The capital markets ecosystem turned in a decent performance in 2016 compared with the previous five years. Although investment banking revenues continued to decline, they did so at a lower rate, while other types of players—such as exchanges and venues, information providers, and buy-side institutions—realized revenue gains. The net result was year-over-year growth of 5% in total industry revenues.
We refer to the shift of global revenue pools from banks to nonbanks as the value migration. This migration has continued along the following paths:
Although a lessening of the effects of quantitative easing, along with impending deregulation, may dampen the impact of the value migration, institutions must still find ways to master it and make it work to their advantage.
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.
The United Kingdom's decision to leave the European Union will transform Europe’s capital markets. In the short term, the effects may be negative as uncertainty surrounding the final status of the UK's position further depresses investment bank revenues. In the medium term, there may be more bad news as banks face an escalation in costs as they staff and build out additional trading hubs. The long-term effects are less clear, with a variety of possible (mostly negative) outcomes. For some banks, “Brexit” could accelerate their withdrawal from parts of the value chain; others might take advantage of the situation by re-engineering their operating model, aggressively implementing cost-reduction programs and restoring performance.
Digital technology is facilitating the flow of information away from investment banks and into new channels. It is also allowing data to be created and controlled by nonbank entities. Some companies are implementing measures to stay ahead of the curve, yet others are adapting too slowly, if at all.
Ultimately, the technology that has forced other industries to completely overhaul their business models is now being brought to bear on the world of investment banking. The time for digital adoption is now.
Leveraging Digital Advances in Capital Markets
MiFID II will transform the financial markets of Europe. It will do this directly, stipulating new practices by market participants. But its more profound effects will be indirect. By increasing automation and transparency, MiFID II will change the economics of securities trading and, hence, the business models of many market participants. New data management and analytics capabilities will be required, traditional sources of revenue will decline (or disappear), and new players will enter parts of the value chain. The overall implications are profound.