Digital Disruption in Capital Markets –The Drivers

Published on April 5, 2017 by Vikash Kumar

Digital has become a key aspect in today’s world, and most businesses have to transform to meet the need of the hour. Like any other industry, banks across the world are also trying to transform themselves to reap the benefits of digitization. Retail banking has already seen a lot of digital disruption through some innovative offerings from banks and Fintech firms.Banks have always believed that digital disruption will impact mostly retail banking and other divisions, such as commercial banking and investment banking, will not have much impact. But of late, banks are rethinking this assumption because of some compelling factors, both internal and external.

Five Key Drivers behind Digital Transformation in Capital Markets

The Capital Market division (buy and sell sides) of banks and financial intermediaries, such as stock exchanges and clearing houses, have started to realize the need for digital transformation of their business. These institutions across the globe are planning to use cutting edge technologies, including blockchain, machine learning, and robo advisors, as they make digitization part of their day-to-day business. Capital markets firms are compelled to embark on this journey because of the following internal and external factors:

1. Margin compression: Capital market firms are facing pressure on margins because of the severe competition in terms of pricing and innovative offerings. The top investment banks saw their ROE falling to 6.7 per cent in 2015 from 9.2 per cent the year before. Stringent regulations and associated costs related to compliance are also pressurizing margins. Firms are also facing increasing pressure from shareholders and investors. In the low-interest-rate regime, investors are looking for better advisory on investments in different asset classes in order to maximize their returns.

2. Competition from new entrants: Various fintech firms have come up with niche offerings, which is forcing capital market firms to rethink their strategies. Capital market companies need to compete or collaborate with these firms. Accordingly, they are feeling the need more than ever to improve their overall operational efficiency, including customer servicing, with a focus on automating various processes.

3. Evolving technology: Technologies, such as blockchain, machine learning, and robo advisors, have made significant inroads into capital market firms, which need to come up with a robust strategy to approach and adopt these fast-evolving technologies. Strategies can range from understanding the available advanced data analytics capabilities to the areas in which it can be implemented (preferably, phase-wise approach, starting from low hanging fruits to reap early benefits and win management’s confidence for wider adoption across the firm). As per an Accenture report, machines can take as much as 30% of the current workload.

4. Changing regulations: Regulations are changing faster than ever. The Dodd-Frank Act, MiFiD, EMIR, and FATCA, and their stringent norms are a few examples. Capital market firms are required to streamline/modify their processes or the way they have been doing business in order to comply with these changing regulations.

5. Digitally connected customer: Digital has become a crucial part of a customer’s life style. Clients expect firms to adopt/customize their offerings to suit their requirements. In addition, clients demand on-the-go services as well as an omnichannel experience from investment banks. Capital market firms need to have an outside-in approach (thinking from the customer’s perspective) rather than an inside-out approach (thinking from the firm’s perspective) while working on product offerings.

Capital market firms need to think innovatively and come up with new business models and new offerings to survive in the current new order. An effective digital strategy is required for these firms to meet the above challenges, thereby creating value for customers. They need to be connected to their clients more than ever through real-time offerings and add value through innovative and customized solutions.

This blog will be followed by a series of blogs covering in-depth discussions around the drivers mentioned above, trends that are shaping the capital market industry’s adoption of digital led transformation, and the approach capital market firms need to adopt to meet these challenges.

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