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25.3.2021 6 NEWS WITH a heady mix of intense compe- tition from the fintech (financial tech- nology) sector, an onerous regulatory burden and the coronavirus pandemic recently directing consumers more de- cisively towards their smartphones and laptops, the story of retail banking's shift towards digitalisation has become a well-publicised and highly visible one. But it's not just within the retail space that banks are experiencing such chal- lenges. At the opposite end of the scale, the same is also true for investment banking. e last few years have seen the in- vestment-banking space undergo sig- nificant changes regarding shifting client expectations, industry trends promoting greater financial inclusion and democratisation, and consistently more stringent regulatory demands. For equity capital markets (ECMs), for in- stance, higher regulatory and reporting costs have eaten into fee income gener- ated from IPOs (initial public offerings), leading to companies being more in- clined to stay private. Indeed, there has been a drastic reduction in the number of companies going public compared to 20 years ago. What's more, there are now many more alternative-fundrais- ing models, which are attracting some of the biggest unicorns away from the traditional model offered by investment banks and thus further diminishing their earnings power. Investment banking is also facing sig- nificant competition from fintech com- panies that can now capture a growing portion of business and clients from the traditional space. Pricing and transac- tion data, for example, has historically been in the hands of the sell-side, such as investment banks, and remained somewhat opaque to clients. is has helped banks command control over their pricing and has thus been a major income source through higher transac- tion fees and wider pricing spreads. But today, digital start-ups can aggregate such transaction data with relative ease, which means they can erode the mo- nopoly power over pricing previously held by investment banks. As Deloitte recently acknowledged, "the trend to- ward greater transparency in pricing and transaction data will continue", which reduces or even eliminates the need for a middleman in many instanc- es. "ese businesses are sprouting and providing intermediary solutions that traditional investment banks do not of- fer or offer in a limited way," Accenture observed in 2017. "Financing through crowdfunding and peer-to-peer (P2P) lending has also eliminated the need for brokers or investment banking services. As these alternative service providers have gained popularity, revenues from security finance, lending, payments and investment services of traditional in- vestment banks have become stagnant." Indeed, there is already a growing trend towards the complete elimina- tion of the investment banker when ex- ecuting and completing deals. In 2016, for example, Comcast Corporation acquired DreamWorks Animation for around $3.8 billion and handled all the talks pertaining to the deal without in- volving an external investment-banking entity. And Spotify managed to list pub- licly and determine its opening price based on the volume of orders it had received, thereby eliminating the need for investment bankers to be involved in the process. "Corporates are build- ing internal deal strategy and advisory teams as a self-service model to execute transactions directly," according to fi- nancial-services research firm Acui- ty Knowledge Partners. "is enables them to be flexible and act quickly when required. Importantly, it also saves them from paying high fees, wherever they can. Corporates are hiring senior ex-bankers from leading Investment Banks as deal strategists to move quick- ly and close transactions fast." What's more, the coronavirus pan- demic has only further accelerated the need for banks to implement sweeping changes to their investment-banking business models, with fees generated from traditional units such as ECMs, mergers and acquisitions (M&As) and debt capital markets (DCMs) hav- ing plummeted during 2020. As such, there is growing urgency for invest- ment-banking business strategies to evolve, primarily to help clients counter the economic shocks but also adapt and identify new sources of revenue during this challenging market environment of higher capital requirements, mounting bad debt and squeezed interest margins that has weighed so heavily on earnings. Digitalisation lies very much at the heart of such a transformation. e coronavirus outbreak and the resulting social-distancing measures put in place all across the world have meant that digital tools have simply become a way of life for businesses to ensure that they can continue operating without inter- ruption and their employees can work remotely. "For many investment bank- ing and capital markets institutions, this challenge only builds on the fierce competition for deal flow and fee and margin compression they face while also meeting heightened client expecta- tions," Deloitte recently observed. To embrace digitalisation, many thought-leaders see either transforming their core-banking systems or creating separate challenger entities as viable Can successfully embrace digitalisation? INVESTMENT BANKING

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