Digital disruption in capital markets and investment banking

By Swaran Patnaik | 23 November 2016

Regulatory compliance dominated IT spending between 2009 and 2015 upon a backdrop of financial crisis, as well as the number of regulations passed during that time. However, firms have now realised that it is also crucial to spend effectively in areas that are critical to business and customer experience. Digitisation of the value chain (across all service areas like brokerage, insurance and banking) is at the forefront of this change.

Many financial institutions which lagged other sectors in digitisation are now gearing up for this change. Regulators (such as the FCA) also are encouraging innovation in this area by enabling financial institutions to test the innovations that provide partial relief from stringent regulatory requirements.

In the space of capital market and investment banking, digitisation has been mainly focused around getting a unified portal for client, deal management, capital raising alternatives, building on the go service applications for clients and staff, and secure online ledgers (like blockchain technology).

Unified client portals

Under severe cost pressure, investment banks are looking at ways where digitisation can render multiple repetitive steps redundant (through automation) and bring all products and services to a single platform. There are significant opportunities presenting the client with an experience that is unified, more convenient, and cost-effective.

Once such example is client portals. Clients may have several trading accounts with several investment banks. Instead of navigating through multiple institution portals, independent client portals can look at consolidating client experience across multiple investment banks.

This is more beneficial for institutional or high net worth clients who will love these portals that enable them to see aggregated pricing information, trade against multiple counterparties, access research insights and see their holdings in one place.

There are also significant opportunities in linking payments, insurance and other investment services to one account and have a single view of the entire holdings across business lines through one portal (for example one bank account can show shared held, insurance policies held, mutual funds held, credit cards held). Such accounts are also enabling transacting in this areas from the same bank account (like paying insurance premium, credit card bills, making investments in funds etc). This consolidation of products enables firms to track customer preferences or activities and design services around that behaviour.

Crowdfunding/peer to peer lending

Crowdfunding and peer to peer lending has been gaining significant momentum in recent years as an alternate source of capital raising and funding risky ventures (about a million crowdfunding campaigns were run in 2012 alone). The connecting and collaborative aspect of the internet is mainly driving this, enabling platforms that provide funding at a much cheaper and faster rate than traditional funding methods.

The success is mainly seen in real estate sector funding. For example, crowdfunding entities now compete with institutional investors and venture capital funds to invest in large real estate projects. This business model poses challenges for traditional businesses in an investment bank, which helps in raising money through private placements or IPOs. It is likely that we would see further pressure on traditional advisory revenues for investment banks as crowdfunding and peer to peer lending gains momentum.

Some of the most successful and leading sites are Kickstarter, Indiegogo, GoGetFunding and FundRazr. There is risk in investing through crowdfunding (when investments go bust, or returns are poor), but slowly protection funds in this area are also becoming popular, reducing potential losses from such investments.

Deal management process

There are significant digital opportunities in the deal management area in investment banking. Currently, each deal (M&A, IPO, and private placement) requires a lot of manual analysis, documentation, coordination and communication between multiple teams (internal to the banker and external to clients, lawyers, regulators). These manual processes delay the deal management process and have an impact on its closure timelines and security.

Many of these steps can move faster with better collaboration online (including the client and internal functions) and repositories for document management (like SharePoint), deal stage tracking and approval. In fact, the end to end deal management process can be automated to a large extent with required security in place around data, communication and collaboration.

Mobile technology, wearables, instant messaging, document management portals, video conferencing; all can be critical components of an ecosystem that improves the deal management process at a lesser cost, and is faster than ever.

Anytime, anywhere services

As clients have access to more data in real-time and would like to perform activities quickly with little effort, there would be significant demand for solutions that improve their ability to decide and act on the go.

For example, as investors receive notifications about pricing, critical corporate/economical/political events, research and insights on holdings, analytics can play a significant role in their ability to act at the earliest and reduce potential losses or improve chances of increasing returns.

How fast these insights are sourced and made available to clients, and how insightful they are, will determine client delight in the digital world.

Internally, sales advisors can also leverage digital technology to provide real time services to clients. Key digital support for advisors or the sales force could include tablets, which can provide help with analysis, proposal management and providing quotations in real-time.

Pictured above: benefits of an effective digital strategy

Blockchain technology

Blockchain could be an answer to the elongated process of securities settlement – making the process faster, less error-prone and at a lower cost. Blockchain technology is in initial stages of experimentation with regulations around it beginning to emerge. It will initially be trialled mainly in areas that do not involve a central clearing system, such as OTC derivatives.

Blockchain technology can transform the way transactions are conducted, verified, reconciled and subsequently reported. It is also being increasingly used in AML compliance.

Banks have also started investing in start-ups that work in blockchain technology. The partnerships aim at working towards development of prototypes and their experimentation.

Impact on IT spending

Over the next five years, spending on digital strategy will be of the highest priority for financial institutions (compliance possibly being the second in the list). Financial institutions have also started investing in fintech start-ups to fund innovations and test innovative ideas.

Regulators have also started clearing regulatory hurdles for new fintech investment by allowing testing of the ideas in a less regulated environment. One such example is Project Innovate by the FCA.

The spending on digitisation is likely to strongly focus on front office/customer facing applications with key objective of providing faster, convenient and secure services to clients and grow revenues.

The back office will also see investments in opting for areas that can promise efficiencies and simplification in the value chain, against an overhaul of infrastructure. Key areas in the back office could be document management/tracking, customer onboarding, compliance monitoring, and big data analysis to support new business campaigns. As part of this exercise, some institutions will also migrate to a modern platform from legacy ones wherever required to support automation and business growth.

Conclusion

As the way banks do business is revolutionised with digitisation opportunities, institutions that quickly move with a set plan of action and implementation will be the leaders and can significantly race ahead by leveraging new digital technology.

While doing so, they will have to work closely with technology providers in giving shape to what they want. While focus must be on areas that has maximum impact on new revenue generations, back office functions that promise benefits in the value chain must also be targeted for optimal benefit.

By Swaran Patnaik, Principal Consultant, Infosys Limited

Become a bobsguide member to access the following

1. Unrestricted access to bobsguide
2. Send a proposal request
3. Insights delivered daily to your inbox
4. Career development