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27 Jun Innovation in #InvestmentBanking—There are Pros and Cons

I just caught a BusinessInsider article outlining what we already knew: macro investment banking is having a bit of a rough year in 2016. The United States is having one of the most underwhelming years so far, underwhelmed only by Australia. Unfortunately, the nature of the industry lends itself to boom and bust cycles like this. However, I’m of the personal opinion that things are changing in investment banking in a big way. These changes—most of which are sparked by advances in fintech—are becoming an ever-present reminder that our industry may have growing pains, dislocations and consolidation on the horizon.

People Bloat

If Amazon is planning on using drones to deliver everything from books to groceries, why can’t the financial services industry see the writing on the wall that things are overly bloated, particularly with people. The heavy swings in boom and bust in investment banking are met with parallel hiring and/or firing (or wage reduction). I too would argue that what we do will always require people at the helm. Complex transactions with a lot of gray area will always require people, but process improvement using today’s technological resources can (and will) eliminate headcount at some of the most prolific investment banks.

The shift is already occurring, but the next five years will bring an even greater influx of new tools that will take many of the jobs away from traders, analysts and associates. The investment banks of the future will be both asset and people light.

The Pros and Cons

There are clear winners and losers in this race to automate systems and processes. First, lack of expensive personnel resources will mean investment banks will run more lean, giving them the ability to weather the storms discussed previously by BusinessInsider. Secondly, operating margins will increase. The lack of headcount will create large boosts in margins for investment banks, particularly in the feasting years like 2015. Technological advances may reduce internal operating expenses inside investment banks, but the gross profit margins are likely to significantly and simultaneously decline. When machines perform most of the functions, some of the high investment banking fees are likely to decline.

There will also be collateral damage, most of which will impact people. The immediate hurt will be the most disruptive. Over time, the number of folks entering investment banking is likely to continue to shrink. As a result, we are likely to see increases in income inequality for those in the higher echelons of financial services, including investment banking. The result may be a zero-sum game.

Unfortunately, the net-net of increased efficiency and cost savings within investment banks are not likely to be evenly distributed in both the financial services sector and the economy at large. As some have indicated, this could contribute to additional social dislocation. Innovation is needed in investment banking. Do the pros outweigh the cons? Is the gain worth the dislocation? Time will tell, but as the machines we create become smarter and work well for investment bankers, I expect to see less articles with “investment banking” and “miserable” in the same title.