How do the Investment Banks function?
Before assessing the challenges that the investment banking sector is facing in the contemporary, it’s important to gain some insights into the functioning of the investment banks. From underwriting of new stocks to handling mergers and acquisition deals and advising clients on profitable investment avenues, there is a lot that investment banks bring to the world of finance. Let’s find out how investment banks handle this multi-dimensional role in the financial services industry.
Investment Banks as Underwriters
As underwriters, the investment banks serve as intermediaries between the corporation seeking to raise funds through IPO and the investors who are ready to invest money in a profitable venture. Investment banks buy the securities from the corporations as per the agreement and then resell it through stock exchanges.
Investment banks in Merger & Acquisition deals
Mergers and Acquisition deals are one of the most important aspects of the investment banking field. Investment banks have a huge role to play in the Merger & Acquisitions deals which are carried out to increase profitability and reduce competition between corporates.
Investment Banks in an advisory capacity
Investment banks guide big corporations and high net worth individuals to park their money in profitable avenues. Investment banks assess the needs and risk appetite of their clients and provide customized investment solutions to them.
Challenges in the Investment Banking domain
It all seems so fancy from the outside but all is not well in the investment banking sector. Ever since the global financial crisis in 2008, regulatory bodies have imposed new standards that are to be met by the players in the financial services industry. Let’s dig deeper into some of the most prominent challenges in the investment banking landscape.
One of the most pressing challenges that the investment banks face in the contemporary is regarding the regulatory requirements imposed by regulatory bodies. The Basel III norms require financial institutions to maintain core liquidity, reduce short term funding and hold more liquid assets. Basel III has caused fundamental shifts in product profit margins.
The Disruptive Fintech Industry
Everybody is talking about the Fintech industry, the finance and technology amalgamation has completely disrupted the traditional finance industry. Working on the principles of democratization and financial inclusion, the Fintech industry proves to be the next big thing in the Finance segment leaving investment banks behind. Fintech companies also enjoy much more flexibility when it comes to aligning itself with regulatory requirements.
Talent acquisition has been one of the most significant challenges in the investment banking industry. The workforce today has equally lucrative alternatives to try out their career in, working in the investment banking industry can be challenging given the long hours and complexities in the job.
Cybersecurity has been a nightmare for the finance industry, according to the UK’s financial regulatory body cases of security breach has grown multiple folds in the last 2 years. More than five prominent British banks, including the likes of Royal Bank of Scotland and Barclays, were forced offline temporarily after a series of cyber-attacks.
Augmenting Client Experience
We are no longer living in a world where products and services are offered, today it’s all about selling experience, and customers value the experience of availing the product or service more than anything else. Hyper personalization has totally changed the game in the B2C segment, the B2B segment is looking up to a similar makeover. This has increased the client’s expectations from investment banks who are still operating as per traditional standards.
With the advent of Fintech companies and the stringiness of regulatory bodies post-global financial crisis, the investment baking world is facing some real challenges and quickly need to adapt to new requirements and changing expectations of its clients.