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Technological innovation has caused significant disruption across industries in recent years, shifting the way every business operates. Investment banking deal sourcing has not been immune to this shift, with financial services firms quickly implementing new technological solutions into their business models and origination strategies, such as an M&A platform.
This development has opened new doors for revenue generation, while at the same time stimulating the creation of an entirely new financial services sector—fintech, or financial-technology. Now more than ever, a firm must consider how they can capitalize on advanced technology to successfully compete with their counterparts in the digital age.
Here we review five recent trends in technology and investment banking that are driving the market forward into 2020.
#1: Fintech Disruption
The days where large investment banks ruled the financial services sector may well be over. Fintech companies are revolutionizing how the industry functions, causing major disruption and robbing incumbents of profits that were historically safe.
A global Fintech survey conducted by PwC indicated two key points here:
- 28% of profits are at risk in the banking and payments sector due to disruption from fintech companies
- 81% of investment banking chief executives worry about increased disruption in the future.
Fintech providers have emerged that offer customers new ways to manage their finances and make payments, while also offering companies the ability to streamline financial operations and cut out no-longer-necessary financial vendors
Prior to the emergence of these companies, large financial institutions had dominated these revenue streams, but are now facing new sources of competition from smaller firms focused on specific products and services within the industry.
Additionally, disrupters in the banking and payments sector are typically geographically focused, forcing a firm to fight off unique competitive threats in different regions, further complicating their ability to adjust.
However, the emergence of fintech has also had a beneficial effect on the banking sector, leading to a rise in partnerships between investment banks and third-party fintech companies.
#2: The Rise of Research Management/Data Aggregation Software
Investment banks have capitalized on new technologies by partnering with companies that can increase their knowledge capacity and improve decision-making processes.
Companies like SourceScrub are enabling investment banks to make informed decisions by leveraging their technology and streamlining M&A activity in several noteworthy ways:
- Enable investment banks to identify investors quickly and more accurately
- Analyze private companies easily by providing access to firmographic data
- Enhance lead generation processes
- Improve post-deal marketing methods
- Uncover strategic buyers in the M&A space
The emergence of enhanced information gathering processes has had a direct effect on increased M&A activity in the global markets. Effectively, partnerships with fintech companies like SourceScrub have been a major source of revenue generation for investment banks.
As the interlude between investment banking and technology converges, this trend is expected to continue into the new decade.
#3: Fintech Leveraging Investment Banks
While investment banks have surely leveraged third-party technology companies, fintech firms are also utilizing the knowledge base of investment banks to stimulate their own growth.
The fintech market has witnessed a major increase in collaboration with investment banks, enabling them to extract value in several key ways:
- Tap into investment banks’ large customer base
- Create partnerships to get access to the wealth of information that investment banks own
- Utilize the compliance and regulatory arms of investment banks that would otherwise require major investment
- Expand into new geographic markets
While investment banks have traditionally been more careful when considering partnerships with individual fintech companies, that trend looks to be shifting.
Investment banks are increasingly adopting fintech solutions to improve their operations and cut costs. An example of the impact of technology on the investment banking industry is blockchain technology.
Since the emergence of Bitcoin as a viable (albeit volatile) currency for many investors, blockchain technology has slowly crept into the mainstream. The financial services industry is now experiencing an enhanced rate of adoption of blockchain technology that has the potential to stimulate cost reduction and increase security.
Banks and other firms have adopted forms of blockchain for two specific reasons:
- To replace intermediaries between funds transfers, and thus, reduce costs
- To increase security of transactions by tapping into the core of blockchain technology
The security benefit is especially interesting, as companies have recently increased spending on cybersecurity due to the enhanced risk of cybercriminals targeting banks. Further adoption of blockchain could significantly reduce that risk.
While blockchain has experienced slower market adoption within the banking sector, technologies like artificial intelligence (AI) have been streamlined despite being in a relatively early developmental stage.
#5: Artificial Intelligence
Financial services firms are quickly investing time and money towards developing new ways to stimulate efficiency through artificial intelligence.
In the same PwC survey previously mentioned, over 50% of executives stated that they had made significant investments into AI platforms, with the majority of these efforts focused on cost reductions.
Customer service and fraud are two key areas where AI has been applied across the banking industry. Employees are now managing fewer and fewer queries, as chatbots are able to process most client issues. AI technology can now identify a potential fraudulent transaction, notify a customer, and put a hold on their account automatically. These two innovations alone have created massive cost savings for large financial institutions that can be rerouted towards other operations.
Looking Toward 2020
These technology trends can be a double-edged sword to the investment banking world. While it is apparent that technological advancement poses a disruptive threat to the investment banking sector, it also has stimulated efficiency and improved decision-making processes. It can be devised that the investment banking firms that lean into technology to optimize their business operations will ultimately win in the end.
- Forbes. The 7 Biggest Technology Trends To Disrupt Banking & Financial Services In 2020. https://www.forbes.com/sites/bernardmarr/2019/11/08/the-7-biggest-technology-trends-to-disrupt-banking–financial-services-in-2020/#7ba78fa62c42
- McKinsey & Co. Synergy and disruption: Ten trends shaping fintech. https://www.mckinsey.com/industries/financial-services/our-insights/synergy-and-disruption-ten-trends-shaping-fintech
- PwC. Financial Services Technology 2020 and Beyond: Embracing disruption. https://www.pwc.com/gx/en/financial-services/assets/pdf/technology2020-and-beyond.pdf
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