Despite Recent Revenue Uptick, Continuing Migration to Digital Services and Business Models Is Pressuring Banks to Be More Client Centric, Attract Fresh Talent, and Become More Agile, Says Report by The Boston Consulting Group
NEW YORK—As technological advances and a more diverse array of industry participants challenge investment banks’ historical dominance, incumbent institutions must take forceful action if they hope to survive and thrive in the new digital environment, according to a new report by The Boston Consulting Group (BCG). The report, titled Global Capital Markets 2018: Embracing the Digital Migration, is being released today.
The report, BCG’s seventh annual study of the capital markets industry, examines key market developments and performance metrics, explores the erosion of traditional value drivers and the rise of digital disruption, and offers detailed action steps on how investment banks can move to a more robust business paradigm that will lead to a prosperous future.
“The reality is that many incumbents have yet to evolve their capital markets business models deeply or quickly enough,” says Philippe Morel, a BCG senior partner and a coauthor of the report. “While a few have experimented around the edges—partnering with fintechs or exploring some new revenue opportunities—most have simply leaned harder on traditional responses such as cost rationalization, taking market share from peers, and growing scale. While important, those conventional responses ignore the ongoing erosion taking place in the core investment-banking business model.”
Key Market Developments
According to the report, 2017 proved to be another year of strong performance for the capital markets ecosystem as a whole. Total industry revenues rose to $671 billion from $628 billion in 2016, an increase of 7% driven primarily by strong market performance. Yet those results masked underlying difficulties for the investment-banking sector. Global investment-banking revenues, which consist of equities; fixed income, currencies, and commodities (FICC); and primary markets, fell for the fifth consecutive year, down 3% to $220 billion, with profits falling 4% to $73 billion. Securities services, meanwhile, posted strong revenue growth of 7%, and other ecosystem players also realized revenue gains. The mixed performance illustrated the continuing industry value migration. On an upward note, investment-banking revenues rebounded in the first quarter of 2018.
The Erosion of Traditional Value Drivers
The report says that investment banks have long relied on their product and market expertise, balance sheet strength, talent, and superior technology to raise capital, intermediate risk, and advise their corporate and investor clients. These attributes have, in turn, created deep client relationships and superior business economics. Yet as the market has evolved, each of these traditional sources of value has been challenged, raising three strategic questions for banks: How have client needs and preferences changed over time? Can we address these changing client needs with traditional value propositions? Are clients willing to pay a relationship premium for these services?
In any industry, the prospect of a large potential revenue pool combined with business model stagnation heightens the likelihood of disruption—the entry of new players with fresh technologies capable of reshaping the market. (See the BCG white paper “Fintech in Capital Markets 2018: Boosting Productivity Through Technology Innovation.”) This dynamic is evident in capital markets, Global Capital Markets 2018 says, as the redistribution of value that began after the 2007–2008 financial crisis has become a steady shift, driven by the migration to digital services, processes, and business models. As a result, investment banks now make up 33% of the capital markets revenue pool, a sharp decline from 48% in 2006 and a downtick from 36% in 2016.
The Call to Action
The only way for investment banks to regain their footing, BCG says, is to address the root causes of this deterioration. To protect their long-term futures, BCG recommends that banks focus on five imperatives:
“The takeaway is clear,” says Charles Teschner, a BCG senior partner and a coauthor of the report. “To survive the digital migration, banks must evolve their business models—and they must do so quickly. That is the only way they will continue to remain viable and profitable in this rapidly changing market.”
A copy of the report can be downloaded here.
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The Boston Consulting Group (BCG) is a global management consulting firm and the world's leading advisor on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with offices in more than 90 cities in 50 countries.