People’s interactions with their banks have undergone an extraordinary transformation. From the emergence of app-only challengers such as Monzo to the evolution of physical branches, technology has dramatically changed the age-old relationship. However, compared to typical high street interactions, the investment banking landscape has always been markedly different, sustained by services such as capital raising and M&A advisory. Thanks to this structure, there has never been any pressure on such firms to vary the products offered to clients.
Since the repeal of the Glass-Steagall act, a piece of legislation that separated commercial banks from their retail counterparts and the annulment of which is considered by many to be a primary cause of the financial crisis, members of the former group have become powerhouses trading on information and access to credit. In this context, huge organisations such as JP Morgan and Merryl Lynch can draw on low-cost funding without having to interact with other banks not affiliated to them. However, combined with increased competition and the cost of regulation, recent rhetoric around breaking up the power of Wall Street has caused speculation that the act will be re-instated. Ten years on from the financial crisis that the act’s repeal supposedly ignited, these factors are putting commercial banks and the existing industry model under pressure.
Investing in technology
While the core services around equity, debt, structured finance and M&A will endure, many of the ‘low touch’ activities carried out by investment banks are being commoditised by technology. These are typically people-intensive processes such as regulatory reporting, risk management and product control. Thanks to automation, the next 10-15 years may present a vastly different landscape in which only the most highly customised, ‘high touch’ services are handled by humans. For example, investment banks could offer customised product and pricing systems for the average institutional customer, using a fraction of the time and human intervention that is needed today.
Furthermore, services such as Know Your Customer (KYC) that are core, but non-differentiated, are becoming simplified and now take minutes rather than days, in the same way that retail outfits such as Monzo have achieved. Some organisations are already using blockchain-based platforms for instant settlements, mitigating credit and counterparty risks simultaneously and paving the way for ‘exception-only’ intervention. In fact, arecent Cognizant study found that 90% of financial services executives say their firm has identified or is currently identifying processes and functions that can be automated through the technology. Even ancillary services such as research can be easily personalised for institutional and high-net-worth clients using automation, based on buying behaviour patterns. Most novel for investment banks, technology is enabling greater collaboration between banks. Using smart algorithms, organisations can select a syndicate of lenders, giving a corporation easier access to funding, through reverse auctions taking place in real-time. Lead by mass automation, investment banks are experiencing the same kind of digital disruption felt by their retail siblings.
The dawn of the storefront model
Beyond these basic process efficiencies, technology in our view has heralded the arrival of a ‘storefront’ model in investment banking, something usually associated with the retail banks. The defining factor of this is the level of personalisation provided, in this case, to institutional clients, high-net-worth individuals and even sovereign entities. Compared with the one-size-fits-all approach of old, clients are now presented with an array of product combinations depending on their requirements, in the same way that consumers would take out a loan. For example, a bond-issue could feasibly be as easy as buying a mortgage, while a mezzanine financing deal could be carried out via a series of simple, context-dependent steps to profile, risk-score and approve the financing. Therefore, we are seeing specialist investment banks without a retail arm become sophisticated ‘virtual windows’, through which clients of all risk profiles and needs will be able to shop for services.
As this model gains traction, institutional clients will also be able to ‘test-drive’ trading portfolios and other products with simulated returns. This access to sophisticated software that banks provide their clients gives them an additional incentive to buy. It is only a matter of time before similar platforms for trading and risk management are opened up to clients, in the same way that Amazon allows us to preview a book before buying. Organisations such as Goldman Sachs are leading the way in this field, tailoring their services and marketing themselves as tech firms in the business of banking. This new model forces investment banks to re-consider how they price and design products, although they often take advantage by charging a premium for personalised products, something that increases alongside the value of the customer. While it is likely to be the smaller, more agile investment banks that move down this path first ahead of larger outfits, change is coming for organisations of all sizes.
Equally interesting is how this trend will impact the fortunes of traditional investment banks that are now foraying into more mainstream consumer banking, a prime example of which is Goldman Sachs with their Marcus lending platform which is soon to come to the UK in 2018. In Goldman’s case they will cover online deposits and extend to lending over time, seeking to both take on established high street players as well as create a more sustainable customer-base. And once traditional sell-side firms venture into the retail space, we should start to see the full extent of this ‘store-fronting’ for a wider cross-section of customers across investment and retail banks.
Crossing the bridge to personalisation
Depending on the extent that this route is chosen, the new model will require an overhaul of an organisation’s technology infrastructure and the way they price, sell, execute, clear and maintain products, all the way through from customer experience to back-end design. Investment banks are increasingly in a position where they must adapt and differentiate, or find themselves racing to under-cut competitors on price.
Ironically, while recent years have seen a huge focus on a ‘customer experience’ revolution in consumer finance, it is the sedate world of investment banking that is primed for change. Moving away from a world of bland trading and towards more tailored offerings may result in a bigger shop window with more products than retail banks, but the impact will be similar as technology simplifies the buying experience for institutional clients. This is undoubtedly a seismic shift for the industry. Whether incremental or something that happens all at once, we will see a fundamental change in how investment banks interact with their clients. Whatever the speed of transition and style of delivery, they must remember that the primary goal is to provide customers with the most intuitive service possible.
Abhijit Deb, Head of Banking & Financial Services, UK & Ireland, Cognizant