8 minute read 30 Apr 2020
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How COVID-19 will accelerate the investment bank transformation

Firms must refine their transformation objectives, consider lessons learned from the pandemic and review their broader strategic agenda.

The COVID-19 crisis is an unprecedented global pandemic event, which has had dramatic impact on daily lives and the broader economy. In the global markets, the pandemic has brought significant dislocation with volatility and spikes in trading volumes, creating challenges in the primary, secondary, funding and derivatives markets.

As the impacts of COVID-19 continue to unfold and the crisis progresses, lessons can be learned from the events of 9/11, the global financial crisis of 2008/09 and several recent natural disasters. However, there is no precedent for the international nature and widespread effect on the global economy and the financial sector, specifically. The functioning of the investment banking (IB) divisions of financial institutions has also been significantly disrupted with the displacement of staff to a work-from-home environment, driving significant operating, cultural and business challenges.

The economic environment has severely impacted clients of the IBs. Corporate clients have faced significant revenue and cost challenges, requiring access to credit lines to maximize cash on hand and reduced capital expenditure. Institutional investors also have been affected by large surges in redemptions and falling asset values. National governments have introduced fiscal and monetary stimulus to offset the downturn in economic activity and to stabilize market confidence. In the US, this has led to financial institutions preparing to manage their business in a low and potentially negative interest rate environment, which had been prevalent in other economies prior to the pandemic.

Market volatility, volume spikes and demand for services alone would be challenging for IBs to navigate. The introduction of remote work has complicated the environment further. Most firms have the vast majority of IB staff working from home, including, notably, substantial portions of their sales and trading front-office workforce. With what has been essentially an overnight and prolonged shift to work from home (WFH), IBs have faced challenges in provisioning equipment at scale, supervising remote staff, enabling collaboration and establishing business as usual (BAU) in this extraordinary environment.

It should be acknowledged that IBs and the broader market infrastructure (including financial market utilities and third-party infrastructure providers) have demonstrated an impressive level of resiliency to date through the pandemic. The markets, overall, remain liquid, albeit volatile with significant value fluctuations, and operational processes have experienced a significant increase in volumes during this unprecedented time. However, the pandemic has exposed certain vulnerabilities and opportunities, which need to be addressed to enable greater resiliency, sustainability and efficiency for the IB.

With outlooks suggesting a prolonged impact to the markets and to daily life, the IB processes, client proposition, technology and business mix across the front-to-back value chain may look very different as we come through the pandemic and emerge into what will be a new normal. Key factors that will shape this new normal include:

1. Preparing a return-to-work strategy

Firms need to develop and communicate a clear return-to-work strategy. The strategy includes identification of the triggers to initiate return to on-premises working, the scheduling and timeline of bringing back functions and people, and clarity on the precautions taken to limit the risk of community spread and the potential for a re-emergence. Firms need to consider the relative operational risk of each function and the ability to maintain remote working across sales and trading, operations, risk management, control functions and beyond. The return strategy is the first stage in identifying longer-term strategic opportunities and priorities.

2. The need for a proactive postmortem

Firms should be proactive in undertaking a deep dive qualitative and quantitative review and assessment of performance through the crisis across front-, middle- and back-office functions. The assessment should identify vulnerabilities in their business from a performance, resiliency and control perspective resulting from the pandemic. The results of the assessment should outline a strategic road map to address identified opportunities and challenges on priority basis. It is expected a postmortem will also form a key pillar of the annual regulatory examination process, with many firms already receiving requests from their regulators.

3. Digital enablement of the workforce

The IB workforce is traditionally office-based, particularly in front-office sales and trading roles. The pandemic triggered a significant displacement of the workforce to work remotely. The transition to remote working highlighted a need for greater digital enablement through the toolkits firms provide to the workforce, both in hardware and software terms (e.g., virtual turrets, digitized workflows, collaboration tools, etc.). The manual processes that remain prevalent across the IB were particularly challenging to execute and monitor remotely.

Firms should take advantage of lessons learned from the pandemic and develop a more flexible location strategy where they can get comfort that processes can be sufficiently digitized to perform sustainably and be risk managed appropriately in a remote environment. Firms will also need to consider the cultural impacts and differences in managerial capability to appropriately enable a high performing culture in this new way of working.

4. Accelerated reshaping of business strategy

The pandemic will likely accelerate reshaping the business profile and client value proposition among the IBs. We expect to see a more active approach to client, region and business, acquisition and exit as firms reshape their product mix and focus resources on strategically valuable products, clients and geographies.

Firms are expected to shift the value proposition offered to clients, with an increasing emphasis on data-driven and analytical offerings, digital toolkits and electronic market access. There could be an emergence of a digital-first business model, with a primary focus on electronic trading and the associated digital offerings, to service low touch, high frequency or cost sensitive clients. Such strategic move will require a further cultural shift in how IBs serve and service their clients as the focus becomes selling the platform and not a transaction.

 

Leading IBs will emerge from this crisis with new organizational flexibility and agility, increasingly digital-first business models and streamlined operations process.

5. Data enabled risk management

Financial and nonfinancial risk management through the crisis have required a number of tactical adjustments to maintain the control environment and ensure risk transparency. Historically, IBs’ risk management, supervision and surveillance capabilities have relied heavily on physical oversight and manual reviews. As firms review their performance, we expect to see a transition to a more digital approach to risk management, which will be data-driven and artificial intelligence (AI) enabled.

The capabilities will include an ability to view risk exposure to a client or risk concentration at the enterprise level on a near-real-time capability, with predictive analytics leveraged to alert on potential exposure challenges. Digitally enabled supervision and surveillance will become prerequisites for increasingly allowing front-office personnel to work remotely in the normal course of business.

6. Operations digital transformation

The pandemic exposed a number of vulnerabilities across the operations functions of the IB, where market volatility and transaction volume spikes put pressure on operational capacity. The number of manual and custom processes that are offline to core workflow applications exposed specific challenges in providing flexible capacity to surge resource processes on demand.

IBs need to review their operational capabilities and identify opportunities for digitization and standardization of processes into a common data and process model to enable an agile operational function. Through the postmortem analysis, firms need to understand the root cause of operational frictions and bottlenecks to strategically address them at the source, enabling the digital transformation of the operational function, enhancing operational capacity, resource flexibility and realizing efficiencies. This approach will also open opportunities to leverage greater industry tooling and utilities and provide the ability to offer management insights on status and issues on a near-real-time basis through a standardized workflow tooling.

7. Enhanced elasticity of IT Infrastructure

IB technology infrastructure has come under strain with the significant market volatility and volume impacting performance, reliability and resiliency. The increased processing demands on infrastructure highlighted challenges to meet service-level agreements. The increased threat from cyber attacks and capacity constraints to virtual private networks (VPN) due to remote working also presented similar challenges.

Firms need to focus on upgrading legacy technology applications and infrastructure, such as mainframe infrastructure, which struggled to support the remote working environment. Leading firms are also transitioning to a flexible microservices architecture. The need to have an elastic supply of capacity and maintain performance through load balancing is challenged by legacy infrastructure, which was a bottleneck to firms through the pandemic that needs to be addressed.

Firms should also review their cybersecurity protocols and capabilities, which also showed vulnerability through the pandemic. Firms that address deficiencies in bandwidth, cyber and surge capacity that the crisis exposed will create lasting competitive advantages due to IT flexibility, distributed capabilities and security.

IBs broadly have demonstrated resiliency and played a key role in sustaining an orderly market, supporting the economy, ensuring market liquidity and business continuity. They should, however, use this as a learning experience to further enhance their capabilities and address the challenges observed to improve their own and the market’s resilience.

Firms should take two immediate actions. First, firms need to develop a detailed multistage and staggered cross-functional return to work strategy playbook. Second, firms should initiate the execution of a holistic and proactive post-mortem review, developing prioritized remediation action plans. We expect both to form a central part of audit and horizontal supervisory reviews over the coming months.

From a strategic perspective, it is imperative that firms refine their transformation objectives considering lessons learned to date through the pandemic and review their broader strategic agenda. We expect the most proactive firms in assessing their vulnerabilities to be best placed to direct strategic investment. IBs that focus on digital transformation strategies and upgrade their data, technology and front-to-back infrastructure will be strongly positioned for growth and profitability in the new normal.

Summary

The leaders of IBs must strengthen their organizations’ capabilities and resiliency by learning from the challenges highlighted during the pandemic, and by focusing on the underlying root causes. Firms should ensure that they conduct a thorough review of the successes and challenges that were experienced. Many of the challenges are not new but have been further exposed through the pandemic. Leading IBs will emerge from this crisis with a refined business strategy focused on data and digital transformation enabling organizational flexibility and agility, increasingly digital-first business models and client solutions, streamlined transactions lifecycles and a digitally enabled workforce.