Investment bankers can’t hide from disruption

The problems faced by retail banks in an increasingly digital world are legend. But many thought investment bankers would have an easier ride. Think again, says Boston Consulting Group.

New technologies are helping insurgent competitors in the capital markets investment banking industry gain access to larger amounts of rich information at lower cost, according to BCG.

On a blog post entitled “Breaking to Bits: Digital Disruption in Investment Banking” BCG argues that the last two years have witnessed a data explosion, and the amount of data is expected to grow another tenfold in the next six years.

Huge increases in mobile penetration over the past four years are also profoundly altering the competitive landscape. “This acceleration in innovation comes at a time when the CMIB industry is most vulnerable. Traditionally, investment banks have been shielded by their regulatory status, their unique ability to deploy risk capital, their unrivalled understanding of and ability to serve clients, their ability to attract the best talent, and the universal belief that they are the trusted agents of a complex global financial system.

Now, however, the foundational pillars are crumbling. “Regulatory advantage has turned to disadvantage as sustained pressure continues to take its toll on the traditional operating model. Risk capital now comes at a punishing price. Cost-cutting, unbundling, and ring-fencing undermine the ability to serve clients. The global financial crisis and subsequent scandals have damaged banks’ reputations as trusted institutions.

The bottom line, according to the researchers, is that banks have lost their traditional information advantage at the same time that IT is entering an important new phase. “ Digital advances are facilitating the flow of information away from banks and into new channels. These advances are also allowing data to be created and controlled by non-bank entities.

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(Image source: BCG)

The company also suggests that the market-making universe has expanded to include high-frequency trading firms, hedge funds, and even (depending on the asset class) asset managers and that investment banks have to “make specific choices in the future about where on the value chain they wish to focus — but these choices can lead to numerous digital opportunities.

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