health, economic and social impacts have exacerbated the factors causing difficulties and accelerating disruption in the investment banking industry: declining share rates, liquidity tension, shifting financial legislation, consumer democratization, competitive pressure, enhanced consumer maturity, shifts to remote

We expect investment banking to move from a full-scale service model to a bifurcation with two broker archetypes against this difficult backdrop: “consumer capturers” specialized in front-office functions and “flow players” focused mainly on middle-office functions (figure 1). In an integrated, increasingly global, and perhaps automated, environment that involves alliances that have different back-office roles, these archetypes would certainly work.

The realignment of the sector should generate opportunities for investment banks to press for higher levels of return. Organizations should no longer tinker around the margins, however, to deliver on this agenda. In order to prioritize client-centricity, emerging technology, regulatory recalibration, and the transformation of the workforce and workplace, many will likely need to radically retool their existing market models and organizational frameworks. Moreover, inside the new ecosystem, they can decide which archetype they want and are willing to be.

What is a model for linked flows?

Linked flow is a streamlined, flexible, customer-centered operating model that enhances the capabilities of a financial institution with those of a partner ecosystem by standardizing and centralizing the supply of non-differentiated resources across the sector to generate cost efficiencies. Leveraging internal and partner data offers insight into maximizing efficiency for the most valuable operations and consumers through sales and cost factors and targets the usage of financial capital.

Adopting the related flow model would allow investment banks to reimagine their industry on four large topics: modernization of technology, future workforce, consumer centricity and recalibration of regulations. Ultimately, through expanded automation and better tooling, the model can maximize performance, overcome cost issues and produce outcomes with decreased inventory and sales leakage.

Model of Linked Flow

In the future, investment banks would possibly entail shedding non-core assets and redesigning their service delivery around a related flow model, shifting capacity and processes between various geographies and ecosystem partners, and maximizing the use of financial technologies, data and analytics to produce differentiated insight and added value. The investment bank is a data-centered enterprise that focuses on the consumer experience, transferring middle and back office functionality to sell utilities or financial technologies (fintech). In order to forecast their consumer trading practices and risk appetite, a rich data set would allow the bank to model customer behaviour and use artificial intelligence, machine learning and natural language processing.

The investment bank is also an agile player in a diverse environment that tackles current industry dynamics and relies on identifying aspects such as risk models and consumer service.

Ultimately, in an investment bank’s internal processes, only a few value-add functions will need to be implemented: risk control, payments, internal and external data collection (such as customer data and regulatory reporting data) and general ledger.

To deliver this vision, technology exists today:

  • The foundation for a public ledger that minimizes reconciliations is distributed ledger technology.
  • Open-source platforms allow data lakes to store the large amounts of data produced by the enterprise.
  • From this knowledge, advanced analytics and cognitive technologies will extract value.

Considerations of the Archetype

Investment banks should consider how their current structure, technological infrastructure, resource supply, product portfolio, and talent pool map to the expected core competencies of each archetype (Figure 2) and, if possible, how to bridge any capacity holes while determining if it will be more beneficial to become a consumer capturer or a flow player:

How the investment bank of the future will be established

Are investment banks able to reconsider, reconstruct and focus on others to boost their sustainability in the future? For certain companies, untangling their current systems, designing and acquiring emerging technology to effectively connect with clients, healthy ecosystem partners (service providers), and harnessing and commercializing the combined potential of internal and partner data can be challenging, expensive, and time-consuming. The possible solution, though, is likely to be decreased competition and/or disintermediation of the market.

In order to identify where to concentrate and accelerate progress, banks should consider “zooming out” to imagine the future beyond immediate constraints and “zooming in” to convert this vision into prioritized programs within a system of concepts that can help lead their journeys.

The following are examples of steps to continue the journey:

  • Identify the utilities for either outsourcing or creating mutual internal, bank-wide services functions (for example, for data management and Know Your Customer compliance).
  • To be efficient, consider the governance structures needed for a utility-based model.
  • Decide on standardization driven by industry and consider how the environment will be impacted.
  • Consolidate the procedures and functions of operations across asset groups (such as single post-trade processing).
  • To improve flexibility and build smooth integration, centralize data storage and invest in application programming interfaces.
  • To increase overall performance, achieve quicker time to market, and reduce ownership costs, consider using a flexible, cloud-based architecture.
  • Explore the art of digital technologies such as AI, blockchain and sophisticated data processing with the art of the conceivable.
  • Via a post-pandemic perspective and the transition from conventional, office-oriented jobs to more mobile workspaces enabled by technological advances, analyze employee and organizational behaviors.

What’s in advance?

As long as major market penetration hurdles (capital requirements, regulatory oversight, behavioural risk, and long-standing customer relationships) remain in place, investment banks are unlikely to be threatened by technology disruptors or other non-industry rivals for their market share. Investment banks looking to the future, however, should consider leaving costly internal infrastructures in the midst of evolving market conditions and shift towards a linked flow model where external providers provide services for both essential and non-critical functions. The capacity of the investment bank to produce and harness differentiated perspectives from data is its new strategic edge in this new world.

Bank of 2030: Make a bold transition

From now, the future of banking will look very different. Banks will need to start placing plans in place now to help them plan for banking in 2030, in the face of changing customer preferences, evolving technology and new market models.

In the next 10 years, how can you accelerate a bold transition in your organization?

#Investment #Banking #BankOf2030 #Competitiveness #Archetype

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