Over 90% of financial markets executives and government officials believe the financial services industry will unbundle – apparently ‘wealth destruction leads to self reflection’, according to a survey by IBM Institute for Business Value. The study reveals that as the financial markets industry radically restructures, firms must adapt to a new lower-margin landscape where they will need to specialise around services that clients value rather than continuing to provide a full range of in-house offerings.
The study predicts significant consolidation in segments wrought with over-capacity such as investment banking, asset management, and wealth management. Enhanced regulation and transparency will also eliminate opacity, with previously high-margin activities becoming commoditised.
“Banks have been used to a level of volatility and business cyclicality, and are currently slashing headcount and closing business lines in order to save money, just as they have done in previous downturns. However, in the current restructuring radical efficiency improvements will be required for survival,” said Shanker Ramamurthy, global managing partner for banking & financial markets at IBM Global Business Services. “Indeed IBM’s analysis suggests that the current wave of redundancies and divestitures will provide insufficient savings and that firms will need to seek further efficiency improvements of 20% or more as they face the need for a level of transformation and radical business model reform not seen in previous downturns.”
The study predicts three specific areas of specialisation that are likely to emerge from the new economic conditions:
- Beta transactors: the majority of financial markets firms will concentrate on utility services (trading, asset management, etc) that provide the infrastructure required to facilitate market-making in the same way that water companies provide the reservoirs, purification processes and pipes required to deliver clean water.
- Advisors: a smaller number of firms will concentrate on providing advice – such as wealth management or mergers and acquisitions advice.
- Alpha seekers: a handful of private equity firms, hedge funds and boutique investment houses, none of which are ‘too large to fail’, will focus on generating high returns from high-risk investments.
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