In my previous post “Top 10 Challenges for Investment Banks (part 1)” I discussed the first three challenges Investment Banks currently face responding to regulations and restrictions by among others (local) governments. Now I will discuss the four challenges Investment Banks face when they are building and maintaining a solid client base—and regaining client trust—which is necessary to drive profitability, gain analytical insights and improve efficiencies.
4. Addressing the Rise in Buy-Side Power
The crisis has shifted the balance of power from the sell-side to a more demanding buy-side. Faced with this ‘new normal’, investment banks need to reconfigure operations to deliver at scale and with greater efficiency. Traditional sell-side organisations are increasingly vulnerable to competition from established agency-only brokers and second-tier firms, and their regulatory influence has eroded considerably.
In respons investment banks are going back to basics – shifting the emphasis from complex product innovation towards increased client intimacy. The priority now is to better align service offerings with clients’ needs – a significant challenge for the majority of banks that have neglected client service-based investments in recent years. Banks that can truly understand and meet client needs will stand out from their competitors.
Faced with this new reality, investment banks must take action to improve their efficiency, flexibility and client responsiveness. Meeting buy-side expectations will require banks to rethink their operating models, increase workforce productivity and invest in client-facing technologies.
5. Managing Capital and Collateral Intelligently
Regulatory responses to the recent financial crisis, including Basel III, new derivatives trading rules are forcing investment banks to reconsider how they manage their assets. Collateral management is a risk management
tool and function that’s core to any decision to lend or to trade. As capital requirements rise and liquidity falls, banks must find ways to use the limited collateral at their disposal as effectively as possible. Leading organisations recognize that developing a coherent strategy and investing in key technologies will be important steps if they want to maintain and expand their client base in this challenging environment.
The first and foremost challenge investment banks face is simultaneously managing costs and protecting RoE. Banks must identify ways of maintaining and growing their client bases while managing their assets. Therefore investments in technology infrastructures will be essential to ensure interfaces align with relevant services, trade and market data. Coherent operating strategies are needed to address a number of vital areas, including: “optimizing bilateral contracts with core client segment”, “ensuring operations departments are able to support enhanced clearing services” and “Deciding whether the bank can afford to or has the appetite to become a clearing member”.
6. Valuing Client Relationships, Not Product Profits
Trading margins are declining, regulatory requirements are rising and clients are increasingly disappointed
by investment banks failing to understand their specific needs.
For many years, investment banks organised their operations around products instead of people—a reflection of growing product complexity and a culture that prized short-term business line performance over cooperation. Now, as trading margins decline, they are refocusing on customers to take advantage of cross-sell opportunities and increase their share of client wallets.
The historic approach for investment banks of selling specific products to specific clients via discrete silos
is no longer fit for purpose. Banks must rethink client relationships and develop and maintain a global view of
clients to maximise cross-selling. Only then will investment banks be able to deepen existing relationships, attract new business and have a more coherent ‘go to’ market strategy across both product lines and geographic regions.
7. Marshalling Fluid Architectures for Business Innovation
Investment banking front offices have a proud tradition of using innovative technology to drive near-term
revenues. In light of recent structural change in the industry, the ability to infuse innovation across the organisation has become critical for creating and maintaining a competitive edge. As structural changes have reverberated across the industry, technology innovation has become a key imperative for creating and maintaining market edge.
Leading banks are transitioning to fluid IT architectures as a way of transforming technologies into flexible services that create strategic advantages and drive profitability. The challenge facing banks is that current innovative technologies are not benefiting the whole enterprise as re-use across functional areas remains very limited. As a result, technology and business executives have found it practically impossible to evolve technology development to a new level, or apply innovation in a way that delivers concrete benefits and true competitive advantage for the whole enterprise.
Next week I will discuss the last three challenges for Investment Banks on taking full advantage of the next wave of growth. For now I want to leave you with one question: Do you think that Innovation is essential to provide world-class products and services that creates value for your clients?