Investment banking: Darwinian capital markets

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“Absent a serious effort to amplify their strengths and address their weaknesses, it’s hard to imagine how investment banks will be able to sustain growth in an oversupplied, rapidly commoditizing and increasingly disintermediated industry.” 

Boston Consulting Group doesn’t pull any punches in its report on digital migration across the capital markets, published in May. 

The numbers certainly don’t look good. While the total capital markets revenue pool grew 7% in aggregate from 2016 to 2017, investment banks now capture only 33% of total revenue, down from 48% in 2006, according to BCG. Investment banking revenues declined for the fifth consecutive year in 2017, while securities services revenues posted strong growth of 7%. Global investment bank revenues declined by 3% in 2017, primarily the result of weakness in FICC, which fell by more than 9% to $105 billion. 

Analysis published by Dealogic in early April showed a 14% decrease in global investment banking revenue for the first quarter of this year, down to $18.4 billion from $21.3 billion in the first quarter of 2017. Revenue was down 17% year on year in the Americas, down 3% year on year in EMEA and down 9% in Asia Pacific. The US business was particularly hit by a 22% year-on-year decline in syndicated lending revenue, a market segment in which alternative providers have made big inroads.

“The only way for banks to regain their footing and secure their long-term future is to identify the root causes of the deterioration and make the changes necessary to address them,” declares the consultancy. That is easier said than done. 

Lion’s share

Euromoney has covered the potential impact of new technologies on banking in some detail. So far, the lion’s share of these innovations has been targeted at payments and settlement, rather than investment banking businesses. 

“The reality is that many incumbents have yet to evolve their capital markets business models deeply or quickly enough,” warns BCG.

The solution, it argues, is for banks to adopt a ‘bank-as-a-platform’ model in their capital markets businesses as well as their consumer offerings, through which they offer a one-stop shop for products and services from both banks and their partners. 

As part of this they need to change their servicing approach internally and establish a single point of client contact that is responsible for coordinating all services across the bank. 

BCG points out that the banking industry remains plagued by overcapacity and that large institutional investor clients are now aggressively negotiating the fees for cash securities and sourcing liquidity for transactions from platform-traded funds and alternative providers. 


The task of turning an investment bank into the equivalent of Airbnb for financial products seems overwhelming. Banks have so far been protected by the desire of alternative providers to avoid intense regulatory scrutiny as they expand their scale and scope. 

Banks also benefit from the long-standing and sticky nature of investment banking client relationships. The latter is crucial.

“The capital markets players that own the client relationship will be the ones in position to dictate commercial terms to others,” predict the BCG analysts. 

If banks are going to own that relationship, they need to create platforms that allow them to be the primary point of contact with clients. This necessitates a huge investment in not only upgrading their existing technology infrastructure but rethinking how their investment banking processes can be made fit for purpose in a digital world. 

Speaking at a Bloomberg event in London shortly before his departure from Deutsche Bank, co-head of corporate and investment banking Marcus Schenck declared that the bank was not far away from saying that it would be as important that you could code as you could speak English to work there. 

That is not so much of a surprise given how much needs to be done for investment banks to turn the tide in their capital markets businesses.