The major challenges that the investment banking sector will encounter in the late 2020, or early 2021, would revolve around market digitalisation and electrification, high capital charges, layered and inflexible technology involving high degree of sophistication, stuck cost base, and stringent regulations.
This year is going to be an interesting one, provided that there will be many hurdles in the pathway to success for the banking sector? The chances are, that there will emerge a banking ecosystem that will be highly volatile. The conditions that seem most favourable, constitute the latter half of the year filled with destructive storms, similar to what happened in 2008. The chances are very slim that the investment banking sector will see a bright and rewarding 2020.
On the other hand, a small percentage of professionals in the said sector may have to let go off their respective jobs, given the degree of recession, COVID pandemic has brought in. However, there will emerge new opportunities, once the epidemic ends. Most of the professionals who have been laid off recently, will find opportunities to come back into the workforce.
For young finance graduates, it will be a great opportunity to break into investment banking, the moment pandemic ends, and the job market revives. Getting your hands on industry-relevant investment banking certifications would certainly be a great competitive advantage.
The Majority of the Year Will Go Into Dealing with Crisis Recovery
Second half of the year is expected to make investment banks busy dealing with the post economic crisis revival, and there is every chance of fin tech firms rising high amid all of this. However, the predictions many go wrong like a weather forecast, but similar to climate science, the trends always indicate the looming truth. And that’s why, it’s high time for investors and banks’ c-suite executives to plan attentively for the remaining of the year.
Top 6 Challenges That Await the Investment Banking Sector
Difficult Regulatory Norms
There is an international standard, called IFRS 9, designed and developed by IASB (International Accounting Standards Board) that oversees financial instruments. It constitutes a whole set of mandatory rules & requirements that are to be stringently followed by the banks. It leads to a different level of sophistication and complexity for bankers. BASEL, the international regulatory organization, too, has soared its minimum capital requisite for investment banks from 2% to 4.5%, advancing from BASEL II norms to now new, BASEL III norms. Such difficult standards set by the regulatory bodies can lead to many financial institutions forced to change their behaviour of working.
Amid the intense competition among the different banks in the said sector, the continuous need to launch and offer new services from time to time, has become a mandate. Servicing your clients and customers well, is the need of the hour for investment banks around the world, or you simply lose them, as your immediate competition would grab the chance of attracting your client/customer towards them.
To remain competent as an investment bank in 2020, you ought to offer new and diverse services to your customers that entice them, and keep them glued to you. Coming up with new services that the clients of investment banks would like, will be a big upcoming challenge in the latter half of the year.
With the advent of BASEL III, there has come limitations to product profitability. Arrival of such new regulatory standards does affect the profit-making, and ROE (return of equity). Banks will need to dig into their current business structure to identify the loopholes, and get rid of the non-profiting services and transactions. Efficient capital management will be the key to success, as it’s quite evident that the available capital to the banks is absolutely scarce at this point in time.
Challenges with Cross-Border Service Offerings
A majority of large investment banks are known to offer international banking services, which is worth a trillion-dollar market to tap into. However, the introduction of new stringent regulations this year, have made it intensely difficult to seamlessly provide for cross-border services. The disadvantages of transacting in bitcoin (popular cryptocurrency) for international payments are not unheard of. However, blockchain has emerged among the most-promising disruptive technologies that facilitate cross-border transactions, but with the recent happenings of hackings and fraud, has put it under ‘unsafe’ category.
Cost-Management for the Services Extended
Cost-optimization would be a big worry amid the strict government regulations that are needed to be followed by the banks, in 2020. The laws been formulated off late by the governments across the world, has hit the ROE of banks really hard, and has forced them to reconsider their production costs. Bankers need to ensure that there is no loss incurred while they offer their clients, the services of their liking. And for that, performing effective cost management and detailed risk analysis is required.
Financial service firms are the most vulnerable to malware attacks and hacking. Reports of a number of digital thefts and frauds have been observed in the recent past, pertaining to investment banks and financial institutions, globally. Banks will need to deploy stringent network security algorithms to their central servers so as to help prevent such mishaps. If the banks want to survive in this digital age, they will have to cope up well with the loopholes in the system.