a.Heightened Customer Focus
Clients of capital market firms are becoming more prudent about relationships with providers both on the retail and institutional sides of the house. The bar for customer service has been raised and the expectation is set for non-negotiable service thresholds albeit with minimal human interface or in-person servicing. Typical enablers include self-service tools, 100% system uptime/ performance, inviolable data privacy and integrity, and real time virtual collaboration and communication. Leveraging data, AI/ML, and real time analytics capabilities have become crucial for sustained market penetration, customizing the client experience to deliver delight, and launching of innovative products and services to deepen client relationships, and to strengthen the franchise.
b. Acceleration of ‘Digital First’
COVID-19 has starkly exposed the digital chasm in the market. The slow adoption in prior years and the urgency now to develop and adopt mature digital capabilities is a telling story. ‘Digital first’ is therefore the new mantra and the need of the hour is to combine data, real time analytics, and AI/ML to increase transactions via digital channels, improve digital / social media presence, emphasize multimodal communication on digital platforms, accelerate the move to cloud, and develop responsive self-service client apps. A large cultural transformation will be undertaken as front office teams including Relationship Managers, Traders, and Account Executives are made digital-aware. Digitalization is reducing the need for physical infrastructure but in turn also lowering the entry barriers for newer entrants to intensify competition. Going digital also opens up a plethora of cybersecurity issues that need a comprehensive approach for pre-emption and mitigation.
c.Resiliency Beyond Keep the Lights On
COVID-19 has exposed loopholes in internal systems and processes as firms struggled to cope with a range of issues like failed trades, customer service delays, system outages, repeated triggering of circuit breakers, price discovery issues, margin call delays, etc. Resiliency is now a foundational pillar for a holistic business model, which includes core process excellence, monetizing of non-core assets, and leveraging the partner ecosystem for scale, efficiency, and expertise. To get it right first time, scalability and efficiency will be key for adoption of agile operating environments, virtual infrastructure, alternative work arrangements and better ways of working.
d.Regulatory Compliance Revisited
Regulatory changes often increase in the aftermath of a crisis or a downturn; for example, the European Union recently reformed rules for central counterparties to address potential systemic risks, and these are on similar lines of ‘recovery and resolution’ framework for banks. Non-Financial Reporting Directive is getting revised across the board, and potential resiliency related regulations and frameworks are being evolved. The backlog of regulatory implementations will be high due to temporary relaxations provided during COVID-19. This is an opportunity, however, to build more robust systems that are pressure-tested for higher volatility and uncertainty. Firms are buckling down on the implementation of new systems and platforms to swiftly accommodate new regulatory features / functionalities, compliance, reporting, fiduciary and disclosure requirements. Doing this without upsetting the delicate balance on corporate IT budgets requires leaders to take advantage of the innovation ecosystem comprising multifarious products and service partners.
e.Capital Conservation and Industry Consolidation
Taking advantage of strategic opportunities to unlock value and building stronger liquidity buffers is paramount for the recovery process. Secondary equity offerings and investment grade bond issuance have increased in the immediate aftermath of COVID-19, driven by rising demand from corporates to supplement their working capital and liquidity buffers. Capital market firms, with strong balance sheets, are assessing opportunities to pursue platform and/or bolt-on mergers and acquisitions in the quest for scale, new/niche capabilities and new markets, and to fill in the servicing gaps. And these firms, specifically private equity firms with over $1.5 trillion of dry powder, could also take advantage of impaired or distressed financial assets which nonetheless boast of strong client equity and market penetration in their respective niches.
Investing in a resilient future
The COVID-19 script is yet to be fully written, but there is reason for a tempered sense of optimism in the broader capital markets sector. Leaders can emerge from the COVID-19 crisis with a new strategic vision, more future-proofed business models, and stronger market franchise through digital customer value propositions and scaled-up market presence. Technology and operations will play a big role in the future; however, taking a going concern approach, with renewed focus on culture, and 360-degree relationships with all stakeholder constituencies, will be the most critical ingredients to future success.