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Is Digital Transformation a Threat to the Business Model of Corporate & Investment Banking?

Since 2013, GreySpark Partners have been monitoring and assessing how a new approach to technology and innovation is taking shape in the investment banking industry. What originally started as ‘electronification’ – the automation of external-facing, front-office processes and workflows – has become much more pervasive, and it now encompasses the entire value-chain. This is the Digital Transformation of investment banking.
By Frederic Ponzo

Investment banking and global markets businesses are historically built on four pillars:

  1. The ability to tailor the investment and hedging solutions offered to clients (institutional, corporates and individuals) to their very need and circumstances.
  2. Asymmetries of information, allowing banks to leverage unique insights to help clients or take advantage of discrepancies in the market.
  3. Significantly higher margins and returns on equity than the ones enjoyed in the more stodgy parts of the banking business such as retail finance or loans to SMEs.
  4. A highly skilled and specialised workforce that is handsomely rewarded for its ingenuity.

In all aspects, investment banks are the master craftsmen and jewellers of high finance, especially compared to the metal bashers and ironmongers working the production lines of retail banking.

The onset of the financial crisis and its aftermath of behavioural changes and re-regulation have upset this past equilibrium:

  • the larger US-based banks became even larger, enjoying unprecedented clout and economies of scale, while banks elsewhere in the world are still trying to carve a niche for themselves where they can continue to strive to do so;
  • costs remain stubbornly high when compared to revenues, despite wave after wave of cost-cutting and consolidation;
  • clients demand both different services and a different user experience, while no longer rewarding longevity of relationships; and
  • transparency is now imposed by regulators on everything – from prices formed to trades done, fees charged or risks taken.

In this context, a myriad of ‘digitally native’ new entrants – several of them extremely well-funded by private capital – are vying to pick at the banking franchises bit-by-bit. Unburdened by the weight of legacy and powered by state-of-the-art technology, the nimble Digital Davids are set to take on the lumbering analogue Goliaths.

As a consequence, the choice faced by most corporate and investment banks in 2019 appears binary: either to transform in order to adapt and proper; or to brace themselves for a long, slow and inescapable decline. The reality is that the vast majority of the CIBs are already engaged along some path to use digital to transform the way they operate.

However, the key challenge is not only to change how the business is done and by whom, but also to redefine what business is done and for whose benefit.

Transforming the CIB Business

wdt_ID Digitalisation Imperative Pre-transformation Post-transformation
2 Business Model Risk-taking & Management Agency & Intermediation
3 Driver Sales & Trading Capabilities & Technology
4 Focus Products Services
5 Delivery Proprietary Infrastructure Distributed Supply Chains & Shared Utilities

Measuring how far down that path each bank currently is remains a crucial question. This is the challenge that GreySpark Partners are set to help and solve.

Next week, we will explore the opportunities that the digitalisation of CIB’s services and processes can bring.

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