Partnerships present key opportunity to investment banks

28 August 2023 Consultancy.uk 6 min. read
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Investment banks face a difficult market, with declining revenues and a need to digitalise services. Partnerships offer a key opportunity to both ends, according to Theadora Bulajic and Nikhil Shah of challenger consultancy Elixirr.

Businesses in every sector are grappling with the same fundamental set of challenges. Amid this, pooling resources – both talent and capital – has become an increasingly logical response – even if the mechanics of how this might work in practice are not immediately obvious, following decades of dog-eat-dog competition, and the previous fragmentation of supply chains.

One sector which seems to be lagging behind on this front is the financial services market. However, banks need not see ‘collaboration’ as a dirty word anymore – in fact, linking up with other organisations could provide them with an excellent opportunity to move beyond their outdated in-house technology infrastructure, saving them time and money as they digitalise their offering.

Partnerships present key opportunity to investment banks

“Traditionally, investment banks have favoured internal development and maintenance of all products and services, driven by notions of pride, “prestige” or the imperative of risk management,” notes Nikhil Shah, a principal at Elixirr. “Despite recent efforts to prioritise client-centricity and enhance the client experience, the operational machinery supporting these goals has remained largely unchanged – albeit some tactical fixes, given the complexity and degree of investment required to remain current.”

In a piece appearing on Elixirr’s website, Shah and analyst Theadora Bulajic suggest that partnerships can help deliver genuine client-centricity – allowing time to focus on strengthening core services, while entrusting capable partners to handle the running of IT services.

Bulajic adds, “The speed and degree of technological innovation has surpassed the ability of most investment banks to handle internal operational processes that support the evolving client needs. While keeping these processes internal may have been manageable in the past, many investment banks now struggle to provide specialised services. Instead of trying to keep up with innovation, it is time for investment banks to concentrate on their core strengths. They should explore new revenue streams by offering their strongest services as third-party offerings and collaborate with specialist firms to use their superior capabilities, wherever it is optimal.”

Partnerships no longer ‘taboo’ for investment banks

Previously, the idea of partnering with service providers to deliver operational change has been associated with a loss of control. The Elixirr experts assert this is a “myth”, and such a loss of control is entirely avoidable, provided banks establish “clear service level agreements (SLAs), robust escalation paths, and transparent handshakes, alongside stringent quality controls and regular evaluations, form the bedrock of any thriving third-party relationship.”

Part of this means establishing a precedent for regularly evaluating the commercial viability of the agreement, comparing the quality of service received with alternative market options. At the same time, firms need to ensure robust and tested business continuity plans are in place for all third-party relationships; and ensure that, when required, there is room to oversee and challenge partner-performance as second and third lines of defence.

As leaders in the sector increasingly realise this, they are opening themselves up to partnerships. According to Bulajic and Shah, Tier 1 banks have acknowledged that they are better off when they partner with the industry experts, instead of trying to do everything in-house, and are outsourcing certain operational processes.   

“A prime example of this shift can be seen in the case of MUFG, which outsources its custodian provider to benefit from Citi’s technology capabilities and extensive sub-custodian network,” expands Shah. “This allows MUFG to pass on value-added benefits and cost efficiencies to its clients. Similarly, prominent institutions like BNP Paribas, Barclays and Credit Suisse have teamed up with FIS to offer innovative futures and cleared over the counter (OTC) servicing. This collaboration helps them address the challenges of increased volume and decreased margin by centralising critical post-trade tasks onto a market-leading, fully funded system.”

As the economic slowdown drags on, investment banks are facing budgetary constraints – and having to develop expensive new IT infrastructure for themselves, for example, puts further strain on this. But by forging strategic partnerships, banks have access to a realm of expertise and cutting-edge solutions, propelling operational efficiency, streamlining processes and slashing costs.

Bulajic suggests, “Clients may not even realise that certain tasks are seamlessly handled by trusted third-party providers. Moreover, these dynamic third-party firms evolve at an astonishing pace, enriching banks with an array of additional benefits to seize upon. Take, for example, Finastra’s introduction of ALM IQ, a groundbreaking solution empowering community banks to revolutionise their risk and compliance management for their balance sheets. This compelling narrative underscores the transformative potential that partnerships unlock for investment banks.”

New revenue opportunities

A market in which partnerships are the norm does not only present the chance to save money, either. Banks are also finding space to develop value-add services, enabling a wealth of additional beneficial capabilities to tap into – and finding ways to combat their declining revenue streams.

This is especially enticing amid a backdrop of volatile markets, high interest rates, and geopolitical instability which can erode profitability and business performance. The Elixirr professionals warn that this path requires careful navigation, though, as it demands meticulous assessment and unwavering commitment from the C-suite.

Advising on what it takes to get the most of this tact, Shah states firms should first identify a client need “with a compelling value proposition and a business case that demonstrates commercial viability.” Following from this point, firms can ensure the service or offering is supported by predominantly automated processes and scalable technology.

“Facilitate easy onboarding and offboarding for potential clients,” he continues. “Define your target audience and clarify your core motivation for providing a third-party service, as this will shape your targeting strategy. Then, develop a distinctive selling point that sets you apart from the market of third-party providers.”

Getting started

Even with the potential opportunities on the table, it can be difficult for decision-makers to set aside their egos, and “admitting someone else can do it better actually makes us stronger, not weaker”. But Shah contends that there is “tremendous value in honing our expertise and focusing on what we excel at, propelling us to new heights of success.” 

“In a world where excellence is the goal, we must acknowledge that we can’t do it all,” concludes Bulajic. “It’s time to ask ourselves: ‘when was the last time we compared our institution to the dynamic market landscape, including technology firms and business process outsourcing firms?’ Embrace the fact that certain services are worth retaining in-house, while others may be more efficiently and effectively outsourced, allowing you to focus on delivering exceptional service.”