Heard of Prosper.com or Kickstarter.com? What about Zopa™ or LendingClub®? These are all examples of disruptors using digital technologies to disintermediate various services. And while the concept is not a new one, it is one that is starting to make its presence felt in investment banking, so much so that the traditional investment banking model will likely be threatened by smaller, niche players.
The opportunities are considerable for disruptors
Two examples of disintermediation of traditional financial products are block trading disintermediation, and financing through crowd-funding and peer-to-peer lending. Investment banks and other market participants have created a variety of “dark pools,” trading venues where buyers and sellers can meet and match their desired trades anonymously, without giving away information regarding their desire to buy—or sell. This is in contrast to how investment banks traditionally operated, when they enabled transactions of large blocks of stock by discreetly matching buyers with sellers. The next wave of disintermediation is expected to focus more on areas of investment banking with higher fees and commissions, for example the raising of capital.
Then there’s crowd-funding and peer-to-peer lending. In time, digital technologies could bring crowd-funding to securities origination or syndicated lending. In the case of peer-to-peer lending, digital technologies could directly match borrowers looking for low interest-rate loans with savers looking for higher-than-average interest on their savings.
We’ve only just begun
The disintermediation we have seen in the retail financial sector is just the beginning. In no time, we will see this disintermediation spread to institutional businesses. Forward-thinking investment banks will need to ensure that their intermediation provides sufficient value to their clients, and simultaneously explore and invest in potential, disruptive models, which may eventually cannibalize their traditional business models.
I hope you enjoyed our series on the six key themes, which we expect to be driving forces in the coming digital disruption of investment banks. To learn more: