Asset managers are increasing their technology budgets to develop more complex, sophisticated abilities and reduce their dependence on the sell side, according to a report from GreySpark Partners, a capital markets consulting firm.
In a report “Digital Transformation of Investment Banking”, GreySpark said that since 2008 fund managers have changed the way they search for liquidity and the way they execute as they have become larger and grown assets under management. Since 2011 the growth of assets under management has been an average of 7% per annum, with growth of 18% between 2014 and 2015.
“They are more cost aware and increasingly savvy when engaging with the sell side and they now pick and choose the services they pay for rather than purchasing products and services as a holistic offering,” added GreySpark. “This is forcing investment banks to reconsider their perspective on client relations and to develop new interaction models to meet clients’ expectations.”
Fund managers have also been hiring highly skilled personnel with investment banking experience and developing technology systems that give them greater capacity to inform their decision-making and bring more actionable facilities in-house. “This [technology] expenditure is directed towards foreign exchange aggregators, collateral management tools, transaction cost analysis tools, risk management tools and client-to-client trading platforms,” said the report.
Large fund managers have economies of scale of that allow them to source services, such as clearing, from alternative providers rather than relying on the executing party to provide the service. GreySpark added that as a result investment banks should view mid-tier and lower-tier buyside firms as a critical source of clients and harvest them by providing the services they may not have the capacity to hold in-house.
“Investment banks are being pushed towards ‘componetised’ or deconstructed products and services to capture clients,” said the report. “Buyside institutions are consolidating their spending on intermediaries, causing smaller players to white label execution and clearing in some products.”
For example, credit trading is becoming ‘componetised’ by the sellside, from primary issuance and placement, to pricing, execution, and custody and asset servicing. “This trend will allow investment banks to capture a share of more clearly defined market spaces that may include research, market access, clearing, allocation, custody services and bespoke exotic structured products and algorithms,” said the report.
Greyspark expects banks to acquire the best practices of the automotive or aircraft manufacturing industries and reinvent their operating models on three pillars – a fully-automated manufacturing plant for the creation, assembly and packaging of financial products and services; a multi-channel distribution franchise that provides a consistent user experience for all interactions between a bank and its clients and managing data as an asset across the entire supply chain.
As a result the number of joint ventures and strategic alliances between complementary institutions will multiply as banks focus on their core expertise, client franchises and geographies.
Saoirse Kennedy, GreySpark senior consultant and report co-author, said in a statement: “In banks today, data exists as a series of inputs and outputs in systems defined by business processes that feed workflows, specifications and systems. The next generation of investment banks – digital investment banks – will see data as the foundation on which systems interact.”
In a report last week, “The world needs banking but not banks”, PwC said that nearly three-quarters of global banking and capital market chief executives see cyber threats as a barrier to growth.
“The combination of higher capital charges, liquidity demands and compliance costs is forcing many to abandon what had once been profitable mainstays in their business,” added PwC.
More than two-thirds of the executives plan further cost-cutting initiatives over the next twelve months and 64% plan significant changes in the way they manage risk to be able to see risk coming, contain it early and adapt quickly. More than 10% said they plan to sell a majority interest in a business or exit a significant market over the next 12 months.
PwC surveyed 176 banking and capital markets chief executives across 62 countries. The study found that the top three technology areas that are expected to yield the greatest return in terms of engagement with stakeholders are customer relationship management systems (80%), data analytics (75%) and social media communications (56%).
Technology is also transforming customer expectations, lowering barriers to market entry and opening up growing competition from fintech entrants, which almost every banking and capital market chief executive believes is the trend most likely to transform their business over the next five years.
Ronan Doyle, PwC Ireland’s banking leader, said in a statement: “Driving delivery of technology and innovation will be critical in delivering the choice, service and pricing bank customers want. The pressures of economic conditions, regulation, costs, risk management and increasingly cyber remain. As one of the chief executives we surveyed noted – the world needs banking but not banks.”
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