The impact of digital innovation on Investment Banking

Published On February 29, 2020
In Investment Research, Blog Archives

Disruption is inevitable, even in the banking sector. It’s a constant force that has been driving businesses and investment banks aren’t experiencing it for the first time. Investment banking is becoming a challenging business day-by-day, largely due to a heavily regulated industry and competitive pressures. In the earlier days, when the digital wave hadn’t yet hit the business landscape, senior partners at investment banks used to manually calculate stock prices using pen and graphs. At that time, employees were compelled to perform these tasks as they didn’t have access to past stock data. With digitization, this changed as the flow of data became smooth.  

The traditional way in which investment banks work has come under scrutiny with the advent of technology. Investment banks act as an intermediary between buyers and sellers, providing financial consultancy to individuals and organizations also, helping them raise capital. With people having access to transparent data and alternate financial capital options, the operations of investment banks have become very difficult.  

Digital transformation in Investment banking 

Data transparency 

In some capital markets, the clients are kept aloof from the pricing and transaction data as it is aggregated by the investment banks. Earlier, due to monopoly of information, the “sell-side” i.e. investment banks had pricing power, which allowed to charge higher transaction fees and ensure that the gap between buyer’s bid and seller’s ask price is high. According to a research by Deloitte, the emerging digital technologies have the potential to assist startups to fill the gaps left by the investment banks. The digital innovation in investment banking will make pricing and transaction data accessibility cheaper, easier and faster. As we move further, exploring diverse digital technologies, the trend of data transparency in transaction data and pricing will persist. This indicates the dismissal of the middle man for various transactions.  

Competitive pressure 

The emergence of multiple funding and strategic advice avenues has made the competition fierce. When companies decide to go public, with the modern approaches in place, giants like Google or Spotify have been able to completely bypass or keep the involvement of investment banks to bare minimum. For example, for Spotify, the need for an investment bank to underwrite the offerings was less as the company was already well-known to the public and was generating ample revenue. The company went public in 2018 via direct listing, where the public investors could directly buy the shares of the company. 

Conclusion 

The proliferation of data transparency will not completely nullify the role of investment banks as there will always be a need for expert advice on complex and large scale transactions. Investment banks must explore new avenues for generating revenue and ways to safeguard their high-margin advisory business. Data analytics and integration can help them identify new M&A opportunities. Insightful and sophisticated analytics combined with advanced AI technology can enable investment bankers to have a competitive advantage and deliver additional value to their potential buyers. The digital innovation will create rewarding opportunities for investment banks, despite the challenges.  

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SGA Digital Marketing Team
SGA Digital Marketing Team
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