The capital markets ecosystem as a whole posted another strong performance in 2017. 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.
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. This dynamic is evident in capital markets, 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 way for investment banks to regain their footing and protect their long-term futures is to focus on five imperatives:
After three years of buoyant activity, 2017 marked a net slowdown in capital markets fintech equity investment. Such investment was less than half that of the previous two years, and the lowest since 2012, with venture capital firms in particular reducing their funding. As digitalization takes hold in capital markets, weak investment is a hindrance that may undermine growth and open the door to competitors. Financial institutions that invest in technology, on the other hand, operate more efficiently and are more productive.
One year after the UK’s referendum vote to leave the European Union, there is still much uncertainty about what Brexit will mean for small-to-medium enterprises, large corporates, and investors. What is clear, however, is that the impact of Brexit will be far reaching, and that information regarding its potential effects on the real economy is needed to support policy decisions. A new report co-produced by The Association for Financial Markets in Europe (AFME) and The Boston Consulting Group analyzes the possible impacts of a “hard Brexit”—one that includes material barriers to trade and people movement between the EU and the UK—on European end users of wholesale banking and capital markets services.
Enormous opportunity exists from the collaboration of established capital markets (CM) players such as investment banks with young fintech companies, but the potential is far from being realized. Indeed, fintech is introducing new paradigms that CM players can exploit to their advantage in a landscape that is complex and difficult to navigate. By establishing labs to focus on early-stage, novel technologies that are core to their principal activities, and by systematically pursuing adjacencies that have synergies with their existing portfolios, investment banks can position their businesses for a bright, digital future. Yet time is of the essence. Banks and the entire capital markets ecosystem must take action now in order to gain the considerable benefits that are achievable.
Rising costs and technology changes in capital markets would seem to suggest that the sustainable capital markets businesses of the future must be of a minimum size. This leads to a vital question for European universal banks, and particularly medium-size institutions: will only the largest providers survive, or are there other possibilities and strategic opportunities beyond exit or gradual phase-out?