The COVID-19 pandemic was a watershed movement for the investment banking industry. Neo-banking, blockchain investment companies and attractive alternative investment opportunities have been front and centre while the socio-economic, environmental, and governance climates continue to change. In this article, we’ll take a closer look at the trends shaping the industry in 2022.
Investment Banking Trends of 2021
2021 was an impactful year as the market cautiously re-emerged following the pandemic. A few of the trends highlighted in 2021 include:
Growth in high-frequency trading: Analysts predicted that high-frequency trading platforms would experience bullish growth until 2026. These platforms use complex algorithms to spot emerging trends and deliver favourable returns for large investment firms.
The growing popularity of virtual IPOs: Due to lockdowns, roadshows and test-the-water meetings moved to virtual platforms.
The emergence of new digital technologies: This included Robotic Process Automation (RPAs), mobile payments, cyber hygiene tools, hybrid cloud investments and the automation of data distribution through big data analytics.
Shifts in hiring trends to accommodate regulatory changes, hybrid working conditions, and upskilling requirements.
While many of the trends from 2021 are still relevant today, many new trends and technologies have emerged that have changed the investment banking landscape once again.
Investment Banking and Finance Trends of 2022
The turmoil of recent years has clearly changed the investment landscape significantly. The conflict in Ukraine, the popularity of decentralization, and a shift in thinking and attitudes towards the economy and the environment will likely steer banking and finance trends well beyond 2022. Some of the most significant trends include:
The Russian-Ukrainian conflict has introduced harsh and ever-changing global sanctions regimes that are likely to last for several months. Banking institutions have had to rapidly come to grips with second-order exposures and the long-term consequences of the conflict, including declines in GDP and global trade. Banks have also had to sharpen their understanding of ultimate beneficial ownership (UBOs) in sanctioning regulations and how they apply to their existing and new customers. Failure to do so will not only lead to reputational damage but substantial regulatory fines. Poorly assessed or ill-advised customer relationships have never posed a greater threat than now.
Investors are naturally concerned about risks to their investments and will seek an asset allocation strategy to protect themselves while still looking for yield. Achieving yield, of course, becomes more complex to do with minimal risk-taking. Banks must monitor these risks carefully and foresee the resulting impact of an event. They should also be prudent in their geographical and sectoral diversification strategy to attain a certain level of security.
The financial sector has enormous sway when it comes to funding and building awareness around issues of sustainability, including investment into alternative energy sources and supporting businesses that follow fair and sustainable labour practices. Sustainable finance can be defined as environmental, social and governance (ESG) factors of economic activity or project. Environmental factors include the mitigation of the climate crisis. Social factors refer to human and animal rights, consumer protection and fair and diverse hiring practices. Governance factors refer to employee relations, management and compensation practices of various organizations.
Environmental, Social and Governance funds continue to grow as banks are urged to be responsible guardians of our planet. A record $649 billion was poured into ESG-focused funds in 2021, an increase of 20% from 2020. Banks, investors, boards and equity holders are continually presented with new challenges, as well as new opportunities in sustainable finance, spurred on by attitudinal changes, the growth of the green market, the demand for green debt and increased regulation and public scrutiny. There will be even more growth from 2022 to 2023, particularly in the Asian market, as certification and verification programs and standardization start to drive change.
Increase in Infrastructure Spending
Infrastructure spending is yet another trend that can be attributed to the recent pandemic. Initiatives like the G7 Build Back Better World initiative will see nearly USD2.3tn used to revamp ageing infrastructure in the US, while the European Green Deal and China’s infrastructure-led stimulus are rolling out to stimulate economies ravaged by COVID-19 and harsh lockdowns.
Economic research does suggest that infrastructure spending has a stimulating effect on private spending, as well as a large impact on the GDP via the multiplier effect. To reverse the economic downturn in a looming recession, this investment must be timely, as delays can reduce the impact of the investment on the economy. It should also be targeted and place spending in the hands of the multipliers that can multiply its impact, e.g. lower-income households and the economically distressed.
Decentralized Finance and Blockchains Continue To Grow
Global blockchain spending will hit the $19 billion mark by 2024, with $38 billion of value currently locked in decentralized finance (DeFi). DeFi’s role in the future economy is certain to be a prevalent one. There’s a strong likelihood that traditional banking structures will be dramatically altered (if not abolished altogether). Gartner has said that 80% of financial firms will go out of business or become obsolete due to changing customer behaviour and new competition from decentralized pioneers and centralized players who have adapted and innovated accordingly. Centralized banks, regulators and other role players will play a significant role in digitizing and decentralizing the financial system, likely resulting in a hybrid model that combines the best of both worlds.
Staff Shortages and Growing Operational Pressures
Investment banks have not been immune to the Great Resignation effect felt around the globe and have struggled to juggle increased workloads and staff shortages as more staff choose to exit their roles and pursue careers elsewhere. Talent professionals in the banking industry are attempting to reduce workloads, limit working hours, and offer more lucrative benefits in order to attract and retain their staff. These perks can increase operational costs and impact their margins considerably if they are not careful. Many banks are shifting from hierarchical structures to more agile ones as leaders delegate more responsibility to their teams and relationships to become more flexible. These agile teams have greater autonomy and are able to create high-quality customer experiences.
The FCA (Financial Conduct Authority) will bring in a new Consumer Duty that improves the way firms serve consumers by setting new consumer protection standards. The Duty is made up of an overarching principle and new rules that firms must follow. Consumers should receive communications that are easily understood and that offer fair value. Support should be readily available when required.
The Duty may only be the start of the FCA’s broader plan of becoming a more assertive and data-led regulator. The Duty will include requirements for ending overcharging, making it easier for consumers to switch or cancel products, providing timely and clear communication and a requirement to focus on the diverse needs of their customers, including those in vulnerable circumstances, across every interaction.
Artificial Intelligence Models Supporting Deal Closure Processes
Big-tech companies are entering financial services as their next frontier, bringing new strategies for AI to the investment-starved core of the banking and financial services market. Incumbent banks need to become AI-first to deliver new value and distinctive customer experiences. Banks rely heavily on their relationship managers to choose products and negotiate terms that meet customers’ needs while maximizing returns, but existing pricing tools are not designed to assist RMs in making those decisions. By combining BI tools and AI technology, banks can leverage their data assets to provide more relevant insights in the pricing decision-making journey that will not only meet the needs of clients but close more deals. AI assistants can replace time-consuming manual modelling while providing contextually relevant insights for specific deals to drive business outcomes and build stronger relationships with clients.
According to some sources, digitally mature dealmakers that leverage technology transacts 3.5x more frequently and generate IRR8.8 percentage points higher than others, proving that digital savvy can become a significant competitive advantage.
Rise in Banking in Underdeveloped Countries
While emerging markets are enjoying greater investment, these nations need twice the infrastructure investment they currently receive. East Asia’s needs are currently the greatest, while Africa’s is large in comparison to its economic size. Institutional investors have great opportunities in developing-country infrastructure, and more asset managers, insurance companies, pension funds and sovereign wealth funds are looking to these nations for investment.
While the industrial economies of the West are financialized, and credit is a part of daily life, the developing world operates differently. Markets like Asia, where a billion-strong middle class will emerge within the next decade, are becoming lucrative prospects. Early innovators, like Kenya’s M-Pesa, tailored to mobile payment processing in the African market, now process payments equal to 31% of the GDP. Far from replacing the banking sector, it provided access to rural Africans who previously did not have any formalized services available.
Banks and financial services, if deployed ethically, can move the savings of the emerging middle class into productive industries. In emerging nations where mass access to banking has only just begun, banks and investors are thinking about ways to design an emergent banking sector.
Buy Now, Pay Later Options Increase
Buy Now Pay Later (BNPL) options have increased in the last few years due to uncertain financial times. Redundancies and reduced hours meant that people didn’t have a stable income anymore and were considering more flexible options. While interest-free pay later options make it easier for consumers to spread payments across several months, there is a lower risk of defaulting as payments become more affordable. There’s been a reported 2000% rise in Buy Now Pay Later Options for online businesses since January 2020, indicating that this option may become the norm. Business owners should evaluate the possibility and impact of offering BNPL and other flexible payment methods as a means of increasing sales and meeting the expectations of younger generations.
It’s clear the COVID-19 pandemic changed investment appetites, consumer behaviour and the banking and finance sector for good. 2021 saw the biggest deal surge in history, renewed optimism and an appetite for out-of-the-box thinking and new ways of working. 2022 has, in some ways, continued to accelerate investment banking trends but also slammed the brakes as geopolitical changes and requirements influenced the market.
Technological transformation has always been slower in the investment banking industry, but competition and new entrants have led more banks towards new methodologies and agile processes. The current situation in Europe, as well as the influx of decentralized banking and finance applications, have meant that banks need to venture beyond their established borders, exploring other markets (both real and virtual).
There are also internal threats to deal with: the lack of skills in the industry and increased regulatory and environmental requirements continue to place pressure on these institutions in 2022 and beyond.
While we don’t know what the future holds, fainting the ability to remain agile and scalable is clearly the best path forward.