Investment banking has always been a cyclical business. In our view, however, it is different this time. Powerful forces are altering the investment banking landscape in a manner and degree never before witnessed. The ‘old ways’ of doing business need to change. Here are just a few of the trends affecting the industry, as well as some of the tactics being employed by leading investment banks as they race to transform themselves to compete in the fundamentally altered business landscape of the future.
Mobile channels are becoming an increasingly critical component of large banks’ corporate strategies. And corporate clients’ interest in mobile is on the rise. While 25 percent of US corporations had adopted mobile banking at the end of 2013, that number is expected to rise to 40 percent in the next two years.
‘Off the shelf’ solutions are no longer adequate. Clients want the ability to personalize the ways in which they view and interact with their banking information. In response, many banks are delivering user interfaces (interactive dashboards, widget-based interfaces and custom portals) that can easily be customized by users.
Cloud computing is proving to be one of the most disruptive forces in business in the past 20 years. Banks that continue to use outdated legacy systems will find it increasingly difficult to create and launch new services, to provide access to a mobile workforce and to accommodate geographically dispersed customers and partners as well or as quickly as their competitors who are operating in the cloud.
An influx of new payment business models are taking hold at an accelerated pace. Mobile point of sale payment systems (e.g. Google Wallet and Square), remote payment systems (e.g. PayPal) and B2B payment systems (e.g. Ariba, Sage) threaten to chip away at the market share of investment banks.
The rise of peer-to-peer (P2P) lending, which cuts out the intermediary and matches borrowers directly with lenders, poses a significant threat to the industry. The P2P lending market in the UK has tripled in size in the past three years and is expected to be worth £1 billion by 2016. P2P lenders are also beginning to turn to securitization deals, repackaging these loans into bundled securities. Analysts say P2P lenders will continue to steal market share from the banks, translating into steeper competition.
In the face of this dramatic change, executives of investment banks will need to take swift and decisive action, including reviewing their operating models, evaluating the profitability of their business units (with an eye toward shedding those deemed non-core), creating industrialized processes to better leverage data and capabilities across business lines and redesigning business processes and operations to better meet clients’ changing needs. The investment banking landscape is changing. The stakes are high. The firms that emerge as the leaders will be those able to adapt their business mix and operating models, positioning themselves to continue to grow revenues through a relentless focus on serving the changing needs of their increasingly sophisticated and demanding corporate clients.