COVID-19’s Effect on the Future of Investment Banking

By Chase Nerison

COVID-19 changed the world and investment banking is no exception. Thankfully, we have proof from the 2008 financial crisis that a recession does not translate to a lack of deal-making. In reality, according to Harvard Business Review, “companies that made significant acquisitions outperformed those that did not” (Harrison, J). In tough times, companies must innovate quickly. This largely comes with the increased use of technology and ability to adapt. With different approaches to M&A, new fintech companies, and increased technological uses for data, COVID-19 will likely leave important long-term effects on the industry’s evolution.

As previously stated, the entire finance industry was significantly changed in 2020. Deal-making displayed very interesting activity. The first half of 2020 had $971 billion in deal-making activity while the second half had the most deal-making activity since 2007 with $2.2 trillion (Harrison, J). After a slight decline since 2018 as shown by the graph, the second half of 2020 considerably revived this sector. With economic turbulence, the first

half of 2020 created a great opportunity for new entrepreneurs thanks to low-interest rates to stimulate economic growth as one of the many factors (Patel, K). This is consistent with the 2008 great recession creating big names such as Venmo, Whatsapp, Uber, Instagram, Pinterest, Slack, Square, and more. The start of so many new companies also means M&A must adapt. After typically being unprecedented, M&A practitioners worked with almost entirely virtual companies in which the owners sometimes never even saw their inventory (Patel, K). This brings out interesting questions to consider like:

- How does this change consumption?

- How does this change the way we interact inside and outside of the business?

- Is COVID-19 a unique one-off or a semi-recurring event?

These questions are now crucial when looking at which targets are suitable, especially when assessing risk, valuation, and ability to integrate. In my opinion, they will all play a factor in future deals.

The year 2020 also brought technological innovation with the addition of many fintech, or financial technology, companies. This is the integration of technology into financial service companies which improves their offerings to consumers; this has notably disrupted the industry. As stated in the previous paragraph, firms quickly implemented new technology into their models (5 recent trends in technology and Investment Banking). With this added competition, these smaller fintech companies are cutting into large investment banks’ profits. In Fact, 81% of investment banking chief executives worry about increased disruption in the future (5 recent trends in technology and Investment Banking). They are affecting other areas by offering new ways to manage finances and payments as well as the ability to streamline financial operations. Historically, these revenue streams were dominated by large financial institutions (5 recent trends in technology and Investment Banking). Since these new fintech companies are smaller than the large institutions, they are typically geographically focused. With many banks consolidating over the past 25 years, this gives the fintech companies a competitive advantage. Due to this competitive advantage, we have seen increased collaboration between investment banks and fintech companies. By doing so, fintech companies help stimulate their growth, tap into the bank’s customer base, and utilize their compliance and regulatory arms (5 recent trends in technology and Investment Banking). Conversely, investment banks are able to improve their operations and cut costs by incorporating fintech solutions. One impact solution is the implementation of blockchain technology. The financial services industry is using blockchain technology more to reduce costs and increase security. With the increased risk of cybercriminals targeting investment banks, these firms have drastically increased their spending on cybersecurity. I predict blockchain technology and the need for cybersecurity will only increase in popularity for years to come.

Lastly, big data is continually getting bigger. With the greater emergence of online businesses, first party data is promoting growth through being able to track deals, opportunities, and communication (Harrison, J). Using this technology, bankers have the ability to identify new deals and save time by skipping the data entry process when using third party market data sources (Harrison, J). Additionally, Kimberly Baird, Corporate Development Integration Lead at Cisco, spoke on the virtualization of M&A. Tools like virtual data rooms have assisted with this evolution. She mentioned many online tools that M&A firms are using now were in existence before COVID-19 hit in 2020, but they did not use them to their full potential. With this shift, financial services firms have begun investing more money towards data and technology (Patel, K).

Clearly, COVID-19 changed investment banking for the foreseeable future. I suspect these factors to affect the industry’s evolution. Given the difficult circumstances posing investment banks and all companies due to COVID-19, I believe the industry adapted well and is moving in a positive direction.

Works Cited

Harrison, J. (2021, June 16). 5 trends shaping the future of Investment Banking Today. Silverline. Retrieved September 19, 2021, from https://silverlinecrm.com/blog/financial-services/5-trends-shaping-the-future-of-investment-banking-today/.

Patel, K. (2021, August 30). How covid-19 has changed the way M&A deals are executed. RSS. Retrieved September 19, 2021, from https://dealroom.net/blog/how-covid-19-has-changed-the-way-mergers-and-acquisitions-deals.

5 recent trends in technology and Investment Banking. SourceScrub. (2021, September 14). Retrieved September 19, 2021, from https://www.sourcescrub.com/post/5-recent-trends-in-technology-and-investment-banking.