Social, mobile, analytics, big data, cloud and interactive technology are rapidly penetrating technologies, which in combination are disrupting traditional business models across many industries. By creating new client expectations, making data more transparent and available, and enabling firms to more easily split processes across providers, these “digital disruptors” also changing investment banking.

Mixed responses mean missed opportunities

Investment banks have been uneven in their overall response to digital technologies. Many are still not leveraging the potential of digital technologies, and it’s likely due to a number of reasons: the aftermath of the financial crisis has directed most of banks’ focus to regulatory compliance, risk management, and the new, tighter economics of doing business in the current environment. Investment banking technology development has been concentrated in regulatory and risk projects, and much innovation has been squeezed out of IT budgets.

Nothing is sacred

Much of the traditional investment banking business model depends on longstanding industry structural elements, such as the value of concentrated resources (e.g., balance sheet), lack of price transparency in some products, and vertical integration of trade processing. Digital technologies have overturned these business models in other industries—think crowd-sourcing, price comparison tools, collaborative filtering and self-service applications that replace intermediaries. There is no reason to expect that digital technologies will not enable these kinds of disruptions in investment banking.

Overcoming attacker advantage

Read the report.
Read the report.

In digital disruption, “attackers” have advantages in not having revenues to protect, existing business models to transition, nor the complexity costs of technology that has evolved over many years. To overcome this, incumbent investment banks must invest in seeding and experimenting with digital technologies—to create options for themselves. They must risk creating self-cannibalizing channels and products. And they must avoid letting transition costs prevent them from adopting the most cost-effective processes and technologies.

Join me next week when I explore six key themes, which we expect to be driving forces in the coming digital disruption, and how investment banks can address them.

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