Highlights
- The pandemic has heightened the need for enterprises to embed agility and resilience in their fabric.
- To survive market crises and make it through uncertainties, capital market firms will need to become secure and adaptive. This will allow them to tap into the limitless opportunities each market disruption offers.
- Firms must exhibit secure behavior and win customer trust by embracing business models founded on socio-economic values and sustainable business practices.
- A strong digital core will enable firms to adapt to the changing market scenarios swiftly and seamlessly.
- Operating in ecosystems and rewiring business models will allow capital market firms to explore new growth opportunities and drive value leadership.
In this article
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Abstract
Capital market firms have weathered the pandemic much better than other industries.
Despite market volatility, increased transaction volume, higher demand for advisory, and other contributing factors, sub-industries within the capital markets domain have done well. The pandemic has underscored the need for firms to adopt sustainable business practices to withstand COVID-like shocks in the future.
The ability to effectively deal with market volatilities, uncertainties, and other crises is key to retaining customer trust. To accomplish this, capital market firms must embrace future-proof, innovative business models to nimbly adapt and respond to changing client and market contexts. We highlight the key traits of future-ready firms—secure, adaptive, limitless—and discuss what capital market industry players must do for accelerated growth and a profitable, shock-proof sustenance.
GETTING TO THE TOP, AND STAYING THERE
Most large capital market firms have performed well in the past two years and we anticipate a positive outlook for investment banks, asset management firms, and wealth management firms in 2022 as well.
Over the last two years, firms have largely focused on improving business resilience, embracing hybrid and remote operations to reduce real estate and infrastructure cost, launching innovative products like sustainable funds and crypto products, and building agile platforms to support transformation strategies.
To build resilience and drive future growth, capital market firms must embed three traits—secure, adaptive, and limitless—into their organizational DNA. Achieving this will require firms to build trust by adopting a purpose-driven business model, respond swiftly to change by embracing an agile organizational structure and launching differentiated products, and explore new frontiers through collaborative ecosystems and a scalable operating model (see Figure 1). Weaving them into firms’ ethos and culture is imperative to ensure business adaptability for long-term sustainability and growth.
Figure 1- What it takes to be a future-ready capital markets firm
Figure 1: What it takes to be a future-ready capital market firm
Secure is about a firm’s ability to build trust among stakeholders while adaptive pertains to the ability to constantly evolve to the changing industry context. These two foundational pillars are critical to remaining competitive and retaining market position. Being limitless envisages a mindset shift—a shift from traditional business models. It is about forging non-traditional partnerships and harnessing ecosystems to launch breakthrough products, target untapped customer segments, and build innovative business models to disrupt the market and achieve leadership.
TRUST IS PARAMOUNT
A business built on trust is crucial across industries but the implications for capital market firms are significantly higher.
This is because an adverse impact on financial stability has considerable negative impact on individual businesses and the overall financial health of communities. Recent media reports of scams, regulatory breaches, and unlawful marketing and sales practices have not only resulted in heavy penalties for banks but have also created a certain level of distrust and wariness in the investor community.
Firms must exhibit secure behavior and win customer trust by embracing business models founded on socio-economic values, for example, by adopting environment, social and governance (ESG) practices and offering personalized offerings driven by customer purpose. All these measures collectively help improve customer confidence as well as enhance the brand image. Let us examine some measures that are critical to building and retaining customer trust.
Create purpose-driven offerings
A firm’s offerings must align with its customers’ savings and investment goals and address the challenges or pain points within the client’s context. In the case of institutional clients, capital market firms must gain comprehensive understanding of their customers’ digital journey and preferences, adopt digital-first strategies, and leverage partner ecosystems to meet diverse customer requirements. An important tool in this regard is the ecosystem journey map, which helps firms understand the real need or purpose that drives their customers, and design offerings accordingly. For example, wealth management firms must explore life planning frameworks that align to a customer’s values and underlying motivations while defining financial goals, and focus on helping them achieve their objectives. With the increased focus on sustainable investing, capital market firms must develop capabilities to personalize socio-economic themes at the product level, for example, offering personalized ESG funds that better map to individual clients’ values will help gain goodwill and trust.
Deploy risk and compliance mechanisms
Firms must strengthen key businesses and operating parameters to build the resilience needed to weather market volatilities and COVID-like storms and ensure long-term business sustainability.
The capacity to successfully pivot in uncertain times is critical to winning customer trust.
Strengthening risk and compliance mechanisms in areas like capital management, regulatory compliance, climate change, business and operating models, and stakeholder management is key to building resilience. Managing the impact of the Fundamental Review of the Trading Book (FRTB) regulation, aAmong others, on capital management, ensuring compliance with anti-money laundering (AML) regulations, undertaking modifications to support hybrid work models, modelling risk frameworks to launch new products like crypto funds, and facilitating accurate ESG reporting are some areas that will need special attention.
MATCH THE SPEED OF CHANGE
The ability to adapt business and operational models to changing industry context is a core trait of successful firms, and this was on display during the pandemic.
Firms that were able to quickly adapt to changing client demands and those that built digital capabilities in response to the increasing demand for digital engagement weathered the COVID-19 crisis far better than the others, and witnessed significant growth.
Capital market firms must embed responsiveness and adaptability into their organizational DNA. This will entail adopting agile practices across both business and technology areas such as product management, channel and relationship management, infrastructure, among others.
Here are three ways in which capital market firms can become adaptable and responsive.
Develop capabilities to launch quickly
The ability to launch products swiftly, once a market trend, opportunity, or threat is identified allows firms to gain competitive advantage or retain parity, in turn attracting new clients and retaining existing ones. A swift response, however, will require firms to re-evaluate their product operating models, restructure the people-process-technology triad, and ensure robust data management to improve time-to-market for new products and services.
For example, wealth management firms must quickly launch products that can be personalized to individual clients’ preferences or sustainability values gaining an edge over firms offering standard sustainability products. Integrating ESG strategies, data, and dashboards and regulatory reporting mechanisms into the product operating model is thus a key step for a quick launch.
Infuse agility into processes
Catering to dynamic customer journeys, omni- and opti-channel engagement, hybrid engagement platforms, hyper-personalization, and digital self-service requires a high degree of business agility. The industry is already seeing such trends. Wealth management firms are looking at introducing a hybrid digital advisory platform to enable clients to gain access to advice in an efficient, understandable, convenient, affordable way while also meeting clients’ sustainability objectives. Retail firms are automating the entire onboarding process for better customer experience while some institutional banks are offering open APIs to provide a technical foundation to facilitate digital, cross-organizational business processes. Similarly, some firms are deploying digital assistants to provide self-service facilities to clients and on-demand insights to staff.
Accomplishing all this mandates a high degree of business agility, which in turn necessitates a robust business and operating model underpinned by a digital core, intelligent automation, cloud transformation, and machine-first principles. The industry needs to focus on new paradigms such as:
- Strengthening the digital core by adopting artificial intelligence, cloud, and cognitive technologies
- Embracing risk and complying with regulations in a rapidly changing ecosystem
- Fuelling innovation and infusing agility in business and IT
In this context, the increasing shift to a hybrid workforce model deserves a special callout given unexpected benefits like real estate cost savings and the ability to attract and retain new talent. To adapt to a hybrid workforce model, firms must build the requisite agility and infrastructure to support remote workers.
Manage evolving regulations
Becoming future-ready will entail rapidly adapting to evolving and new regulations, necessitating a robust risk and compliance management framework. To this end, firms must leverage technology to improve overall operational efficiency and at the same time reduce cost. With the increased focus on climate risk today, adopting the right technology platforms can help financial firms model physical and transition risks and factor them into business, operating, and investment models. Key technologies that firms will need to adopt are:
- Scalable enterprise platform
- Intelligent automation for know your customer (KYC) and anti-money laundering
- Next gen data architecture
- Report automation and data analytics
- Risk assessment tools and technology platforms offered by fintech players
- AI enabled risk assessment frameworks
EXPLORE NEW FRONTIERS
Capital market firms have strong inter-connections within the industry and with other industries as well, which translates into limitless growth opportunities.
By leveraging business connects within and across industries and establishing partner ecosystems, capital market firms can launch disruptive or disparate products, target untapped or new client segments, and offer a differentiated value proposition in new markets.
Develop cross industry solutions
A key area that firms can explore for limitless growth is the product and offerings space—creating or leveraging cross-industry ecosystems in order to offer holistic and innovative solutions to meet customer needs is emerging as a priority. While designing the offering, the focus needs to be on nimbly capitalizing on market opportunities as they arise and meeting ever-evolving customer needs driven by shifts in client demographics and rising preference for digital. And the market is already witnessing this trend—we observe that some wealth management firms are going beyond traditional investment advisory to offer insurance solutions leveraging ecosystem partnerships with insurtech firms. Investment management firms are starting to embrace embedded finance by offering products leveraging adjacent industry solutions and so on.
Embrace emerging trends
Firms need to closely monitor disruptive trends in the market and embrace emerging business models with a fail-fast approach to achieve limitless growth. Given the increasing client demand for digital assets like cryptocurrencies, firms will need to offer solutions such as crypto trading, custody, funds, derivatives, and investment portfolios by leveraging industry partnerships.
Another trend that capital market firms must consider is entering new customer segments and markets; for example, designing new products in the private market segment for qualified retail investors—an area that was earlier restricted only to institutional investors. Changing customer preferences and goals offer firms limitless opportunities to expand their portfolio and unlock exponential value.
Firms must also rapidly tap into emerging markets and cross-border investments to cater to clients’ investment goals.
Digital technologies are also paving the way for firms to enter wider markets through enhanced distribution networks and synergy-driven mergers and acquisitions (M&As).
Embracing emerging trends will help firms register limitless growth; however, it will require firms to:
- Move to ecosystem-driven business models—leverage the larger partner ecosystem by using utilities for commoditized functions, migrating platforms to the cloud, utilizing distributed ledger technology (DLT) based tokenized assets, collaborating with emerging fintechs, driving synergy-driven M&As, and adopting an agile culture (agile, DevOps, and SecOps, among others).
- Develop agile, efficient, and scalable operating models spanning people, process, data, and technology
- Build foundational capabilities using microservices and intelligent automation
- Enable new business models in a shorter timeframe by building a cognitive enterprise and digitalizing the customer experience.
THE BOTTOM LINE
As firms prepare to operate in the post-pandemic world, business adaptability will be key to accelerating growth and realizing exponential value.
In this journey, embracing the behavioral pillars of secure, adaptive, and limitless is critical to ensuring sustainable and successful business outcomes.
Our experience tells us that individual firms will need to define their own path to embedding these traits into their organizational DNA depending on their specific contexts.
How they engage in this journey will determine their future growth and market position—firms that act quickly stand to benefit from the first-mover advantage.
