Future of Banking 2019

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Josie Cox Freelance business reporter, commentator and broadcaster, she worked at Reuters and The Wall Street Journal, and was business editor of The Independent. Ian Fraser Financial journalist and author of Shredded: Inside RBS, The Bank That Broke Britain, he was business editor at The Sunday Times Scotland. Clare Gascoigne Formerly on the staff of the Financial Times, she is now a journalist specialising in City and fi nancial features. Duncan Jeff eries Freelance journalist and copywriter, he covers digital culture, technology and innovation, and has written for The Guardian, Independent Voices and How We Get To Next. Joe McGrath Editor of Index Trader and Insolvency Today, he was previously editor of What Investment magazine and deputy editor of Money Management. Matthew Staff Former editorial director, he is now applying his multi-sector B2B experience across numerous industry titles Distributed in Publishing manager Hannah Smallman Digital content executive Fran Cassidy Head of production Justyna O'Connell Design Joanna Bird Grant Chapman Sara Gelfgren Kellie Jerrard Harry Lewis-Irlam Celina Lucey Colm McDermott Samuele Motta Tom Radford Head of design Tim Whitlock Managing editor Benjamin Chiou Associate editor Peter Archer Published in association with Although this publication is funded through advertising and sponsorship, all editorial is without bias and sponsored features are clearly labelled. For an upcoming schedule, partnership inquiries or feedback, please call +44 (0)20 8616 7400 or e-mail info@raconteur.net. Raconteur is a leading publisher of special-interest content and research. Its pub- lications and articles cover a wide range of topics, including business, fi nance, sustainability, healthcare, lifestyle and technology. Raconteur special reports are published exclu- sively in The Times and The Sunday Times as well as online at raconteur.net. The information contained in this publication has been obtained from sources the Proprietors believe to be correct. However, no legal liability can be accepted for any errors. No part of this publication may be reproduced with- out the prior consent of the Publisher. © Raconteur Media /future-banking-2019 @raconteur /raconteur.net @raconteur_london FUTURE OF BANKING T R U S T I M P E R A T I V E O N T H E E D G E F I N T E C H F R I C T I O N Trust has recovered since the fi nancial crisis, but consumers remain wary Edge computing is set to propel banking services into the future Fintechs and traditional banks are working together, but are they good partners? 03 05 06 raconteur.net C A P I T A L M A R K E T S Contributors Boston Consulting Group/Expand Research 2018 Infrastructure spending IT PRIORITIES IN BANKING AND INVES TMENT SERVICES Priority ranking of IT areas by chief information offi cers in the industry I N D E P E N D E N T P U B L I C A T I O N B Y 0 2 / 0 6 / 2 0 1 9 # 0 5 9 4 R A C O N T E U R . N E T Wall Street rivals, have seen profi tability decimated since the 2008 crash, with some fi rms opting to withdraw from investment banking altogether. Mr Edelmann says: "Our clients in invest- ment banking understand that, in the future, their industry will be a technology game with a banking licence attached." Better capitalised and more profi table Wall Street investment banks are better placed to make the transition to modular platforms than more troubled European players and are likely to be the long-term survivors. According to Mr Wright, any player that lacks £200 million or so to invest in super-ef- fi cient new trading systems or super-effi - cient back-offi ce processes is going to strug- gle or fail in the new environment. Others expect the investment banking business will fragment along the more specialised lines, Race is on as tech shakes up capital markets The next decade or so could herald more changes in the capital markets than in the past 40 years and only the most innovative players will survive he main players in global capital markets – investment banks, asset managers and stock exchanges – collectively generate some $500 billion in revenues each year. But according to Wil- liam Wright, founder of think tank New Financial, this is far from suffi cient to ensure their survival. The industry is in the middle of a "perfect storm", he says, in which revenues and mar- gins are being driven down by tighter regu- lation, the rise of technology, changed social expectations and latterly also by Brexit. Some incumbent fi nancial institutions, ill-prepared for the technological changes that are revolutionising their industry, are still deploying customer-unfriendly business models, processes and intermediated value chains that haven't much changed for decades. This is creating an opportunity for far- sighted insurgents, which are not burdened with legacy systems or tied to obsolete prac- tices, to embrace new technologies and ways of working to disrupt the established players out of existence. Though margins in asset management have held up at around 40 per cent in the 11 years since the fi nancial crisis of 2008, Christian Edelmann, co-head of Europe, Middle East and Africa fi nancial services at Oliver Wyman, warns they are at risk of plummeting. "We see a scenario in which asset manage- ment will be transformed through the rise of an Amazon-style marketplace distribu- tion model, in which price will be evermore important," he says. "In this scenario, we believe 50 per cent of traditional asset man- agement fees could be at risk." Mr Wright adds that other storm clouds looming for asset managers include regula- tors "now looking at the industry from con- sumer and competition perspectives, rather than from a purely fi nancial stability or a conduct perspective". He also believes job numbers will come down as artifi cial intelli- gence and technology replace human inves- tors and traders, and not just at one or two quant-based hedge funds. Investment banking is facing similar pressures. European banks, unlike their as existed before Margaret Thatcher's gov- ernment liberalised fi nancial markets with the so-called Big Bang in October 1986. It may have been founded in 1850, but SIX, the Swiss stock exchange, is ahead of the game when embracing new technologies is concerned. The Zurich-based bourse's head of securities and exchanges Thomas Zeeb has confi rmed it will launch the SIX Digi- tal Exchange. SDX promises to be a ground- breaking digital asset exchange, powered by blockchain, a distributed ledger technology which records data across a network of com- puters rather than on a centralised server. It will start trading digital tokens in a pilot phase from next month. Mr Zeeb says tokenisation will enable smaller companies that would normally be unable to launch initial public off erings (IPOs) and participate in equity markets or to issue bonds to do so, and that it will also broaden the pool of capital. "The cost of doing IPOs and issuing bonds will come down dra- matically, opening up funding options for smaller fi rms and for project fi nancing," he says. "There will also be new asset classes; you can tokenise property and fi ne art." The London Stock Exchange (LSE) is also gearing up for the use of blockchain technol- ogy in the trading of fi nancial instruments. In April it hosted the fi rst issue of equi- ties using blockchain-based tokens, when round £3 million-worth of shares in the fi n- tech fi rm 20|30 were fl oated in tokenised form. The LSE has also invested in the Lon- don-based fi ntech startup Nivaura, which has issued the world's fi rst automated cryp- to-denominated bond. Even though consolidation of owner- ship among European stock exchanges can be expected to continue, Mr Zeeb doubts whether there will ever be fewer than one exchange per country. "We're seeing nation- alism growing rather than decreasing in Europe," he notes. Mr Wright says European policymak- ers are going to have to do more to broaden and deepen the continent's capital markets. European corporates currently obtain 75 per cent of their funding from banks and just 25 per cent from the bond markets, the exact inverse of what happens in the more devel- oped US capital market. "The clear view is that you need to reduce dependency on banks and that, by going more towards a capital markets structure, you will create more attractive and diversifi ed oppor- tunities for investors," he says, adding that Brexit is going to "break the European capital market in two" undermining such plans. Mr Wright singles out a surprising dis- connect between the outlook for capital markets activity, which he says is gener- ally very rosy as "the number of companies seeking to raise capital, the amount of sales and trading activity, the number of people becoming wealthier and putting money into savings and investments" is going up. For industry players, especially in invest- ment banking, "profi tability is being driven down, causing the hollowing out of what has traditionally been a highly profi table endeavour", he says. "I'm bullish on the outlook for activity, but bearish at the industry level. Within this, not everybody is going to suff er to the same extent. A small number of large fi rms are likely to become even bigger and more prof- itable. And a large number of smaller, less profi table fi rms today will either disappear or fi nd themselves merging with other fi rms in a desperate attempt to make the econom- ics stack up," says Mr Wright. SIX's Mr Zeeb predicts an even bigger revo- lution for the capital markets industry: "Over the next 15 years, I am convinced we're going to see more changes in how capital markets function than we've seen in the last 40 years," he concludes. Ian Fraser T Our clients in investment banking understand that, in the future, their industry will be a technology game with a banking licence attached Gar tner 2018 Business intelligence/analytics Digitalisation/digital marketing Mobility/mobile applications Artifi cial intelligence Cloud services/solutions Legacy modernisation Application programming interfaces Customer relationship management Automation Omnichannel/multichannel 26% 21% 11% 8% 8% 4% 4% 4% 3% 3% 30% 25% 45% Run-the-bank spending Change-the-bank spending TECHNOLOGY BUDGE TS AT INVES TMENT BANKS More than half of IT budgets are directed at non-innovation spending Data editor Georgie Cauthery

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