The investment banking industry is undergoing a high disruption driven by technological changes. Traditional solutions offered by investment banks, such as trading, capital raising, and initial public offerings, are developing due to changing market forces and emerging technologies. To assist technology leaders in keeping up with the pace and the needs of the business, investment bankers present the key drivers of these changes.
The pace of transition throughout the investment banking industry is accelerating because of rising customer demands along with cost pressures and competitive products and services. These ongoing changes place new demands on IT and require industry leaders to align their operations with business partners and stakeholders, along with ensuring that they play a vital role in developing new solutions.
Traditionally, the investment banking sector was built on personal relationships and networks. However, a relationship-driven approach to the core functions has hindered the adoption of new ways of doing business. But many competitive forces are now accelerating the use and integration of technology in their operations to reshape many aspects of the investment banking industry.
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Role of Investment Banker in Financial Innovation
Investment bankers perform a less glamorous role in stock offerings. Their job is to create the documentation for the Securities and Exchange Commission before the corporation can sell its market shares. This implies that the investment bankers compile financial statements along with information about the organization's management and current ownership. Investment bankers help clients in different ways. They assist broker M&As, lending their expertise to guarantee things go as planned. When clients seek investment opportunities outside their expertise, investment bankers take up advisory roles to assist them in finding the best opportunities.
Duties of Investment Bankers
Investment bankers perform many jobs for their clients. While at some firms, an individual banker wears multiple hats, at others, they have specialized responsibilities, with different bankers performing different jobs. But at the very crux of every investment banking role lies one component - raising money for their clients. And this role can be primarily done in two ways: by issuing debt and selling equity in the organization.
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Issuing Debt
Issuing debt implies selling bonds to different investors. When an investor invests in a corporate bond, they loan money, or capital, to the issuing company for a fixed number of years at a fixed interest rate. The issuing company then issues interest payments throughout the term of the bond. When the bond term ends, the organization remits the principal back to the investor.
One of the biggest challenges for an organization is wanting to raise capital by allocating bonds and finding qualified investors with money to invest. This is where an investment banker comes in. Investment bank houses are staffed with aggressive salespeople with large contact lists of leads to solicit investment. A company wanting to issue bonds hires an investment bank to assist them in structuring the bonds and tapping into the vast network of potential investors.
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Selling Equity
The same framework worked for raising capital by selling equity or stock. Investment bankers are the primary go-to people when an organization holds an initial public offering (IPO) to make its stocks available to the public. While many public companies are scrutinized on how their IPOs turn out, the success, or lack of success, from an IPO often sets them on an irreversible trajectory. Due to this reason, many companies enroll the help of investment bankers to line up big-time investors as well as to position their IPOs in the most auspicious positions.
The Changing Investment Banking Landscape
Technological innovation today has found its way into every industry. And the investment banking sector is no exception. As a result, these financial institutions are integrating world-class tech teams to focus on building and implementing new technological solutions to remake their processes and business models. Technology has become ubiquitous in finance, and capital market firms are becoming early adopters of digital technologies to thrive in such a competitive industry.
Similar to other private financing firms, investment banking is a relationship-focused business. Irrespective of integrated automation or technologies, nothing can replace the power of personal relationships in the investment banking industry. An investment banker can rely on their network to source deals as well as to identify the right capital providers. However, depending on outdated spreadsheets along with sales CRM is slowing down their productivity and competitiveness.
Advising companies and assisting them in raising money is an important part of investment bankers and several other functions. Most investment banks are diversified in terms of their services. Some of their other income sources are as follows:
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Research: Larger investment banks house large teams to gather information about corporations and offer recommendations to buy or sell their stock. While they use these reports internally, they also generate revenue by selling them to hedge funds and mutual fund managers.
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Trading and Sales: Many firms also have an in-house trading department that assists in executing stock and bond transactions for their clients. Previously some banks have also engaged in proprietary trading, gambling their own money on securities. But recent regulations have clamped down on these activities.
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Asset Management: Many investment banks manage enormous portfolios for their clients, including pension funds, foundations, and insurance companies, through their asset management department. They assist clients in selecting the right mix of stocks, trusts, debt instruments, and other investment vehicles to achieve their unique goals.
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Wealth Management: Many investment banks also cater to retail investors. With their team of financial advisors, they help individuals, as well as families, save for retirement and other long-term needs.
Key Highlights
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Investment banks today act as a bridge between large enterprises and investors.
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The primary goal of an investment banker is to advise businesses as well as government institutions on ways to meet their financial challenges.
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Investment bankers assist clients with research, financing, trading, and sales, along with wealth and asset management, IPOs, acquisitions, mergers, hedging, and more.
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The Future of Investment Banking
Technology is quickly changing the pace at which investment banks conduct business, such as industry-specific software is assisting businesses to optimize their operations and improve their decision-making process. As a result, investment banking firms need a long-term plan to implement the right resources, tools, and processes to remain relevant and competitive.
Technology leaders and IT departments are aligning their business need to ensure they are rightly positioned to deliver new products and services in the market. Mature core IT capabilities, including data governance, enterprise architecture, and infrastructure planning, are critical to success. And with changing consumer preferences and tech innovations, industry leaders are exploring new opportunities that will transform the future of investment banking.
While certain sophisticated services or products have given investment banks a bad reputation, these firms are now playing a critical role in helping companies and government entities to make informed financial decisions and raise the required capital.
The future of investment banking promises more emerging technologies, making it crucial for investment banks to establish a structured framework for innovation management. They also need to consider external trends and internal processes to succeed in new environments.
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