A digitalised corporate and investment bank is erected on four distinct and complementary pillars:
“Manufacturing” encompasses the design and elaboration of the financial products and associated services. Manufacturing covers the full product life-cycle: from research, to structuring, to trading, to risk management, to straight through processing and asset servicing.
“Distribution” is the domain of client interactions, sales and coverage.
“Data” and the processes transforming the raw facts into information, that information into insights and those insights into decisions.
“Technology” is nowadays the driver of business change, and no longer a mere tool designed to support it.
Let’s focus today on the first of these pillars: Digitalisation of Manufacturing.
By Frederic Ponzo
Over the past decade, the banks’ producers and doers have been caught in a seemingly never ending whirlwind of “efficiency drives”, “technology and organisation simplification programmes”, “process automation initiatives” or “innovation hackathons”. Taking a step back from this buzzword frenzy, it is undeniable that the ways financial products are designed, built and serviced are being transformed and, more significantly, industrialised.
Tasks & process robotization
The historically high margins enjoyed by the banking industry have hidden for long the inherent efficiencies of a production model based on highly educated professionals often performing mundane and trivial tasks. Therefore the obvious, but nonetheless capital, starting point is the systematic automation by using machines for all the repetitive and error prone tasks performed by human operators. Investment banks are now truly entering the age of industry, 250 years after the cotton mills.
Decision-making automation
More than just executing tasks with a constant quality, the digitalisation of business processes opens the possibility to, first, understand precisely on which basis humans take a range of decisions and, second, to systematise that decision-making. The machines will only remain as good as the people that train them, but they never tire, cheat or let their emotions cloud their judgement.
Distributed supply chain
The more fundamental challenge that digitisation brings to the established business models of Investment Banks, is the realisation and acceptance, that one bank cannot do everything itself anymore, but sit in the nexus of a complex and dynamic ecosystem. Mastering the reliance on others and optimising the product life-cycle based on each contributor’s competitive advantage remains today a nascent discipline for the financial industry.
Accounting value-creation where it occurs
Until now, value-creation has been accounted for in only one place: the traders’ books.
However, once one accepts that value is created, albeit in variable proportions, at every step in the production chain, therefore, such value-creation should be accounted for accordingly. It is obviously easier said than done, and approximations and models have to be used.
However, as measuring value-creation becomes more aligned with where value is actually created, rewards can then be aligned to it. When the reward structure has changed in such a way, it is in fact the governance structure of the investment bank that has been overhauled.
Many senior executives dream of running the Apple, the Google or the Amazon of wholesale financial services. At GreySpark we believe that inspiration should rather be sought from the manufacturing industries: despite tough competition, high capital costs and often heavy regulatory oversight, they design unique products, their employees concentrate on what machines cannot do, they aptly leverage vast networks of partners and suppliers and are no longer ruled by one guild of privileged workers…
Later on this week, we will be looking into what ‘digital distribution’ means for CIBs.
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