David Tomljenovic mba ll.m CIM

Head Of Financial Services
Industry Research
Info-Tech Research Group

Analyst Perspective

The investment banking industry is experiencing a period of high disruption that is increasingly being driven by technology change. Traditional services provided by investment banks including trading, capital raising, mergers and acquisitions (M&A) advisory, and initial public offerings (IPO) are evolving rapidly as a result of changing market forces, competition, and emerging technologies.

Traditionally, the investment banking industry has been built upon personal relationships and networks. Institutional salespeople, traders, and investment bankers heavily rely on their personal relationships to be successful in their roles. However, a relationship-driven approach to many of the core functions in an investment bank have had the effect of blocking the adoption of new ways of doing business. Also, an element of inefficiency exists within the relationship model. Competitive forces, many of which are accelerated and enabled by technology, are reshaping many aspects of the investment banking industry.

Info-Tech’s approach focuses on an analyst’s investigation of strategic foresight. This methodology helps the IT department, and the business, process what is happening in the organization’s external environment in a way that guides ideation and opportunity identification. As a methodology, strategic foresight flows from the identification of signals to clustering the signals together to form trends and uncover what is driving the trends to determine which strategic initiatives are most likely to lead to success on an industry level.

The pace of change throughout the investment banking industry is accelerating. Customer demands, cost pressures, competitive products and services, and the increasing pace of business are placing new demands on IT.

The business is evolving to meet the new market conditions. IT must stay closely aligned to its business partners and stakeholders to assure they play an active role in developing new products and services.

IT is often not included in new product and service development. Without early stage involvement, IT may struggle with system design, implementation, and support. It can often cause additional challenges with existing systems and infrastructure.

Excellence in IT operations, governance, and business-aligned strategy is essential. Now, more than ever, IT needs to be highly aligned with business needs to ensure they are in a position to deliver the new products and services that are coming to market.

Mature core IT capabilities are essential to achieving success. Data and data governance, enterprise architecture, and forward-thinking infrastructure design and planning are critical to success.

Many factors are driving change throughout most of the core market activities that an investment bank performs.

A high level of regulation exists and new regulations continue to be added that affect core functions. The industry is trying to find ways to minimize effort related to regulatory burdens.

Technology is enabling new capabilities in the areas of trading, IPOs/capital raising, and M&A services.

Investment banking customers are demanding more efficiency. They are trying to find new and more efficient (simpler as well as cheaper) ways to satisfy their capital market needs. This often threatens traditional goods, services, and processes.

Most roles in an investment bank follow a hierarchy. Entry level individuals must move their way through a series of roles where they are supervised and taught by more senior members of the organization. An individual working in the investment banking role will have to move through five levels before they become a managing director.

Senior members of investment banks rely heavily on networks developed through their families, their education, and their work experience and are reluctant to adopt new ways of doing business that threaten the value of the systems they have worked decades to develop.

Additionally, traditional investment banking activities rely heavily on commissions as their prime sources of revenue. Much of the industry disruption threatens traditional commission rates.

Investment banks must come to terms with their present and future market realities where customers and the market, not investment banks, are evolving new products and processes.

Investment banks must embrace new technologies that continue to disrupt existing core activities.

The role of IT within an investment bank is dramatically growing in importance. As the need for change from the business escalates, IT will be required to support new business opportunities, processes, and products.

The continued alignment between the business and IT needs to keep pace with the rapidly changing business environment.

Increasing regulatory requirements for selling securities to the public, such as S-1 Registration Statements, are driving up the cost and complexity for companies to access public capital that has led to increased use of Special Purpose Acquisition Corporations (SPACs), which can reduce investment banking involvement and fees.

The increasing use of technology throughout institutional investment processes is leading to a reduced role for investment banks, especially in the sales and trading groups where technologies, such as Direct Market Access, is growing in adoption and usage among the invitational investment managers.

(Source: The Wall Street Journal MoneyBeat)

100% of institutional asset mangers (a large investment bank customer group) report cost pressures in their business

65% of institutional asset managers report regulatory constraints as a primary challenge in their business (Source: Deloitte )

New digital assets as tokenized assets and non-fungible tokens (NFT) are creating a new asset classes that investment banks are well suited to provide services around.

Crypto currencies also continue to hold a small yet persist place among the investment community. Investment banks can repurpose their capabilities to raise capital via IPOs and apply them to ICOs (Initial Coin Offerings).

Technologies that are Transforming The Investment Banking business

• AI
• Automation
• Real-Time Data

17.6% is the growth rate of the US investment banking market in 2022

8.5% is the growth rate of the global investment banking market from 2017-2022 (Sources: IBISWorld)

The Past

The investment banking industry has a unique history. The scale and importance of the services that investment banks provided to their customers resulted in close-knit relationships in which trust was developed over time.

Complex or proprietary data provided barriers to new entrants. Democratization of data/information is changing this leading to greater levels of competition.

Technology was not a major enabler for many of the key services offered by an investment bank. Telephone and email were the only technologies required for success in many aspects of the investment banking industry.

The Present

Technology has proliferated throughout the investment banking industry. Customers (institutional asset managers, private equity, and specialty hedge funds) are rapidly adopting new technology as well.

Technology has revolutionized access to data. Data was historically quite proprietary in nature (trading information, M&A transaction details, market statistics).

In many ways, technology has democratized much of what was proprietary. As well, it has provided access to datasets that previously did not exist.

Technology has reshaped investment banking. It has removed and redefined many historic value drivers.

The Future

The future of investment banking is much more technology enabled. Investment banks need to become technology/platform providers in order to continue to deliver value to their customers.

The nature of work is changing. Some of the work that individuals, from analysts through to managing directors, use to perform will be highly impacted or possibly replaced by technology.

Trading services are becoming increasingly automated. Humans are frequently being bypassed during trade execution.

The massive amounts of data that trading provides will become the enablers of equity, debt, and M&A activity.

Automated

The nature of front office functions will change, or potentially be eliminated. This includes sales, trading and advisory services. Customers are choosing self-service or self-directed alternatives. These require increasing levels of automation to enable customers to engage with the investment bank (IB) according to their preference

Automation is becoming essential. The ongoing democratization of the investment banking business, combined with customer centric pricing pressures will require investment banks to use automation to continually reduce costs.

Data Driven

Data is critical to modern investment banks. The investment banking business and its customers increasingly rely on access to a growing number of rich data sources to power their businesses. IBs must assure their data capabilities are leading edge.

Internal use of data is becoming an essential component for success. Investment banks produce massive amounts of valuable customer-derived data that must be used for innovation.

Innovation and modernization will rely heavily on data to identify and launch new products and services.

Platform Centric

Investment banks are intermediaries. Much of their values comes from connecting consumers and providers of capital to one another. This is at the center of the sales, trading and advisory services.

Technology is disintermediating investment banks. Technology is enabling consumers and providers of capital to transact without the involvement of an investment bank.

IBs must find new ways to deliver unique value to their customers. They must take control of the technology innovation externally and provide new value to customers on their own platforms.

New Market Development
Become an enabler of new products and services

Embrace change. The innovation that is happening throughout the investment banking value chain needs to be embraced, not feared.

Trading is being disrupted by direct market access (DMA).

Private Securities Trading markets are evolving to create liquidity for non-public securities.

IPOs are llama being replaced by Direct Listings and SPACs

New products and processes are rapidly evolving such as Initial Coin Offerings (ICOs) or tokenized securities.

M&A Innovation
Continued consolidation

M&A Advisory is being challenged by transaction exchanges, deal matching services and new AI power technologies.

Relationships still matter. Despite the ongoing impact that technology is having on M&A services, investment banks still have an advantage by having relationships and proprietary customer and marketplace insights.

Investment banks must combine technology and proprietary knowledge to bolster their M&A capabilities.

Data is essential. Data that comes from other parts of the business can be used to identify M&A as well as other high-value activities such as capital raising.

Real-Time Systems
Speed is critical

Real-time systems are proliferating. Throughout the financial industry, the movement toward real-time systems is expanding.

The investment banking industry still has some delays throughout its processes such as the trading business that can take trade one, two or three days for settlement.

Real-time settlement is critical for risk management/mitigation, regulatory compliance, and new product and service developments.

Investment Banking of the Future
Trends Report

Business context & IT Strategy

The future will hold more trends and technologies, making it pivotal that your investment bank continues to establish itself as the disrupter, and not the disrupted. You must establish a structured approach to innovation management that considers external trends as well as internal processes. Info-Tech’s Define Your Digital Business Strategy blueprint and Build a Business-Aligned IT Strategy blueprint gives you the tools you need to effectively process signals in your environment, build an understanding of relevant trends, and turn this understanding into action.