In recent years, advancements in technology have significantly affected many industries, changing the way businesses operate. And then the pandemic hit.
What was expected to happen after two more years came in abruptly. The digital market flourished despite market volatility and uncertainty. And while 2020 became a challenging year for most companies, technology opened doors for new business models, revenue generations, and many other positive changes.
Investment banking welcomed this shift. Financial institutions adapted quickly. Technological solutions were implemented into origination strategies and business models. It also paved way for fintech (financial services technology), a new financial services sector, to emerge. In today’s article, you’ll learn what other changes recent digital transformations enabled in the investment banking sector.
Rise of Financial Services Technology
Fintech service providers offer customers new ways to make payments and manage their finances. They also provide companies with streamlined financial services that enable operations to eliminate unnecessary financial vendors — the banking and payment sectors.
While financial technologies are expected to continue doing so, experts observed how it somehow robbed the banking and payments sector of profits. According to the industry leader in audit and assurance, 28% of said sector’s profits are at risk. This caused chief executives from the investment banking industry to worry.
Fintech has indeed, disrupted how the investment banking industry functions. Experts are saying that large investment banks are in peril. Before the emergence of fintech, large investment banks were at the top of the financial services sector, receiving revenue from numerous streams. Smaller fintech companies have now become major competitors.
On the brighter side, fintech has opened up new partnerships in the banking sector. This has helped the e-commerce industry to offer products and services to a wider customer base. Mainly, several third-party fintech businesses are working together with investment banks, starting yet, a new trend.
Blockchain Technology Making it to Mainstream
The cryptocurrency Bitcoin is a volatile currency. Despite this, many investors saw its potential and now, it has gradually made it mainstream. Many banks and firms are adopting blockchain technology, financial services that offer Bitcoin, to increase security and reduce operational costs.
Costs are reduced as intermediaries between fund transfers are replaced. Security, on the other hand, is increased as transactions are made at the core of blockchain technology. It’s a useful venue for banks and firms that are always at risk of cyberattacks.
Blockchain technology has also allowed other industries, such as trusted oil extraction companies, to manage their finances. These companies have relied on large investment banks for their huge projects. With blockchain technology, they are further improving their financial transactions, reducing the risk of error and fraud.
Unexpected Benefits of Virtual Investor Relations
Initial public offerings (IPOs) were traditionally dependent on in-person meetings that would take around two weeks for any deals to be closed. The pandemic, however, has demanded from companies and prospective investors to opt for virtual IPOs. Lockdowns forced investor relations to rely on remote connections and transactions. The expedited process is now 50% less of the time that it previously took.
And because the pandemic is a busy time for the healthcare industry, it relied heavily on virtual IPOs. The need for rapid healthcare solutions involving digital technologies necessitated offerings and so is the demand for capital, especially for clinical trials to proceed.
Faster Transactions Using High-Frequency Trading
High-frequency trading (HFT) uses large computers for trading transactions, which is achieved in a matter of seconds. It uses complex algorithms to execute orders based on market analysis. Large investment banks use HFT considering the vast amount of transactions they have on a daily basis.
Companies that use HFT have a systematic approach to active trading, enabling them to expect high favorable returns on trades. While it is the large investment banks that are benefiting from HFT, the Investment Banking Council of America believes it will gain traction in the years to come.
Environmental, Social and Governance (ESG) Investments
Experts are also expecting ESG (environmental, social, and governance) investments to increase during and after the pandemic. ESG are non-financial factors that investors use to analyze a company’s risks and opportunities. It is based on sustainable investing, which focuses on a company’s ethical and environmental impact.
It is not mandatory for investors to look into this approach, but it is seen to increase in the years following the pandemic as many companies aim to become sustainable. Likewise, many companies are starting to include ESG factors in their annual report. Other times, they create their own sustainability report to show to investors.
While there is no standard for a sustainability report, there are institutions that are working to create them to encourage companies and investors to include ESG in the investment process. These institutions include the Task Force on Climate-related Financial Disclosures (TCFD), Global Reporting Initiative (GRI), and Sustainability Accounting Standards Board (SASB).
To Embrace or Combat Disruptors
The disruption of technology has started an evolution in the investment banking industry. What the world has seen has just began and experts believe it will develop further. To be successful in this new landscape, financial institutions could either embrace disruptors or combat them and find new ways to improve the industry.