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TOP 10 CHALLENGES FOR INVESTMENT BANKS 2016


Digital Disruption:
Embracing an integrated digital ecosystem

Challenge 08

Introduction

Investment banking firms are under pressure from all sides.

Non-traditional competitors are entering high-margin areas, such as capital raising and advisory services, while other services face continued commoditization and competitive threats from lower-cost providers. The recent era of cost-cutting, using traditional approaches, has reached the point of diminishing returns, and many established firms still carry the burden of complex, often inflexible operating and technology platforms that make innovation difficult (see Challenge 2: Investment Banking Technology: Jettisoning Legacy Architectures).

Investment banking was once characterized by high barriers to entry, but many of these hurdles have been lowered. As the consumerization of technology continues, flexible sourcing of people, infrastructure, software and information—through the use of cloud computing and “everything as a service” (XaaS)—has converged with new design, development and deployment approaches and tools.

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THE COST OF LAUNCHING A TECH STARTUP HAS DROPPED DRAMATICALLY




Source: https://www.cbinsights.com/fintech-trends-overview

NUMBER OF INVESTMENT ROUNDS IN FINTECH COMPANIES IN NEW YORK


SPECIFIC STEPS FOR INVESTMENT BANKS



A FUEL IN RESURGENCE


Other players—such as asset managers and hedge funds–that have their own platforms and the desire to expand into investment banking also face reduced costs. The lowering of these barriers is helping to fuel a resurgence in innovation, with client emphasis driving new thinking and the biggest ideas originating from unexpected places.

Cost and complexity—once sources of competitive advantage—now serve as encumbrances, making traditional players seem antiquated and arbitrarily complex. Scale and global reach have become de facto commodities, and information and liquidity are no longer constrained. The central investment banking concept is changing and a new digital ecosystem is emerging. Innovative firms are rushing to capitalize on opportunities to better serve clients and partnering to better manage cost and risk.

NUMBER OF FINTECH DEALS IN NEW YORK,
BY SEGMENT

Note: “Other” includes Account Management, Accounting & Finance, and more
Source: Accenture, Partnership Fund analysis of CB Insights data

THE INNOVATION IMPERATIVE

Changing Nature of technology providers

Investment banks should also note the changing nature of the industry’s technology providers. Varying in size, many of these providers no longer see themselves as developing enabling technologies, but rather as helping to define and satisfy end-client expectations related to service delivery and overall customer experience. Firms like CAN Capital, Motif, and Funding Circle (among others) are demonstrating that technology and experience-led innovation are not limited to the retail space. These types of providers are creating competitive offers that challenge aspects of investment banking and push other players in the ecosystem to innovate.

They have access to deep talent pools and attract many of the most promising new entrants to the technology field. New techniques and technologies let them innovate and scale quickly at minimal cost.

To take advantage of these developments, investment banks must embrace participation in digital ecosystems and begin to forge ecosystems of their own. This shift in thinking represents a fundamental leap “back to the future”—to a time when innovation was institutionalized, the battle for talent was being fought (and won), business and technology architectures were open, and collaboration and utilities reigned.

The Digital Revolution

THE “DIGITAL REVOLUTION” PRESENTS OPPORTUNITIES FOR CAPITAL MARKETS FIRMS

Change how work is done
Enhance efficiency
Change role/value of processes, data and infrastructure
Exploit data
Change the nature of customer interactions
Engage customers (products, segments & channels)
Shift value within or across industries
Evaluate operating model boundaries
Create or destroy industries
Experiment with new business models

Source: Accenture Research

SPECIFIC STEPS FOR INVESTMENT BANKS

Conclusion

Establishing momentum is an important element of any successful change journey, but it is particularly critical when tackling digital innovation and ecosystem development. It is an opportunity to demonstrate early results and gain recognition for a willingness to innovate and experiment. Investment banks could jumpstart ecosystem development by acquiring businesses (particularly high-potential tech startups), investing in greenfield ventures that emphasize new client categories or banking capabilities, and forming joint ventures. In addition to identifying and exploring areas of “white space” with high potential for returns, banks should look to establish pace, momentum and a reputation for forward-looking investment.

The move to an integrated digital ecosystem is not an option for investment banks—it is an imperative. The nature of each ecosystem will depend on the customers, capabilities and value proposition of each firm. Successful firms will be willing to unbundle their current offerings and combine financial expertise with digital sophistication to create new ways to deliver value to customers and differentiate themselves from less adept competitors.



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