The IBM report finds that banks in many parts of the world have an unsustainably high cost of operation, rendering their traditional operating models obsolete. To succeed, banks must seek to lower operating costs through business model innovation, such as IT.
The days when the financial markets industry could make large sums of money by capitalizing on pockets of opacity and high leverage are over, the IBM report finds. The lax regulatory regime and monetary policy that encouraged such practices will certainly change, as governments everywhere start tightening the reins, it concludes. Moreover, greater transparency will result in the commoditization of much of the market, dictating the need to keep “costs per trade” and “costs per asset managed” as low as possible. Most institutions will thus need to adopt a very different business model from the one they currently use.
The firms that compete most successfully in this new environment will be those that specialize and form partnerships with other organizations to supplement their own areas of expertise. They will be those that listen to their clients and provide offerings that are tailored to the needs of different client segments. To put it another way, the outperformers will be the firms that embrace transparency and follow the sensible money, rather than seeking inflated returns through unsustainable practices.
The global financial markets industry has been experiencing significant turbulence over the past 18 months, and executives in the sector are understandably nervous. The current crisis is transforming the competitive landscape, how the industry operates and the way in which its clients behave. Given these changes, many senior executives are wondering how their firms will make profits in the future. This is the question the IBM Institute for Business Value set out to answer in its latest study of the sector.
IBM conducted a survey of more than 2,700 financial services industry participants to determine four things: Which forces are disrupting the industry? What will clients be willing to pay for? How will the basis for competition change? And what steps should financial services firms take to prosper over the next three years? In short, where’s the money? IBM supplemented its findings with in-depth interviews with 185 executives and government officials, extensive secondary research and quantitative modelling. IBM’s analysis shows that, for the past 20 years, the financial markets industry has profited by capitalizing on “pockets of opacity” – i.e., creating, buying and selling complex products, often via lightly regulated entities.
However, this does not produce sustainable value. Using sophisticated financial instruments and structures can indeed generate very high returns, but it also results in more extreme risk assumption and mitigation cycles and makes the markets much more volatile. If the industry is to thrive in the future, it will have to adopt a different approach. Specifically, it will have to:
• Join forces with regulators to develop a framework that balances stability with innovation
• Deliver what it promises
• Solve its identity crisis.
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