Digital disruption & Capital Markets Industry: The Five Forces

Nowadays, there is a need for all businesses to be updated and integrated in the digital world in order to meet the current requirements. Banks are as well as any other type of business, adapting to the digitalisation to acquire all the benefits that it can provide. Fintech firms and banks have introduced several groundbreaking offerings and retail banking has been affected by digital disruption as a result. It was an expected result, since it was believed that retail banking would be affected and other sectors (investing and commercial banking, for instance) would not receive much impact. However, there are some reasons that are making banks change their minds regarding this assumption.

Driving forces towards digital transformation in Capital Markets

Digital transformation is a key aspect in banking, and the Capital Market division of banks and financial intermediaries have perceived this need. Institutions of this field, such as stock exchanges and clearing houses worldwide, are designing the introduction of vanguard technologies that range from blockchain to machine learning or robo-advisors, since, in this way, digitalisation becomes part of their daily activity. The factors for which capital market firms are starting the digital transformation are the following ones:

1. Drop in profit margins

Due to the harsh competition regarding pricing or groundbreaking offerings, capital market firms are coping with pressure in profit margins. As several statistics show, the ROE of the top investment banks dropped from 9.2% in 2014 to a shocking 6.7% in 2015. Other factors such as demanding regulations or associated costs put pressure on margins, too. Shareholders and investors contribute to increase margin compression even more, since they seek top advisory about investment in various asset classes with the objective of increasing their profits.

2. Competitiveness

Several Fintech firms are uncovering profitable offerings and this fact is making capital market companies reconsider their techniques and approaches. Capital market firms are compelled to either compete or cooperate with these Fintech companies. Subsequently, they are urged to enhance their general functional efficiency in areas like customer service, by approaching the automation of different procedures.


3. Ever-changing technology

Technology is constantly developing and some devices like blockchain, robo-advisors or machine learning have been introduced in capital market companies. As a result, these companies require thorough schemes to address and embrace these continuously-evolving devices. Such schemes include a comprehension of the advanced data analytics potential and the different fields in which it can be applied. At this point, an approach by stages is advised; beginning with the collection of the early profit and gaining experience in management in order to achieve a further introduction in the company. According to an Accenture report, 30% of the current chores of companies could be carried out by machines.


4. Regulation requirements

The Dodd-Frank Act, EMIR and FATCA are some of the constantly evolving and harsh norms that can illustrate the continuous changes in regulations. There is a need for updating and accelerating processes in capital market companies so as to obey the new regulations.

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5. Customers’ digital links

Digital is in every aspect of customers’ lives. Due to this fact, customers expect companies to offer their services in an updated and digital way. Therefore, clients want to have access to services in motion and this is translated into omnichannel and on-the-go experiences from investment banks. Capital market firms require a customers’ perspective instead of maintaining a firm’s approach when they offer their services or products.

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