The Digital Disruption of Investment Banking
The following article appeared in the July 31, 2017 edition of BRIEFINGS, our weekly email about trends shaping markets, industries and the global economy. You can subscribe by clicking here.
Richard Rivero is the global head of a group of engineers who use quantitative frameworks to advise clients across industries on corporate finance in our Investment Banking Division. Richard shares his views on how data, technology and digital ecosystems are transforming the investment banking business.
Can you explain the role of strats, or data scientists, within the investment banking business?
Richard Rivero: When I joined the firm in 2004, strats were synonymous with financial engineers, not data scientists. Back then, strats focused on structuring, pricing and risk managing financial products, often in proprietary code bases and programming languages. But the world changed. Today, technology and software are freely shared through open-source platforms and conform to common web standards. People communicate through apps, online ecosystems and, increasingly, the Internet of Things, while the digital world around us is generating data at a fantastic pace. Nowadays, we think the "secret sauce" in investment banking is one part data scientist, or strat, one part application developer and one part banker. That's why our group is focused on creating a unified engineering front to work with bankers and, increasingly, with clients directly. We're exploring ways to embed our advisory work into platforms that we can use and share with our clients. Everything -- clients, bankers and advice -- needs to be connected digitally: that's the scale play. That's how we grow the franchise.
How has technology changed the way bankers work with each other and with clients?
RR: Ultimately, we have two key goals. First, we want to digitize our bankers' workflows through tools that can improve not only our own businesses but also enhance our bankers' lives. Second, we want to use technology to engage our clients in a way that's more modern, digital and data driven. For example, we can go to client meetings, show them interactive scenarios that can be modified on the spot, and analyze changes to their capital plan in real time. We've also created applications that bankers use in client meetings while also making those apps available on clients' desktops through the firm's Marquee platform. One such application, called Zephyr, allows bankers to create and run customized analyses across a variety of debt capital structures for clients in real time. The tool not only eliminates manual processes, but it also allows bankers to ask and answer questions that were previously prohibitively time consuming or difficult to address.
How does the industry utilize data and machine learning?
RR: Compared with internet-based sectors, the data available in investment banking is relatively scarce. But while we're starting off with a lower density information set, the data is richly structured and reflects trillions of dollars of value. Any competitive advantage you can create for yourself can have a multiplier effect in a meaningful way. And with computing power being so cheap and accessible, we can create a multiverse of possible worlds through which we can evolve a company's operating performance and make strategic and financial recommendations. Some of the apps that we've developed use machine learning algorithms in a way that personifies M&A transactions as an engineering problem. For example, we're building apps that help clients better understand how their shareholders relate to each other by applying machine leaning analytics to SEC mutual fund filings. In other cases, we're analyzing the factors that make a company vulnerable to shareholder activists. In addition to using machine learning to highlight new analyses, data visualization and statistical inferences, we're deploying these tools in a way that requires little to no junior banking involvement. The goal is to eliminate the mundane, rote tasks for analysts to free up their time to work on more satisfying work. It's a radical revision of IBD practices.
Does this mean that investment banking jobs will be automated away?
RR: The growing use of technology in investment banking isn't about cost cutting. It's about growth, better client coverage, deeper insights and empowering our people to become better investment bankers. Face-to-face relationships still matter but going forward we can enrich our relationships through technology. Yes, technology can help cut costs and create efficiencies. But it can also create the opportunity to do more. A page or exhibit that's encapsulated in coding language can be regenerated or updated hundreds of times at no additional cost. Automating mundane tasks and collecting data in a programmatic way helps our bankers refine their insights and serve clients better. With digital tools our bankers can cover more clients and in more regions. And instead of working all day on pitch books, our junior bankers can get out on the road, meet with companies and spend more time being students of the markets.