Investment Banking business Model
Distribution.Explicit charging models for both research and value creation are needed. Banks must also explore dynamic pricing for capital-light agency services versus balance-sheet-intensive principal-based services. Digital functionality will be needed both to improve the customer experience and to invigorate distribution. Areas of primary markets that depend chiefly on human talent—such as high-margin, low-capital-intensive M&A teams—are under less of a threat than more capital-intensive trading businesses.
Moreover, front-office head count, compensation, and technical specialization must all be aligned with client-coverage strategies and product-offering needs. With trading head count representing 30% to 50% of costs (depending on the asset class), aggressive front-office reduction will be required as markets become increasingly electronic. Distribution via electronic channels, which in turn should be consolidated with standardized connectivity, must also be pursued. Moreover, since shifts in trading execution can also impact revenue-model dynamics, serious thought will be required about whether, for certain asset classes, a move toward an agency model—as opposed to an outright exit—would be beneficial. Commitment to a few key asset classes and to building electronic scale through powerful internalization engines will be critical, as will big-data-driven customer analytics in those areas. Broker, clearing, and exchanges costs will need to be tightly controlled in order for an electronic market-making business to succeed.
Client Centricity. An improved understanding of client profitability, share of wallet, and segmentation will significantly help firms understand the balance of trade between themselves and their customers. Banks will have to move away from supplying products to providing services. Only by helping their clients to succeed can they expect to generate revenues.