Ernst & Young (EY) in collaboration with Innovate Finance has published a report titled ‘Capital Markets: Innovation and Fintech Landscape’ which gives insights on how collaborating with Fintech can transform investment banking industry and embrace innovation. Collaboration with Fintechs can help the investment banks to reduce structural costs and enable enhanced regulatory compliance and better customer service. The report findings are based on 40 stakeholder interviews conducted with Investment Banks and Fintech firms across the globe.
As per the report, Innovation in capital markets is no longer optional and the industry is going through a transformational time. The industry needs to evolve quickly and for that collaboration rather than competition with Fintech needs to be done. The return on equity (ROE) for investment bank industry is declining with average ROE for the top 14 banks sliding from 7.8% in 2014 to 6.3% in 2015. Typical cost of equity for investment bank is around 10-12%. In 2016, the situation has not improved due to warnings of slowdown in global economic growth.
Major challenges faced by banks over the past years are structural costs, regulatory reforms, conduct issues and capital requirements. The respondents believe that banks have not given priority to innovation but now innovation is very crucial in seizing the opportunities in future. The report identifies Artificial Intelligence, Robotic Process Automation, Smart Contracts, Blockchain, digital transformation and other advanced analytics can be game changers for the investment banking industry.
Imran Gulamhuseinwala, EY Global FinTech Leader believes that investment banks need a top-down culture that supports innovation and accept that there is no such thing as free bet. He said: “While there is no shortage of willingness to engage between Investment Banks and FinTech firms, there are practical challenges of getting ideas out of the lab and into production. FinTech organizations are still maturing in how they deal with large, complex Investment Banks.”
The report highlights the fact that there are more than 5000 Fintech firms and the number is continuously set to grow which provides the investment firms countless opportunities for collaboration. These opportunities needs to be approached and addresses in a right way, methodically researched and smartly activated.
David Williams, EY Capital Markets Innovation Leader believes that banks can’t change overnight but the decisions which they take now will be driving their future. He said: “We expect the investment bank of the future to look markedly different to today – we think that the winners could be those that create the smartest ecosystems.”
The full report can be downloaded by clicking here.