Why Investment Banks Need to Be Radical to Survive

By Anthony Ginn, director at global technology training academy and talent provider, mthree

Investment banks and their revenues have been below par for some time. Unfortunately, it’s become clear this isn’t cyclical, but a structural change in the industry.

The decline set in after the 2008 financial crisis, and since then the path has been predominately downward for the sector. Indeed, revenues plunged to a 13-year low in 2019. In North America, investment-banking revenue declined 4% year-on-year to $42.7 billion, and in Europe it was down a staggering 15% to $16.4 billion.

Surprisingly, the coronavirus pandemic actually boosted revenues to a five-year high during the first quarter in 2020. However, while investment banks have benefited from a short-term increase in trading, they are expected to be hit hard by the anticipated global recession triggered by the COVID-19 crisis. It’s therefore reasonable to assume that the next phase for the industry is going to be even more difficult.

Downward trend

The reasons behind this worrying reduction of the market are numerous, but there are a few key drivers:

• Lower than historical market volatility impacting client activity, due to central bank interference in the bond market.
• Net interest margins that are compressed compared to historical averages due to near zero or negative interest rates and quantitative easing. This is not likely to change in the coming years due to lack of global growth and the FED loosening monetary policy.
• Global regulation that has restrained banks’ activity, and increased capital requirements have made several historically profitable businesses too capital intensive.

In addition to these challenging economic factors, banks are also under threat from a wave of new, tech-driven financial services startups. There is certainly an awareness amongst traditional banks of the need to evolve and embrace digital transformation in order to avoid becoming obsolete. However, meaningful change can be costly, and the big players are still a long way behind the disruptors in the technology stakes.

So, the question is, can banks successfully accelerate their digital journey in this challenging, cost-conscious environment? The answer is yes, but it will require a complete overhaul of their tech teams, and their approach to technology.

Tech talent strategy

Many banks have been attempting to weather the storm by reducing their front-office headcounts. In fact, despite the increase in revenues, jobs were cut at the fastest pace in six years in the first quarter of 2020. While this will help to minimise outgoings to some extent, they also need to be looking at other ways to enhance their profitability.

In order to ensure their survival, banks will need to recognise that they are, at their heart, technology companies. As a result, investment in new technology talent will be essential. And with any investment in technology needing to be almost self-funded in the current economic climate, it makes the most financial sense for banks to look at widening their emerging talent pool.

In addition to creating valuable career opportunities for young people, establishing a consistent pipeline of tech talent offers a host of unique, often overlooked advantages for banks themselves.

Passionate people at the start of their careers are often full of enthusiasm and energy, and are more likely to have their finger on the pulse of the latest industry trends. This can really help to boost creativity and innovation; they are more likely approach longstanding challenges in unconventional ways, which can result in new solutions to old problems.

A steady influx of junior tech employees also relieves more senior team members of the easier tasks, ensuring that nobody is working beneath their skill level, keeping productivity as high as possible.

Additionally, banks need to invest in further education for the current employees through reskilling programmes. This will help them to redress the balance between tech employees and other staff, minimise job losses and keep recruitment costs as low as possible.

Culture change

There also needs to be a cultural shift towards a DevOps approach to enable a faster deployment environment.

The rise of DevOps, SRE, and ALDO (Agile Lean and DevOps) have highlighted both the need and the ability to change organisational theory from one that prizes stability and preservation of status quo to one that incentives innovation and rapid response to changing market conditions.

This is a sticky problem and a cultural artefact leftover from days gone by, and since it is mired in the belief system of the organisation, will likely require new pairs of eyes to illuminate and root out.

Embracing diverse emerging talent, reskilling current employees, and overhauling stale company cultures will go a long way to deliver the necessary change for investment banks to be able to navigate the rocky road ahead. Implementing these strategies will enable them to successfully adopt the latest technologies and methodologies, giving wide reaching benefits across the board from advanced use of automation, data and analytics to the relevant trading, research, operations and compliance areas.