Why Has Investment Banking Not Been Disrupted by Technology Yet … And Why It Will Be Soon

It is a common misconception that investment banking remains untouched by technological advancements. In reality, investment banking has already been significantly impacted by FinTech, and even more changes are on the horizon. It is high time we acknowledge the inevitability of disruption and its profound implications.

Introduction to Technological Disruption in Financial Services

Progressive technological advancements, regulatory pressures, and changing customer preferences have combined to create unprecedented disruption in the financial services sector. The transformation of this industry is both rapid and extensive, with substantial consequences for both profits and employment.

According to Goldman Sachs, approximately $470 billion in annual profits are at risk from tech-driven firms, including startups. Considering that financial institutions are typically valued at a 1 to 12x multiple of earnings, the market capitalization at risk is staggering, estimated to be around $6 trillion—yes, in the trillions of US dollars.

Disruption in the Financial Services Industry

The disruption is particularly pronounced in sectors previously considered safe and protected, such as traditional investment banking. The best incumbents in this space are already adapting to these changes, but the wave of innovation is only beginning.

Technological innovations have already redefined numerous industries. From telecommunications to retail, media to computing, and even transportation and lodging, tech upstarts have dramatically altered traditional business models. We must embrace these changes rather than attempt to revert to outdated practices.

Impact on Investment Banking

Investment banking is not immune to this disruptive wave. Technological advances are already reshaping various aspects of the business, including advisory services, capital markets origination, private wealth management, prime brokerage, and sales and trading.

Example 1: Data Collection and Curation

A modern investment bank's junior professionals spend a significant portion of their time collecting and formatting financial data. This process is labor-intensive and time-consuming. Innovations like DataFox have automated these tasks, making them more efficient and accurate. The future is likely to see even more advanced tools that completely replace these manual processes.

Example 2: Sales and Trading Automation

Financial institutions like Goldman Sachs have already seen dramatic reductions in human traders. According to Marty Chavez, Chief Information Officer of Goldman Sachs, the number of traders in US equities has dropped to zero. This transition has not only streamlined operations but also improved client outcomes.

Example 3: Compliance and Regulatory Controls

The traditional regulatory landscape is highly complex, and maintaining robust compliance is a significant challenge. Banks like JP Morgan have added thousands of compliance professionals to ensure they meet regulatory standards. While this move was smart, the trend is towards automation. Startups like FiscalNote offer solutions that can automate compliance checks, significantly reducing costs and improving efficiency.

Why FinTech Will Continue to Disrupt Investment Banking

FinTech's impact on investment banking is not limited to startups. Some of the world's most dominant tech companies—including Apple, Amazon, Alibaba, and Google—are targeting traditional financial institutions with the intent to disrupt and innovate.

The leadership at traditional investment banks recognizes the urgency of adapting to these changes. Jamie Dimon, CEO of JP Morgan, is a prime example. His company has already realized the need for automation and innovation in compliance, a critical area of banking.

Conclusion

The technological disruption in investment banking is real and ongoing. The best practices of the past century are unsustainable, and the financial services industry must adapt to survive. While the road ahead may seem daunting, it is clear that the changes are here to stay. Investment banks that embrace innovation and automation will thrive, while those that resist will face significant challenges.