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March 6, 2017

Six driving forces in the coming digital disruption of investment banks

Michael Costonis describes six themes that he expects to be driving forces in the coming digital disruption of investment banks—and how banks can take advantage of them.

As I mentioned in my previous post, many investment banks are still not leveraging the potential of digital technologies in their internal processes and external client interactions. But that’s all about to change. We have identified six key themes that we expect to be driving forces in the coming digital disruption to the industry. 

1. A unified customer experience

Clients will expect a unified customer experience across channels, moving beyond the current single-dealer, full-service portals provided by investment banks. Savvy investment banks must think about their current institutional client portals, but also develop strategies for the longer game that include multi-bank portals. 

2. Better data transparency

Increases in data transparency to clients will reduce the need for intermediation, enable additional self-service and further squeeze pricing and profit margins. To prepare and respond, investment banks will need to dramatically cut the costs associated with intermediation, and digitize their businesses to handle higher volumes and a greater frequency of transactions. 

3. Faster access to information

Stakeholders will receive information far more quickly, to the point where it supports real-time management decision-making and compliance monitoring. Successful banks will need to redesign their data “supply lines” and processing schedules, and start thinking in terms of real-time dashboards, minimizing the lag of data and provisioning of business intelligence.

4. Demand for on-the-go services

Increased demand for on-the-go services will drive a departure from the traditional “within the walls” environment of the investment bank. Banks that will leverage mobile and digital technologies in the future need to be testing them, developing “proofs of concept” and implementing the necessary supporting infrastructure, processes and rulesnow.

5. Trade life cycle split among providers

The trade life cycle will be split among the best-in-class providers, helping to control costs, but also sharing the trading revenue pools more broadly. Now is the time for banks to evaluate each piece of their trading life-cycle and consider how to provide it to the clients most cost-effectively and with the highest efficiency, functionality and value-added. Opportunities for market share capture, cost reduction and business and compliance risk control await those who embrace the digital technologies that enable them to do this.

6. Small niche players emerge

Increasing portions of the traditional investment banking model will be threatened by smaller, niche players. Forward thinking investment banks will need to ensure that their intermediation provides sufficient value to their clients, and simultaneously explore and invest in potential, disruptive models, even when those may eventually cannibalize their traditional business models.

Investment banks should observe what the successful digital strategies have been in other industries where these technologies have already caused disruptions, and note the fates of leaders and followers in digitalization. In general:

  • Leaders invest in digital earlyeven before they fully determine how they will use these technologiesand learn more and faster experientially.
  • Followers attempt to build detailed, longer-term plans, but they do not prioritize budgets for digital projects because they view them as exploratory and without sufficient quantitative benefits. Such players may never fully catch up with early adopters.

My advice? Don’t wait. Invest in digital advances as a venture capitalist might, creating multiple “irons in the fire”but balance this with careful strategic planning.

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