How will COVID-19 reshape investment banking business models and technology strategy?

TAHIR ZAFAR, Head of Emerging Technology

As the pandemic continues to unfold, many uncertainties lie ahead. However, one certainty is the role the financial services sector will have to play to not only safeguard their own businesses, but also play a role in the recovery of global markets working with governments and central banks. To ensure business continuity, banks are having to make fundamental changes to their business and technology operating models to build resiliency to withstand the coronavirus and its aftershocks. Here are some thoughts on what the new normal for banking might look like.

Digital acceleration – banks are already going through a process of digitisation, but this crisis will amplify the trend, particularly the demand for cloud enabled services. Historically, we have seen servers overloading and crashing due to increased trading activity related to geopolitical events. The coronavirus has not only driven increased trading activity but has also created the additional system stress of entire workforces working digitally online. In the short term, we will likely see a shift of budgets and funding towards improved technology infrastructure, digitisation and operations to safeguard run-the-bank capabilities.  To fast-track digital innovation, banks will potentially consider investment and acquisitions in the FinTech sector, which is great news for FinTech firms who are likely to see traditional venture capital funding being less readily available post pandemic.

Infrastructure localisation – many financial institutions are reliant on far remote offshore locations for parts of their operations and technology services e.g. India. However, this offshore capability has also had to remote work, with its resources working from home, as the countries in which they are located imposed lockdowns. Many did not have the adequate technology infrastructure at home to ensure business continuity, so banks have had to scramble to find alternatives. This makes a compelling case for near-shoring these services closer to home, so that banks can quickly respond and adapt to local variances.

Security, data, and compliance – all of my banking clients have done a fantastic job of rapidly moving to a working from home (WFH) operating model, with minimal loss in productivity. The clear evidence, throughout the crisis, helps to dispel historical concerns about the effectiveness of remote working and further compels companies to pursue and extend current WFH policies, allowing them to significantly reduce real estate costs and HQ office space. However, there are risks associated with these practices, such as data leaks and security concerns. Typically, banks can sustain 10% of their workforce working from home, but any sudden increase in remote capacity can increase the risk of a cyber-attack in the same proportion. Compliance will also be a challenge with reduced home monitoring capabilities – for example how do you ensure all trading related calls are recorded while working from home or maintain controls around fraudulent activity? Regulators have had to acknowledge that there will be circumstances in which maintaining a strict control environment around trading is challenging. Security, data, and compliance operating models will need to be adapted to extend past the physical office barrier and into the home, with a renewed focus on data strategy as we become increasingly distributed.

The virtual office – for some people, working virtually can cause a sense of isolation, lack of control and often blurs the lines between work and home. How do banks create a virtual environment that considers engagement and well-being? How do we turn the virtual world into a more personable space in line with banking culture? As an example, one of my clients has created a ‘coffee channel’ – an open video conferencing channel so people can come in and out, as they please, mimicking real-life office interaction in say a canteen or office break-out area. How do we capture those informal conversations and mimic body language to allow us to shape conversations in different directions and circumstances? Innovative technologies such as augmented reality combined with further analysis on employee interaction/movement in the workplace can help guide, define and create a truly interactive and personable virtual office.

Machine learning (ML) / artificial intelligence (AI) – ML/AI funds and models is an area of growth within most tier one investment banks, but many have experienced mixed results throughout the COVID-19 crisis – some AI machines were able to identify risks earlier than conventional quantitative analytics, whilst some machines stopped operating all altogether as the pandemic spread and events began to diverge from historical data. AI machines can also be disconnected from the real-world functioning of the markets e.g. one AI fund tried to short sell Italian stocks, but the market had restricted short selling, causing a disconnect.  The crisis demonstrates how much more work is required to build more reliable, robust, and resilient AI models / funds before they are more commonly adopted and used.  Note – AI/ML techniques can be used for less market critical activities such as chat bots to provide important information in times of crisis where resources are less available.  Chatbots are currently used sporadically in the wealth management sector but I expect their use to start expanding into other core business areas as they become more sophisticated.

New products and services – Banks were the genesis of the 2008 crisis and the government bailed them out to avoid global markets collapsing and to accelerate the rate of recovery. This time around it is other industries and organisations that will require help not just from the government, but also the by the banks.  Banks have a chance to play a positive role in the global economic recovery and demonstrate their social utility.  In doing so, banks will introduce new products and offerings not only guided by the government stimulus programmes but also through innovation and client demand.  This also means ensuring that they have the right business model / technology architecture to rapidly deploy and service these new offerings.

Had the COVID-19 virus pandemic struck in 2007, most investment banks would have struggled to survive. The post 2008 structural changes and regulation have, so far, enabled our banking system to sustain the current economic attack – however as the crisis prolongs the pandemic may be serious enough to test the adequacy of banks capital reserves – the IMF seems to think so. Investment banks will continue to evolve their business models and IT architecture to not only safeguard themselves but to play a huge role in managing the risks to their employees, customers and the impact on global markets and wider economy. Will banks be able to evolve, step up and look more like the solution than the problem?

Stay home, stay safe, stay healthy.