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Human Versus Machine: A Comparison of Robo-Analyst and Traditional Research Analyst Investment Recommendations

We provide the first comprehensive analysis of the properties of investment recommendations generated by “Robo-Analysts,” which are human-analyst-assisted computer programs conducting automated research analysis. Our results indicate that Robo-Analyst recommendations differ from those produced by traditional “human” research analysts across several important dimensions. First, Robo-Analysts produce a more balanced distribution of buy, hold, and sell recommendations than do human analysts and are less likely to recommend “glamour” stocks and firms with prospective investment banking business. Second, automation allows Robo-Analysts to revise their recommendations more frequently than human analysts and incorporate information from complex periodic filings. Third, while Robo-Analysts’ recommendations exhibit weak short-window return reactions, they have long-term investment value. Specifically, portfolios formed based on the buy recommendations of Robo-Analysts significantly outperform those of human analysts. Overall, our results suggest that automation in the sell-side research industry can benefit investors.

10. Teil: Rahmenbedingungen des Investment Banking

The prospect of investment banking and arbitration in the space economy.

Morgan Stanley estimates that the global space industry could generate revenues of more than $1 trillion or more by 2040, up from over $400 billion currently. Do declining launch costs, technological advancements and a rising interest in the public sector make space the next trillion-dollar economy? The dynamics of the space sector has led wall street analysts to forecast that the space industry could become the next trillion-dollar industry by 2040. As of January 2018, the global space economy grew more than 8%, generating $414.75 billion in space activities.With unmanned scientific exploration, high levels of private funding advancement in technology the implications of investment for a more accessible, low cost into outer space is significant, with potential opportunities for improvement of the resources in space for profit-making and expansion of business concerns, the expanding interest of public sector migrate into the shift from private finding to public and herald the entrance of traditional finance There are fortunes and resources in the space economy which aids the activities of humans, as well as the bold exploration of countries to expand research and understand the limits use and the extent to the use in the space economy.This paper seeks to explore the prospects of investment banking activities in the growing space economy, seeing the growing development of exchange-traded funds already being explored in the space economy and the new regulations allowing Wall Street to do Venture Capital which expands the exploration of capital and buttresses the objective of raising capital by a major player, Space X which raised about $44 Billion and so grows the prospect of more banking activity. Furthermore, the possibilities that are inherent in the eventual proliferation of investment banking activities in the space industry will be addressed. In attempting to do justice to such a lofty idea, the universal need for funding in the world of business will be examined as a representation of the intersection between banking interests and space interests. The interplay of factors such as risk and understanding of business processes in the dynamics of any relationship between investment banking and the space industry will also be examined. The purpose of such analysis will be to afford an understanding of the role that investment banking has to play in the space industry, as an over text to the elements and characteristics of space activities that define the rate of the growth of the influence and applicability of investment banking to the peculiar needs and unique concerns associated with the pursuit of profitable business in the space economy. Lastly, this paper looks to give an account of the evolution of Space Dispute Arbitration, and how the existing legal mechanisms in force for directing arbitral awards have evolved in scope and flexibility since the first satellite launch. In general, and as a statement of fundamental purpose, this paper will attempt to provide a wide and sufficiently detailed representation of what the space industry is, the dynamics of space arbitration and how its resultant economic sector functions, in order to hypothesize on the part that investment banking has to play in its growth and in the maximization of its resultant profits for all shareholders involved.”


Abstract. The article explores ways to ensure stable economic development through the efficient functioning of the banking sector. The concept of stable development and efficiency of the banking system is revealed. The key principles of macroprudential and microprudential policy are analyzed and the main advantages of each of them are determined. The tools for implementing macroprudential policy to ensure sustainable economic development are described. The peculiarities of the application of rating assessment, the role of state-owned banks and investment banking as the most optimal measures to ensure economic development are outlined. Promising digital technologies in the banking system, which have a long-term strategic nature of development, are presented.             It is confirmed that the development of the country’s economy depends on many factors of the internal organization of the microeconomic environment. Among the aspects of qualitatively increasing the competitiveness of the national economy, an important component is the emphasis on the policy of strengthening the efficiency of the market sector. The infrastructure of the market and financial sector consists of instruments of financial influence, as well as additional comprehensive measures aimed at creating a multi-channel system of various institutions and institutions, a structured real financial services sector given the overall stability of the banking system. The quality and efficiency of the financial sector can be determined, in particular, by the indicators of the peculiarities of the creation of market goods and services, which create an opportunity to create market relations at optimal prices. We concluded that the last important factor for the prospect of sustainable economic development through the efficient functioning of the banking system is the use of digital technologies, because the world is rapidly transitioning from traditional to digital economy, so the banking system must be transformed into modern realities using current innovative technologies. . Keywords: stable economic development, banking system, investment banking, rating assessment, macroprudential policy. JEL Classification O16, O29, G21 Formulas: 0; fig.: 0; tabl.: 7; bibl.: 12.

Perspectives on Corporate, Social, and Employee Purpose among Investment Bankers: A Qualitative Research Study

There are increasing calls to re-establish the role and responsibility of banks towards society to repair trust and enhance financial stability. Through in-depth interviews with senior investment bankers, this study asks what bankers themselves think about the corporate (i.e. the industry’s core business), social (i.e. its moral responsibilities to wider society), and employee (i.e. bankers’ own feelings of purposefulness) purposes of the investment banking industry. Existing research tells us that there are significant reciprocal benefits to organisations, employees, and society at large when the three are aligned. The study’s findings suggest that while there have been important shifts in corporate and social purposes over time, bankers remain sceptical about their banks’ underlying motives and this has resulted in multiple disconnects. Perhaps surprising, the study finds that meaningful work that is also socially focused is something that investment bankers are seeking in some way. These insights should prompt banks to ensure that social purposes reflect and align with their corporate purposes; to move beyond rhetoric and virtue-signalling to action; and to help employees identify their contribution to it all.

Female leaders as ‘Superwomen’: Post-global financial crisis media framing of women and leadership in investment banking in UK print media 2014–2016

Analysis of the contribution of information technology in investments.

This research paper is made with the view of analyzing the contributions of technology in investment sector. Furthermore it tries to answer the big questions like whether technology help to get higher returns from the investments in the stock market? or what is next in investing? or what is the role of technology in investment banking?.

The Role of Investor Protections on the Value of Investment Banking Relationships: International Evidence

On the regulation of investment banking in russia.

Analytical documents of the Bank of Russia and financial statements of large Russian banks indicate the growth in incomes from operations with securities within the gross share of revenues of commercial banks. In the world, there are cases of excessive activity of commercial banks in the security market (the Great Depression of 1929–1933 in the USA, default on state treasury bills in Russia on the 17th August 1998), which led to negative consequences for bank clients. The author analyzed peculiarities of investment transactions conducted by commercial banks in Russia. The author gives recommendations to reduce financial risks for the commercial banks’ customers and promote the attractiveness of the investment banking products. The author’s concept of regulation of banking activity in Russia consists of two directions: regulation of classical banking (income from lending operations exceeds income from operations in the securities market) and regulation of investment banking (the predominance of investment operations). The author justifies the necessity of the introduction of mandatory insurance of funds invested in equity securities of Russian issuers admitted to circulation on the Moscow Stock Exchange in the event of bankruptcy of issuers. The paper critically evaluates the recommendation of the Bank of Russia that professional participants in the securities market should not offer complex investment products to unqualified investors as this restricts the application of derivative securities for hedging financial risks. The author suggests the requirements for the equity capital of professional participants of the securities market and the methodology for calculating the equity capital separately for classical and investment banks.

A Study and Analysis of Investment Banking and Regional Development Among European Economy

Investment banks are financial intermediaries that specialize in the sale of securities and the issuance and underwriting of new shares to raise capital financing. Investment banking is a special segment of banking that assists individuals or organizations to raise capital in the main market. In the tea market, new securities are issued and act on behalf of customers, thus playing an important role in the secondary market. Investment banks undertake new debt or equity securities for all types of businesses, support the sale of securities, and facilitate mergers and acquisitions by institutional and individual investors. Investment banking organizations act as intermediaries between investors and capital markets. Investment banks are becoming important in European capital markets due to many factors including the perception of investment banks among investors and the various other functions implemented by investment banks. The research paper aims to show the role of investment banks in the current scenario. This study is descriptive in nature and uses auxiliary data. The study reveals the growth, development, function and role of investment banking in the European economy. The main objective of this investigation is to clarify how investment banks play a role in increasing a country’s resources and economic growth. It analyzes the various functions performed by investment banks. Investment banks connect the people who sell securities with their investors. Investment banks add liquidity to the market. Investment banks promote savings and investment and eliminate capital shortages. Mobilize small, scattered savings in the community so you can invest in productive businesses. He concluded that the role of investment banks in economic development is important.

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  • Published: 18 June 2021

Financial technology and the future of banking

  • Daniel Broby   ORCID: 1  

Financial Innovation volume  7 , Article number:  47 ( 2021 ) Cite this article

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This paper presents an analytical framework that describes the business model of banks. It draws on the classical theory of banking and the literature on digital transformation. It provides an explanation for existing trends and, by extending the theory of the banking firm, it illustrates how financial intermediation will be impacted by innovative financial technology applications. It further reviews the options that established banks will have to consider in order to mitigate the threat to their profitability. Deposit taking and lending are considered in the context of the challenge made from shadow banking and the all-digital banks. The paper contributes to an understanding of the future of banking, providing a framework for scholarly empirical investigation. In the discussion, four possible strategies are proposed for market participants, (1) customer retention, (2) customer acquisition, (3) banking as a service and (4) social media payment platforms. It is concluded that, in an increasingly digital world, trust will remain at the core of banking. That said, liquidity transformation will still have an important role to play. The nature of banking and financial services, however, will change dramatically.


The bank of the future will have several different manifestations. This paper extends theory to explain the impact of financial technology and the Internet on the nature of banking. It provides an analytical framework for academic investigation, highlighting the trends that are shaping scholarly research into these dynamics. To do this, it re-examines the nature of financial intermediation and transactions. It explains how digital banking will be structurally, as well as physically, different from the banks described in the literature to date. It does this by extending the contribution of Klein ( 1971 ), on the theory of the banking firm. It presents suggested strategies for incumbent, and challenger banks, and how banking as a service and social media payment will reshape the competitive landscape.

The banking industry has been evolving since Banca Monte dei Paschi di Siena opened its doors in 1472. Its leveraged business model has proved very scalable over time, but it is now facing new challenges. Firstly, its book to capital ratios, as documented by Berger et al ( 1995 ), have been consistently falling since 1840. This trend continues as competition has increased. In the past decade, the industry has experienced declines in profitability as measured by return on tangible equity. This is partly the result of falling leverage and fee income and partly due to the net interest margin (connected to traditional lending activity). These trends accelerated following the 2008 financial crisis. At the same time, technology has made banks more competitive. Advances in digital technology are changing the very nature of banking. Banks are now distributing services via mobile technology. A prolonged period of very low interest rates is also having an impact. To sustain their profitability, Brei et al. ( 2020 ) note that many banks have increased their emphasis on fee-generating services.

As Fama ( 1980 ) explains, a bank is an intermediary. The Internet is, however, changing the way financial service providers conduct their role. It is fundamentally changing the nature of the banking. This in turn is changing the nature of banking services, and the way those services are delivered. As a consequence, in order to compete in the changing digital landscape, banks have to adapt. The banks of the future, both incumbents and challengers, need to address liquidity transformation, data, trust, competition, and the digitalization of financial services. Against this backdrop, incumbent banks are focused on reinventing themselves. The challenger banks are, however, starting with a blank canvas. The research questions that these dynamics pose need to be investigated within the context of the theory of banking, hence the need to revise the existing analytical framework.

Banks perform payment and transfer functions for an economy. The Internet can now facilitate and even perform these functions. It is changing the way that transactions are recorded on ledgers and is facilitating both public and private digital currencies. In the past, banks operated in a world of information asymmetry between themselves and their borrowers (clients), but this is changing. This differential gave one bank an advantage over another due to its knowledge about its clients. The digital transformation that financial technology brings reduces this advantage, as this information can be digitally analyzed.

Even the nature of deposits is being transformed. Banks in the future will have to accept deposits and process transactions made in digital form, either Central Bank Digital Currencies (CBDC) or cryptocurrencies. This presents a number of issues: (1) it changes the way financial services will be delivered, (2) it requires a discussion on resilience, security and competition in payments, (3) it provides a building block for better cross border money transfers and (4) it raises the question of private and public issuance of money. Braggion et al ( 2018 ) consider whether these represent a threat to financial stability.

The academic study of banking began with Edgeworth ( 1888 ). He postulated that it is based on probability. In this respect, the nature of the business model depends on the probability that a bank will not be called upon to meet all its liabilities at the same time. This allows banks to lend more than they have in deposits. Because of the resultant mismatch between long term assets and short-term liabilities, a bank’s capital structure is very sensitive to liquidity trade-offs. This is explained by Diamond and Rajan ( 2000 ). They explain that this makes a bank a’relationship lender’. In effect, they suggest a bank is an intermediary that has borrowed from other investors.

Diamond and Rajan ( 2000 ) argue a lender can negotiate repayment obligations and that a bank benefits from its knowledge of the customer. As shall be shown, the new generation of digital challenger banks do not have the same tradeoffs or knowledge of the customer. They operate more like a broker providing a platform for banking services. This suggests that there will be more than one type of bank in the future and several different payment protocols. It also suggests that banks will have to data mine customer information to improve their understanding of a client’s financial needs.

The key focus of Diamond and Rajan ( 2000 ), however, was to position a traditional bank is an intermediary. Gurley and Shaw ( 1956 ) describe how the customer relationship means a bank can borrow funds by way of deposits (liabilities) and subsequently use them to lend or invest (assets). In facilitating this mediation, they provide a service whereby they store money and provide a mechanism to transmit money. With improvements in financial technology, however, money can be stored digitally, lenders and investors can source funds directly over the internet, and money transfer can be done digitally.

A review of financial technology and banking literature is provided by Thakor ( 2020 ). He highlights that financial service companies are now being provided by non-deposit taking contenders. This paper addresses one of the four research questions raised by his review, namely how theories of financial intermediation can be modified to accommodate banks, shadow banks, and non-intermediated solutions.

To be a bank, an entity must be authorized to accept retail deposits. A challenger bank is, therefore, still a bank in the traditional sense. It does not, however, have the costs of a branch network. A peer-to-peer lender, meanwhile, does not have a deposit base and therefore acts more like a broker. This leads to the issue that this paper addresses, namely how the banks of the future will conduct their intermediation.

In order to understand what the bank of the future will look like, it is necessary to understand the nature of the aforementioned intermediation, and the way it is changing. In this respect, there are two key types of intermediation. These are (1) quantitative asset transformation and, (2) brokerage. The latter is a common model adopted by challenger banks. Figure  1 depicts how these two types of financial intermediation match savers with borrowers. To avoid nuanced distinction between these two types of intermediation, it is common to classify banks by the services they perform. These can be grouped as either private, investment, or commercial banking. The service sub-groupings include payments, settlements, fund management, trading, treasury management, brokerage, and other agency services.

figure 1

How banks act as intermediaries between lenders and borrowers. This function call also be conducted by intermediaries as brokers, for example by shadow banks. Disintermediation occurs over the internet where peer-to-peer lenders match savers to lenders

Financial technology has the ability to disintermediate the banking sector. The competitive pressures this results in will shape the banks of the future. The channels that will facilitate this are shown in Fig.  2 , namely the Internet and/or mobile devices. Challengers can participate in this by, (1) directly matching borrows with savers over the Internet and, (2) distributing white labels products. The later enables banking as a service and avoids the aforementioned liquidity mismatch.

figure 2

The strategic options banks have to match lenders with borrowers. The traditional and challenger banks are in the same space, competing for business. The distributed banks use the traditional and challenger banks to white label banking services. These banks compete with payment platforms on social media. The Internet heralds an era of banking as a service

There are also physical changes that are being made in the delivery of services. Bricks and mortar branches are in decline. Mobile banking, or m-banking as Liu et al ( 2020 ) describe it, is an increasingly important distribution channel. Robotics are increasingly being used to automate customer interaction. As explained by Vishnu et al ( 2017 ), these improve efficiency and the quality of execution. They allow for increased oversight and can be built on legacy systems as well as from a blank canvas. Application programming interfaces (APIs) are bringing the same type of functionality to m-banking. They can be used to authorize third party use of banking data. How banks evolve over time is important because, according to the OECD, the activity in the financial sector represents between 20 and 30 percent of developed countries Gross Domestic Product.

In summary, financial technology has evolved to a level where online banks and banking as a service are challenging incumbents and the nature of banking mediation. Banking is rapidly transforming because of changes in such technology. At the same time, the solving of the double spending problem, whereby digital money can be cryptographically protected, has led to the possibility that paper money will become redundant at some point in the future. A theoretical framework is required to understand this evolving landscape. This is discussed next.

The theory of the banking firm: a revision

In financial theory, as eloquently explained by Fama ( 1980 ), banking provides an accounting system for transactions and a portfolio system for the storage of assets. That will not change for the banks of the future. Fama ( 1980 ) explains that their activities, in an unregulated state, fulfil the Modigliani–Miller ( 1959 ) theorem of the irrelevance of the financing decision. In practice, traditional banks compete for deposits through the interest rate they offer. This makes the transactional element dependent on the resulting debits and credits that they process, essentially making banks into bookkeeping entities fulfilling the intermediation function. Since this is done in response to competitive forces, the general equilibrium is a passive one. As such, the banking business model is vulnerable to disruption, particularly by innovation in financial technology.

A bank is an idiosyncratic corporate entity due to its ability to generate credit by leveraging its balance sheet. That balance sheet has assets on one side and liabilities on the other, like any corporate entity. The assets consist of cash, lending, financial and fixed assets. On the other side of the balance sheet are its liabilities, deposits, and debt. In this respect, a bank’s equity and its liabilities are its source of funds, and its assets are its use of funds. This is explained by Klein ( 1971 ), who notes that a bank’s equity W , borrowed funds and its deposits B is equal to its total funds F . This is the same for incumbents and challengers. This can be depicted algebraically if we let incumbents be represented by Φ and challengers represented by Γ:

Klein ( 1971 ) further explains that a bank’s equity is therefore made up of its share capital and unimpaired reserves. The latter are held by a bank to protect the bank’s deposit clients. This part is also mandated by regulation, so as to protect customers and indeed the entire banking system from systemic failure. These protective measures include other prudential requirements to hold cash reserves or other liquid assets. As shall be shown, banking services can be performed over the Internet without these protections. Banking as a service, as this phenomenon known, is expected to increase in the future. This will change the nature of the protection available to clients. It will change the way banks transform assets, explained next.

A bank’s deposits are said to be a function of the proportion of total funds obtained through the issuance of the ith deposit type and its total funds F , represented by α i . Where deposits, represented by Bs , are made in the form of Bs (i  =  1 *s n) , they generate a rate of interest. It follows that Si Bs  =  B . As such,

Therefor it can be said that,

The importance of Eq. 3 is that the balance sheet can be leveraged by the issuance of loans. It should be noted, however, that not all loans are returned to the bank in whole or part. Non-performing loans reduce the asset side of a bank’s balance sheet and act as a constraint on capital, and therefore new lending. Clearly, this is not the case with banking as a service. In that model, loans are brokered. That said, with the traditional model, an advantage of financial technology is that it facilitates the data mining of clients’ accounts. Lending can therefore be more targeted to borrowers that are more likely to repay, thereby reducing non-performing loans. Pari passu, the incumbent bank of the future will therefore have a higher risk-adjusted return on capital. In practice, however, banking as a service will bring greater competition from challengers and possible further erosion of margins. Alternatively, some banks will proactively engage in partnerships and acquisitions to maintain their customer base and address the competition.

A bank must have reserves to meet the demand of customers demanding their deposits back. The amount of these reserves is a key function of banking regulation. The Basel Committee on Banking Supervision mandates a requirement to hold various tiers of capital, so that banks have sufficient reserves to protect depositors. The Committee also imposes a framework for mitigating excessive liquidity risk and maturity transformation, through a set Liquidity Coverage Ratio and Net Stable Funding Ratio.

Recent revisions of theory, because of financial technology advances, have altered our understanding of banking intermediation. This will impact the competitive landscape and therefor shape the nature of the bank of the future. In this respect, the threat to incumbent banks comes from peer-to-peer Internet lending platforms. These perform the brokerage function of financial intermediation without the use of the aforementioned banking balance sheet. Unlike regulated deposit takers, such lending platforms do not create assets and do not perform risk and asset transformation. That said, they are reliant on investors who do not always behave in a counter cyclical way.

Financial technology in banking is not new. It has been used to facilitate electronic markets since the 1980’s. Thakor ( 2020 ) refers to three waves of application of financial innovation in banking. The advent of institutional futures markets and the changing nature of financial contracts fundamentally changed the role of banks. In response to this, academics extended the concept of a bank into an entity that either fulfills the aforementioned functions of a broker or a qualitative asset transformer. In this respect, they connect the providers and users of capital without changing the nature of the transformation of the various claims to that capital. This transformation can be in the form risk transfer or the application of leverage. The nature of trading of financial assets, however, is changing. Price discovery can now be done over the Internet and that is moving liquidity from central marketplaces (like the stock exchange) to decentralized ones.

Alongside these trends, in considering what the bank of the future will look like, it is necessary to understand the unregulated lending market that competes with traditional banks. In this part of the lending market, there has been a rise in shadow banks. The literature on these entities is covered by Adrian and Ashcraft ( 2016 ). Shadow banks have taken substantial market share from the traditional banks. They fulfil the brokerage function of banks, but regulators have only partial oversight of their risk transformation or leverage. The rise of shadow banks has been facilitated by financial technology and the originate to distribute model documented by Bord and Santos ( 2012 ). They use alternative trading systems that function as electronic communication networks. These facilitate dark pools of liquidity whereby buyers and sellers of bonds and securities trade off-exchange. Since the credit crisis of 2008, total broker dealer assets have diverged from banking assets. This illustrates the changed lending environment.

In the disintermediated market, banking as a service providers must rely on their equity and what access to funding they can attract from their online network. Without this they are unable to drive lending growth. To explain this, let I represent the online network. Extending Klein ( 1971 ), further let Ψ represent banking as a service and their total funds by F . This state is depicted as,

Theoretically, it can be shown that,

Shadow banks, and those disintermediators who bypass the banking system, have an advantage in a world where technology is ubiquitous. This becomes more apparent when costs are considered. Buchak et al. ( 2018 ) point out that shadow banks finance their originations almost entirely through securitization and what they term the originate to distribute business model. Diversifying risk in this way is good for individual banks, as banking risks can be transferred away from traditional banking balance sheets to institutional balance sheets. That said, the rise of securitization has introduced systemic risk into the banking sector.

Thus, we can see that the nature of banking capital is changing and at the same time technology is replacing labor. Let A denote the number of transactions per account at a period in time, and C denote the total cost per account per time period of providing the services of the payment mechanism. Klein ( 1971 ) points out that, if capital and labor are assumed to be part of the traditional banking model, it can be observed that,

It can therefore be observed that the total service charge per account at a period in time, represented by S, has a linear and proportional relationship to bank account activity. This is another variable that financial technology can impact. According to Klein ( 1971 ) this can be summed up in the following way,

where d is the basic bank decision variable, the service charge per transaction. Once again, in an automated and digital environment, financial technology greatly reduces d for the challenger banks. Swankie and Broby ( 2019 ) examine the impact of Artificial Intelligence on the evaluation of banking risk and conclude that it improves such variables.

Meanwhile, the traditional banking model can be expressed as a product of the number of accounts, M , and the average size of an account, N . This suggests a banks implicit yield is it rate of interest on deposits adjusted by its operating loss in each time period. This yield is generated by payment and loan services. Let R 1 depict this. These can be expressed as a fraction of total demand deposits. This is depicted by Klein ( 1971 ), if one assumes activity per account is constant, as,

As a result, whether a bank is structured with traditional labor overheads or built digitally, is extremely relevant to its profitability. The capital and labor of tradition banks, depicted as Φ i , is greater than online networks, depicted as I i . As such, the later have an advantage. This can be shown as,

What Klein (1972) failed to highlight is that the banking inherently involves leverage. Diamond and Dybving (1983) show that leverage makes bank susceptible to run on their liquidity. The literature divides these between adverse shock events, as explained by Bernanke et al ( 1996 ) or moral hazard events as explained by Demirgu¨¸c-Kunt and Detragiache ( 2002 ). This leverage builds on the balance sheet mismatch of short-term assets with long term liabilities. As such, capital and liquidity are intrinsically linked to viability and solvency.

The way capital and liquidity are managed is through credit and default management. This is done at a bank level and a supervisory level. The Basel Committee on Banking Supervision applies capital and leverage ratios, and central banks manage interest rates and other counter-cyclical measures. The various iterations of the prudential regulation of banks have moved the microeconomic theory of banking from the modeling of risk to the modeling of imperfect information. As mentioned, shadow and disintermediated services do not fall under this form or prudential regulation.

The relationship between leverage and insolvency risk crucially depends on the degree of banks total funds F and their liability structure L . In this respect, the liability structure of traditional banks is also greater than online networks which do not have the same level of available funds, depicted as,

Diamond and Dybvig ( 1983 ) observe that this liability structure is intimately tied to a traditional bank’s assets. In this respect, a bank’s ability to finance its lending at low cost and its ability to achieve repayment are key to its avoidance of insolvency. Online networks and/or brokers do not have to finance their lending, simply source it. Similarly, as brokers they do not face capital loss in the event of a default. This disintermediates the bank through the use of a peer-to-peer environment. These lenders and borrowers are introduced in digital way over the internet. Regulators have taken notice and the digital broker advantage might not last forever. As a result, the future may well see greater cooperation between these competing parties. This also because banks have valuable operational experience compared to new entrants.

It should also be observed that bank lending is either secured or unsecured. Interest on an unsecured loan is typically higher than the interest on a secured loan. In this respect, incumbent banks have an advantage as their closeness to the customer allows them to better understand the security of the assets. Berger et al ( 2005 ) further differentiate lending into transaction lending, relationship lending and credit scoring.

The evolution of the business model in a digital world

As has been demonstrated, the bank of the future in its various manifestations will be a consequence of the evolution of the current banking business model. There has been considerable scholarly investigation into the uniqueness of this business model, but less so on its changing nature. Song and Thakor ( 2010 ) are helpful in this respect and suggest that there are three aspects to this evolution, namely competition, complementary and co-evolution. Although liquidity transformation is evolving, it remains central to a bank’s role.

All the dynamics mentioned are relevant to the economy. There is considerable evidence, as outlined by Levine ( 2001 ), that market liberalization has a causal impact on economic growth. The impact of technology on productivity should prove positive and enhance the functioning of the domestic financial system. Indeed, market liberalization has already reshaped banking by increasing competition. New fee based ancillary financial services have become widespread, as has the proprietorial use of balance sheets. Risk has been securitized and even packaged into trade-able products.

Challenger banks are developing in a complementary way with the incumbents. The latter have an advantage over new entrants because they have information on their customers. The liquidity insurance model, proposed by Diamond and Dybvig ( 1983 ), explains how such banks have informational advantages over exchange markets. That said, financial technology changes these dynamics. It if facilitating the processing of financial data by third parties, explained in greater detail in the section on Open Banking.

At the same time, financial technology is facilitating banking as a service. This is where financial services are delivered by a broker over the Internet without resort to the balance sheet. This includes roboadvisory asset management, peer to peer lending, and crowd funding. Its growth will be facilitated by Open Banking as it becomes more geographically adopted. Figure  3 illustrates how these business models are disintermediating the traditional banking role and matching burrowers and savers.

figure 3

The traditional view of banks ecosystem between savers and borrowers, atop the Internet which is matching savers and borrowers directly in a peer-to-peer way. The Klein ( 1971 ) theory of the banking firm does not incorporate the mirrored dynamics, and as such needs to be extended to reflect the digital innovation that impacts both borrowers and severs in a peer-to-peer environment

Meanwhile, the banking sector is co-evolving alongside a shadow banking phenomenon. Lenders and borrowers are interacting, but outside of the banking sector. This is a concern for central banks and banking regulators, as the lending is taking place in an unregulated environment. Shadow banking has grown because of financial technology, market liberalization and excess liquidity in the asset management ecosystem. Pozsar and Singh ( 2011 ) detail the non-bank/bank intersection of shadow banking. They point out that shadow banking results in reverse maturity transformation. Incumbent banks have blurred the distinction between their use of traditional (M2) liabilities and market-based shadow banking (non-M2) liabilities. This impacts the inter-generational transfers that enable a bank to achieve interest rate smoothing.

Securitization has transformed the risk in the banking sector, transferring it to asset management institutions. These include structured investment vehicles, securities lenders, asset backed commercial paper investors, credit focused hedge and money market funds. This in turn has led to greater systemic risk, the result of the nature of the non-traded liabilities of securitized pooling arrangements. This increased risk manifested itself in the 2008 credit crisis.

Commercial pressures are also shaping the banking industry. The drive for cost efficiency has made incumbent banks address their personally costs. Bank branches have been closed as technology has evolved. Branches make it easier to withdraw or transfer deposits and challenger banks are not as easily able to attract new deposits. The banking sector is therefore looking for new point of customer contact, such as supermarkets, post offices and social media platforms. These structural issues are occurring at the same time as the retail high street is also evolving. Banks have had an aggressive roll out of automated telling machines and a reduction in branches and headcount. Online digital transactions have now become the norm in most developed countries.

The financing of banks is also evolving. Traditional banks have tended to fund illiquid assets with short term and unstable liquid liabilities. This is one of the key contributors to the rise to the credit crisis of 2008. The provision of liquidity as a last resort is central to the asset transformation process. In this respect, the banking sector experienced a shock in 2008 in what is termed the credit crisis. The aforementioned liquidity mismatch resulted in the system not being able to absorb all the risks associated with subprime lending. Central banks had to resort to quantitative easing as a result of the failure of overnight funding mechanisms. The image of the entire banking sector was tarnished, and the banks of the future will have to address this.

The future must learn from the mistakes of the past. The structural weakness of the banking business model cannot be solved. That said, the latest Basel rules introduce further risk mitigation, improved leverage ratios and increased levels of capital reserve. Another lesson of the credit crisis was that there should be greater emphasis on risk culture, governance, and oversight. The independence and performance of the board, the experience and the skill set of senior management are now a greater focus of regulators. Internal controls and data analysis are increasingly more robust and efficient, with a greater focus on a banks stable funding ratio.

Meanwhile, the very nature of money is changing. A digital wallet for crypto-currencies fulfills much the same storage and transmission functions of a bank; and crypto-currencies are increasing being used for payment. Meanwhile, in Sweden, stores have the right to refuse cash and the majority of transactions are card based. This move to credit and debit cards, and the solving of the double spending problem, whereby digital money can be crypto-graphically protected, has led to the possibility that paper money could be replaced at some point in the future. Whether this might be by replacement by a CBDC, or decentralized digital offering, is of secondary importance to the requirement of banks to adapt. Whether accommodating crytpo-currencies or CBDC’s, Kou et al. ( 2021 ) recommend that banks keep focused on alternative payment and money transferring technologies.

Central banks also have to adapt. To limit disintermediation, they have to ensure that the economic design of their sponsored digital currencies focus on access for banks, interest payment relative to bank policy rate, banking holding limits and convertibility with bank deposits. All these developments have implications for banks, particularly in respect of funding, the secure storage of deposits and how digital currency interacts with traditional fiat money.

Open banking

Against the backdrop of all these trends and changes, a new dynamic is shaping the future of the banking sector. This is termed Open Banking, already briefly mentioned. This new way of handling banking data protocols introduces a secure way to give financial service companies consensual access to a bank’s customer financial information. Figure  4 illustrates how this works. Although a fairly simple concept, the implications are important for the banking industry. Essentially, a bank customer gives a regulated API permission to securely access his/her banking website. That is then used by a banking as a service entity to make direct payments and/or download financial data in order to provide a solution. It heralds an era of customer centric banking.

figure 4

How Open Banking operates. The customer generates data by using his bank account. A third party provider is authorized to access that data through an API request. The bank confirms digitally that the customer has authorized the exchange of data and then fulfills the request

Open Banking was a response to the documented inertia around individual’s willingness to change bank accounts. Following the Retail Banking Review in the UK, this was addressed by lawmakers through the European Union’s Payment Services Directive II. The legislation was designed to make it easier to change banks by allowing customers to delegate authority to transfer their financial data to other parties. As a result of this, a whole host of data centric applications were conceived. Open banking adds further momentum to reshaping the future of banking.

Open Banking has a number of quite revolutionary implications. It was started so customers could change banks easily, but it resulted in some secondary considerations which are going to change the future of banking itself. It gives a clear view of bank financing. It allows aggregation of finances in one place. It also allows can give access to attractive offerings by allowing price comparisons. Open Banking API’s build a secure online financial marketplace based on data. They also allow access to a larger market in a faster way but the third-party providers for the new entrants. Open Banking allows developers to build single solutions on an API addressing very specific problems, like for example, a cash flow based credit rating.

Romānova et al. ( 2018 ) undertook a questionnaire on the Payment Services Directive II. The results suggest that Open Banking will promote competitiveness, innovation, and new product development. The initiative is associated with low costs and customer satisfaction, but that some concerns about security, privacy and risk are present. These can be mitigated, to some extent, by secure protocols and layered permission access.

Discussion: strategic options

Faced with these disruptive trends, there are four strategic options for market participants to con- sider. There are (1) a defensive customer retention strategy for incumbents, (2) an aggressive customer acquisition strategy for challenger banks (3) a banking as a service strategy for new entrants, and (4) a payments strategy for social media platforms.

Each of these strategies has to be conducted in a competitive marketplace for money demand by potential customers. Figure  5 illustrates where the first three strategies lie on the tradeoff between money demand and interest rates. The payment strategy can’t be modeled based on the supply of money. In the figure, the market settles at a rate L 2 . The incumbent banks have the capacity to meet the largest supply of these loans. The challenger banks have a constrained function but due to a lower cost base can gain excess rent through higher rates of interest. The peer-to-peer bank as a service brokers must settle for the market rate and a constrained supply offering.

figure 5

The money demand M by lenders on the y axis. Interest rates on the y axis are labeled as r I and r II . The challenger banks are represented by the line labeled Γ. They have a price and technology advantage and so can lend at higher interest rates. The brokers are represented by the line labeled Ω. They are price takers, accepting the interest rate determined by the market. The same is true for the incumbents, represented by the line labeled Φ but they have a greater market share due to their customer relationships. Note that payments strategy for social media platforms is not shown on this figure as it is not affected by interest rates

Figure  5 illustrates that having a niche strategy is not counterproductive. Liu et al ( 2020 ) found that banks performing niche activities exhibit higher profitability and have lower risk. The syndication market now means that a bank making a loan does not have to be the entity that services it. This means banks in the future can better shape their risk profile and manage their lending books accordingly.

An interesting question for central banks is what the future Deposit Supply function will look like. If all three forms: open banking, traditional banking and challenger banks develop together, will the bank of the future have the same Deposit Supply function? The Klein ( 1971 ) general formulation assumes that deposits are increasing functions of implicit and explicit yields. As such, the very nature of central bank directed monetary policy may have to be revisited, as alluded to in the earlier discussion on digital money.

The client retention strategy (incumbents)

The competitive pressures suggest that incumbent banks need to focus on customer retention. Reichheld and Kenny ( 1990 ) found that the best way to do this was to focus on the retention of branch deposit customers. Obviously, another way is to provide a unique digital experience that matches the challengers.

Incumbent banks have a competitive advantage based on the information they have about their customers. Allen ( 1990 ) argues that where risk aversion is observable, information markets are viable. In other words, both bank and customer benefit from this. The strategic issue for them, therefore, becomes the retention of these customers when faced with greater competition.

Open Banking changes the dynamics of the banking information advantage. Borgogno and Colangelo ( 2020 ) suggest that the access to account (XS2A) rule that it introduced will increase competition and reduce information asymmetry. XS2A requires banks to grant access to bank account data to authorized third payment service providers.

The incumbent banks have a high-cost base and legacy IT systems. This makes it harder for them to migrate to a digital world. There are, however, also benefits from financial technology for the incumbents. These include reduced cost and greater efficiency. Financial technology can also now support platforms that allow incumbent banks to sell NPL’s. These platforms do not require the ownership of assets, they act as consolidators. The use of technology to monitor the transactions make the processing cost efficient. The unique selling point of such platforms is their centralized point of contact which results in a reduction in information asymmetry.

Incumbent banks must adapt a number of areas they got to adapt in terms of their liquidity transformation. They have to adapt the way they handle data. They must get customers to trust them in a digital world and the way that they trust them in a bricks and mortar world. It is no coincidence. When you go into a bank branch that is a great big solid building great big facade and so forth that is done deliberately so that you trust that bank with your deposit.

The risk of having rising non-performing loans needs to be managed, so customer retention should be selective. One of the puzzles in banking is why customers are regularly denied credit, rather than simply being charged a higher price for it. This credit rationing is often alleviated by collateral, but finance theory suggests value is based on the discounted sum of future cash flows. As such, it is conceivable that the bank of the future will use financial technology to provide innovative credit allocation solutions. That said, the dual risks of moral hazard and information asymmetries from the adoption of such solutions must be addressed.

Customer retention is especially important as bank competition is intensifying, as is the digitalization of financial services. Customer retention requires innovation, and that innovation has been moving at a very fast rate. Until now, banks have traditionally been hesitant about technology. More recently, mergers and acquisitions have increased quite substantially, initiated by a need to address actual or perceived weaknesses in financial technology.

The client acquisition strategy (challengers)

As intermediaries, the challenger banks are the same as incumbent banks, but designed from the outset to be digital. This gives them a cost and efficiency advantage. Anagnostopoulos ( 2018 ) suggests that the difference between challenger and traditional banks is that the former address its customers problems more directly. The challenge for such banks is customer acquisition.

Open Banking is a major advantage to challenger banks as it facilitates the changing of accounts. There is widespread dissatisfaction with many incumbent banks. Open Banking makes it easier to change accounts and also easier to get a transaction history on the client.

Customer acquisition can be improved by building trust in a brand. Historically, a bank was physically built in a very robust manner, hence the heavy architecture and grand banking halls. This was done deliberately to engender a sense of confidence in the deposit taking institution. Pure internet banks are not able to do this. As such, they must employ different strategies to convey stability. To do this, some communicate their sustainability credentials, whilst others use generational values-based advertising. Customer acquisition in a banking context is traditionally done by offering more attractive rates of interest. This is illustrated in Fig.  5 by the intersect of traditional banks with the market rate of interest, depicted where the line Γ crosses L 2 . As a result of the relationship with banking yield, teaser rates and introductory rates are common. A customer acquisition strategy has risks, as consumers with good credit can game different challenger banks by frequently changing accounts.

Most customer acquisition, however, is done based on superior service offering. The functionality of challenger banking accounts is often superior to incumbents, largely because the latter are built on legacy databases that have inter-operability issues. Having an open platform of services is a popular customer acquisition technique. The unrestricted provision of third-party products is viewed more favorably than a restricted range of products.

The banking as a service strategy (new entrants)

Banking from a customer’s perspective is the provision of a service. Customers don’t care about the maturity transformation of banking balance sheets. Banking as a service can be performed without recourse to these balance sheets. Banking products are brokered, mostly by new entrants, to individuals as services that can be subscribed to or paid on a fee basis.

There are a number banking as a service solutions including pre-paid and credit cards, lending and leasing. The banking as a service brokers are effectively those that are aggregating services from others using open banking to enable banking as a service.

The rise of banking as a service needs to be understood as these compete directly with traditional banks. As explained, some of these do this through peer-to-peer lending over the internet, others by matching borrows and sellers, conducting mediation as a loan broker. Such entities do not transform assets and do not have banking licenses. They do not have a branch network and often don not have access to deposits. This means that they have no insurance protection and can be subject to interest rate controls.

The new genre of financial technology, banking as a service provider, conduct financial services transformation without access to central bank liquidity. In a distributed digital asset world, the assets are stored on a distributed ledger rather than a traditional banking ledger. Financial technology has automated credit evaluation, savings, investments, insurance, trading, banking payments and risk management. These banking as a service offering are only as secure as the technology on which they are built.

The social media payment strategy (disintermediators and disruptors)

An intermediation bank is a conceptual idea, one created solely on a social networking site. Social media has developed a market for online goods and services. Williams ( 2018 ) estimates that there are 2.46 billion social media users. These all make and receive payments of some kind. They demand security and functionality. Importantly, they have often more clients than most banks. As such, a strategy to monetize the payments infrastructure makes sense.

All social media platforms are rich repositories of data. Such platforms are used to buy and sell things and that requires payments. Some platforms are considering evolving their own digital payment, cutting out the banks as middlemen. These include Facebook’s Diem (formerly Libra), a digital currency, and similar developments at some of the biggest technology companies. The risk with social media payment platform is that there is systemic counter-party protection. Regulators need to address this. One way to do this would be to extend payment service insurance to such platforms.

Social media as a platform moves the payment relationship from a transaction to a customer experience. The ability to use consumer desires in combination with financial data has the potential to deliver a number of new revenue opportunities. These will compete directly with the banks of the future. This will have implications for (1) the money supply, (2) the market share of traditional banks and, (3) the services that payment providers offer.

Further research

Several recommendations for research derive from both the impact of disintermediation and the four proposed strategies that will shape banking in the future. The recommendations and suggestions are based on the mentioned papers and the conclusions drawn from them.

As discussed, the nature of intermediation is changing, and this has implications for the pricing of risk. The role of interest rates in banking will have to be further reviewed. In a decentralized world based on crypto currencies the central banks do not have the same control over the money supply, This suggest the quantity theory of money and the liquidity preference theory need to be revisited. As explained, the Internet reduces much of the friction costs of intermediation. Researchers should ask how this will impact maturity transformation. It is also fair to ask whether at some point in the future there will just be one big bank. This question has already been addressed in the literature but the Internet facilities the possibility. Diamond ( 1984 ) and Ramakrishnan and Thakor ( 1984 ) suggested the answer was due to diversification and its impact on reducing monitoring costs.

Attention should be given by academics to the changing nature of banking risk. How should regulators, for example, address the moral hazard posed by challenger banks with weak balance sheets? What about deposit insurance? Should it be priced to include unregulated entities? Also, what criteria do borrowers use to choose non-banking intermediaries? The changing risk environment also poses two interesting practical questions. What will an online bank run look like, and how can it be averted? How can you establish trust in digital services?

There are also research questions related to the nature of competition. What, for example, will be the nature of cross border competition in a decentralized world? Is the credit rationing that generates competition a static or dynamic phenomena online? What is the value of combining consumer utility with banking services?

Financial intermediaries, like banks, thrive in a world of deficits and surpluses supported by information asymmetries and disconnectedness. The connectivity of the internet changes this dynamic. In this respect, the view of Schumpeter ( 1911 ) on the role of financial intermediaries needs revisiting. Lenders and borrows can be connected peer to peer via the internet.

All the dynamics mentioned change the nature of moral hazard. This needs further investigation. There has been much scholarly research on the intrinsic riskiness of the mismatch between banking assets and liabilities. This mismatch not only results in potential insolvency for a single bank but potentially for the whole system. There has, for example, been much debate on the whether a bank can be too big to fail. As a result of the riskiness of the banking model, the banks of the future will be just a liable to fail as the banks of the past.

This paper presented a revision of the theory of banking in a digital world. In this respect, it built on the work of Klein ( 1971 ). It provided an overview of the changing nature of banking intermediation, a result of the Internet and new digital business models. It presented the traditional academic view of banking and how it is evolving. It showed how this is adapted to explain digital driven disintermediation.

It was shown that the banking industry is facing several documented challenges. Risk is being taken of balance sheet, securitized, and brokered. Financial technology is digitalizing service delivery. At the same time, the very nature of intermediation is being changed due to digital currency. It is argued that the bank of the future not only has to face these competitive issues, but that technology will enhance the delivery of banking services and reduce the cost of their delivery.

The paper further presented the importance of the Open Banking revolution and how that facilitates banking as a service. Open Banking is increasing client churn and driving banking as a service. That in turn is changing the way products are delivered.

Four strategies were proposed to navigate the evolving competitive landscape. These are for incumbents to address customer retention; for challengers to peruse a low-cost digital experience; for niche players to provide banking as a service; and for social media platforms to develop payment platforms. In all these scenarios, the banks of the future will have to have digital strategies for both payments and service delivery.

It was shown that both incumbents and challengers are dependent on capital availability and borrowers credit concerns. Nothing has changed in that respect. The risks remain credit and default risk. What is clear, however, is the bank has become intrinsically linked with technology. The Internet is changing the nature of mediation. It is allowing peer to peer matching of borrowers and savers. It is facilitating new payment protocols and digital currencies. Banks need to evolve and adapt to accommodate these. Most of these questions are empirical in nature. The aim of this paper, however, was to demonstrate that an understanding of the banking model is a prerequisite to understanding how to address these and how to develop hypotheses connected with them.

In conclusion, financial technology is changing the future of banking and the way banks intermediate. It is facilitating digital money and the online transmission of financial assets. It is making banks more customer enteric and more competitive. Scholarly investigation into banking has to adapt. That said, whatever the future, trust will remain at the core of banking. Similarly, deposits and lending will continue to attract regulatory oversight.

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Firms frequently change their business models in order to respond to internal and external challenges. This study aims to explore how investments banks adjust their business models in response to internal and external challenges. Based on a qualitative data from ten major investment banks operating in the largest financial market in the Middle East, we show that investment banks can achieve resilience by adjusting their business models through continuous activity changes in response to internal and external challenges. Specifically, investment banks adjust their business models through deploying alternative combinations of activities from a broad repertoire of activities. Within the same bank, divisions that respond to external challenges tend to sustain their performance, whereas resilient divisions that respond to both internal and external challenges tend to bounce back or achieve substantial increase in performance levels. This study contributes to the literature by proposing resilience as an alternative approach to business model innovation and by providing insight into how firms adjust their business models by altering specific activities in response to both internal and external challenges.

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Firms frequently change their business models (BMs) in order to respond to internal and external challenges. While some firms need to respond to internal challenges such as organisational capabilities (Teece, 2018 ), and learning processes (Futterer, Schmidt, & Heidenreich, 2018 ), other firms need to address external challenges such as changing demands of stakeholders (Amit & Zott, 2015 ), new technology (Cozzolino, Verona, & Rothaermel, 2018 ), and deregulation (Casadesus-Masanell & Ricart, 2010 ). Business Model Innovation (BMI) has been suggested as a way to respond to these challenges by adjusting BMs, and as a new source of innovation that goes beyond product and process innovation (Osiyevskyy & Dewald, 2015 ). Although there is no commonly recognised definition of a BM, scholars tend to agree that a BM is about the value proposition the enterprise delivers to its customers, how it creates that value, and how it captures a portion of it (Wirtz, Pistoia, Ullrich, & Göttel, 2016 ; Massa, Tucci, & Afuah, 2017 ; Foss & Saebi, 2017 ). Moreover, researchers are increasingly becoming interested in how BM evolves over time (Saebi, Lien, & Foss, 2017 ).

There is an ongoing debate regarding what constitutes a BMI. Some scholars claim that BMI constitutes varying degrees of innovation. As Khanagha et al. ( 2014 : p. 324) put it “ activities can range from incremental changes in individual components of business models, extension of the existing business model, introduction of parallel business models, right through to disruption of the business model, which may potentially entail replacing the existing model with a fundamentally different one ”. Researchers advocating this inclusive definition highlight that BMI could be new to the firm as well as new to the industry. Studies show that BMI may affect only a single component (e.g. Schneider & Spieth, 2013 ), “one or more” components (e.g. Sorescu, Frambach, Singh, Rangaswamy, & Bridges, 2011 ), “two or more” components (e.g. Lindgardt, Reeves, Stalk, & Deimler, 2009 ), or the entire BM components and the links between the components (e.g. Velamuri, Bansemir, Neyer, & Möslein, 2013 ). However, other scholars stress that BMI has to be new to the industry (e.g. Aspara, Hietanen, & Tikkanen, 2010 ). Innovation here is typically disruptive where a completely new BM is introduced. In differentiating the types of BMI, Foss and Saebi ( 2017 ) use two dimensions of BMI, namely the degree of novelty (new to a firm vs. new to an industry), and scope of innovation (modular vs. architectural change). As a result, they suggest four types of BMI: evolutionary (fine-tuning process), adaptive (changes in the overall BM that are new to a firm), focussed (changes within one area of the BM), and complex (change the entire BM).

The BMI literature suggests that firms can adjust their BMs through adaptation, which is “ the process by which management actively aligns the firm’s business model to a changing environment ” (Saebi et al., 2017 , p. 569). Some studies focus on how firms adapt their BMs suggesting several approaches namely trial-and-error (Morris, Schindehutte, & Allen, 2005 ), learning (Teece, 2010 ), fine-tuning process (Demil & Lecocq, 2010 ), and continuous adjustments (Landau, Karna, & Sailer, 2016 ). Other studies focus on the conditions facilitating BMI. Firms are more likely to adapt their BMs under conditions of perceived threat than under conditions of perceived opportunities (Saebi et al., 2017 ). Despite the numerous studies on the drivers (e.g. Saebi et al., 2017 ), processes (e.g. Landau et al., 2016 ), and consequences (e.g. McNamara, Peck, & Sasson, 2013 ) of BM adaptation, there is still limited knowledge of how firms adjust their BMs.

Another less explored avenue for adjusting BMs is resilience, which is the ability “ to respond more quickly, recover faster or develop more unusual ways of doing business under duress than others ” (Linnenluecke, 2017 : p. 4). Dewald and Bowen ( 2010 ) suggest that “ resilience depends on a simultaneous internal and external evaluation of the situation ” (p. 212). This line of research stops short of disclosing how firms adjust their BMs in response to internal and external challenges. To fill this gap, our study aims to explore how investments banks can achieve resilience by adjusting their BMs in response to both internal and external challenges.

We choose to study investment banks for at least two reasons. First, Crotty ( 2009 ) argues that investment banking is a complex and risky business, and investment banks face continuous shift in market and regulatory environments. For instance, five of the largest independent investment banks in the US lost their independence in 2008: Bear Stearns and Lehman Brothers failed, Merrill Lynch was taken over by Bank of America, and Goldman Sachs and Morgan Stanley became bank holding companies to qualify for bailout money (Crotty, 2009 ). One of the main reasons for their failure has been attributed to the ambiguity and complexity of their BMs. This could be due to running multiple divisions (i.e. Asset Management, Brokerage, Investment Banking, and Custody Services) independently with ‘Chinese Wall arrangements’ (Lipton & Mazur, 1975 ) to avoid conflicts of interest. Second, investment banks throughout the world have made significant changes to their BMs after the 2008 financial crisis as they were forced by regulators to entirely abandon their old BMs by maintaining lower levels of leverage and accepting lower risk and lower returns (Teece, 2010 ).

Political and economic instabilities are real challenges for businesses in general and investment banks in particular throughout the Middle East. Saudi Arabia, as well as the Gulf region, has been hit by at least three major crises in the past three decades. The first crisis was the invasion of Kuwait by Iraq in August 1990, and the ensuing Gulf war that threatened not only the economies of the Gulf states but also their very existence (Finlan, 2003 ). The second major crisis was the 2006 IPO crisis in Saudi Arabia. This crisis was caused by an oversubscription to company shares on the Saudi stock market (Jeambey, 2007 ). From a peak on 25 February 2006, the Saudi stock market index fell by about 65% (Lerner, Leamon, & Dew, 2017 ). The crisis was felt across the entire Gulf economies. The third crisis was the 2008 global financial crisis, which caused the Saudi stock market to fall even further than it had in 2006 (Lerner et al., 2017 ). In addition, the Middle East region is well-known for its political instability; ranging from the Iraq-Iran war, the Arab Spring, to the current wars in Yemen, Syria and Libya.

Since the 1980s, the financial sector in Saudi Arabia has been given a priority as part of the Saudi government diversification policy away from the dependence on oil revenues (Samargandi, Fidrmuc, & Ghosh, 2014 ). As a result, the government has built financial markets, an efficient banking system, and a competitive insurance sector. Recently, the government launched the National Transformation Program (Saudi Vision 2030). Evidence suggests that although Saudi Arabia still depends on the oil sector, investment in Saudi stock market boosts Saudi economic growth (Jawadi & Ftiti, 2019 ). The shift in the Saudi policy makers towards a more sustainable economy and away from oil dependence makes investment banks an ideal context to study how firms adjust their BMs in response to internal and external challenges.

Theoretical background

Business model resilience.

An emerging body of research in BMI advocates that firms respond to internal and external challenges through resilience. According to Lengnick-Hall and Beck ( 2005 ), resilience is an organisational capacity to adjust routines in order to overcome challenges. BM resilience has emerged as one of the key themes in a recent review of resilience in business and management research (Linnenluecke, 2017 ). Research in this area posits that firms are able to respond to challenges through continuously adjusting, adapting and reinventing their BMs. However, “ the boundaries of organizational resilience have been ill defined and wide ranging ” (Dewald & Bowen, 2010 : p. 199). This field has included studies that range from continuous adjustment (Hamel & Valikangas, 2003 ), surviving an industry attack (Gittell, Cameron, Lim, & Rivas, 2006 ), and adoption or resistance of new disruptive BMs (Dewald & Bowen, 2010 ).

Resilient firms maintain a broad repertoire of options to effectively respond to challenges (Boisot & Child, 1999 ; Lengnick-Hall & Beck, 2005 ). Having a flexible inventory of alternatives enables firms to take a different path from that which is the usual (Sutcliffe & Vogus, 2003 ), adopt unexpected and timely responses to market shifts (Ferrier, Smith, & Grimm, 1999 ), and increase the odds of success (Eisenhardt & Tabrizi, 1995 ). Using the resilience perspective, this study will show the repertoire of options available to investment banks. To do that, it is necessary to outline the BMI challenges and dimensions.

BMI challenges

Firms adjust their BMs in response to challenges (Egfjord and Sund, 2020 ), antecedents (Amit & Zott, 2015 ), and/or barriers (Bocken & Geradts, 2019 ). These challenges have been argued to impact organisational outcomes including influencing business performance (Aversa, Furnari, & Haefliger, 2015 ), financial sustainability (Santos, Pache, & Birkholz, 2015 ), future growth (Gilbert, Eyring, & Foster, 2012 ), firm’s value (Eyring, Johnson, & Nair, 2011 ), competitive advantages (Tallman, Luo, & Buckley, 2018 ), and strategic flexibility (George & Bock, 2011 ). A full review of the BMI literature undertaken by the authors reveals two internal (challenges top management, and organisational culture) and seven external challenges, namely crises, regulations, client demands, new technologies, competitive pressure, industry, and service providers. Table 1 gives detailed explanation on each of the nine identified challenges. Relevant references are also provided for each challenge.

Activity-based approach

In BMI research both element-based and activity-based approaches have been used (Clauss, Kesting, & Naskrent, 2019 ; Spieth, Schneider, Clauß, & Eichenberg, 2019 ). The former is a high abstraction approach that views BMI as a change of BM elements. Although restrictive, this approach has been used to help communicate changes in BMs (e.g. Aversa et al., 2015 ). However, the latter approach views BMI as a change in BM activities (e.g. Tykkyläinen & Ritala, 2020 ). This view goes beyond identifying specific innovation components to by detailing the change in activities performed when adjusting BMs. Based on this view, we use Ramdani, Binsaif, and Boukrami ( 2019 ) activity-based framework (Fig.  1 ). This framework consists of four dimensions and 16 sub-dimensions. Unlike previous conceptualisations that identify the elements associated with BMI, this framework could be used to detail the activity changes within each sub-dimension.

figure 1

BMI Framework (Ramdani et al., 2019 ). Ramdani et al., 2019 . Business model innovation: a review and research agenda. New England Journal of Entrepreneurship, 22 (2): 89–108

The four top level dimensions of BM identify different facets of the firm’s business. The following is a brief review of these four dimensions:

Value proposition : firms adjust their BM activities by rethinking what a firm sells, exploring new customer needs, acquiring target customers, and ensuring the benefits offered will be perceived by their customers. Prior studies in BMI research show that firms adjust their BMs by exploring various alternatives of core offering (Clauss, 2017 ), meeting unsatisfied needs in other markets (Eyring et al., 2011 ), altering activities in the value chain to acquire target customers (Kiron et al., 2013 ), and articulating a value proposition that is attractive for price-sensitive customers (Wu, Ma, & Shi, 2010 ).

Operational Value : firms adjust their BM activities through configuring key assets and sequencing activities to deliver the value proposition, establishing links with key partners and suppliers, and exposing the various means by which a company reaches out to customers. Studies in BMI research highlight that firms can adjust their BMs through integrating various assets (Al-Debei & Avison, 2010 ), developing new processes (Mason & Spring, 2011 ), forming new partnerships (Clauss, 2017 ), and adopting new distribution channels (Cao, 2014 ).

Human Capital : firms adjust their BM activities by experimenting with new ways of doing business, tapping into the skills and competencies (Hock-Doepgen, Clauss, Kraus, & Cheng, 2020 ) needed for the new BMs through motivating and involving individuals in the innovation process. Prior studies in BMI research show that firms can adjust their BMs through learning from previous experiences (Yunus, Moingeon, & Lehmann-Ortega, 2010 ), changing the level of participation in performing the activities (Sorescu et al., 2011 ), adopting different compensation and incentive policies (Brea-Solís, Casadesus-Masanell, & Grifell-Tatjé, 2015 ), and assembling cross-functional teams (Michel, 2014 ).

Financial Value : firms adjust their BM activities by capturing value through alternative revenue streams, changing the price-setting mechanisms, and assessing the financial viability and profitability. Studies in BMI research highlight that firms can adjust their BMs through introducing new cost structures and revenue models (Clauss, 2017 ), exploring ways to manage cash-flows, and generating more profit (Sorescu et al., 2011 ).

Research method

In order to explore how investment banks adjust their BMs, this study employs a qualitative approach (Yin, 2014 ). Multiple in-depth case studies are adopted because research in this field is still in its infancy and researchers are seeking new perspectives (Eisenhardt, 1989 ). Purposive sampling was used to select investment banks that operate all four divisions (i.e. Asset Management, Brokerage, Investment Banking, and Custody Services). As a result, our final sample is 10 fully-licenced investment banks operating in Saudi Arabia.

To ensure the trustworthiness, the authors addressed credibility, transferability, dependability and confirmability based on the criteria developed by Guba ( 1981 ). Credibility refers to the internal validity of the data. This was established through the use of triangulation. Primary data collected through semi-structured interviews was verified with the available secondary data (annual reports, financial statements, websites, and brochures). Transferability refers to external validity, which was achieved through the audio recording and transcription of interviews as well as through the purposeful sampling to collect the data from various top management positions where participants included chairman, executives, heads of division and heads of department. Dependability refers to reliability, which was established through ensuring that participants reflect on their experiences covering events that occurred up to 3 years prior to the interviews as well as recent events. Finally, confirmability refers to the objectivity of the data, which was achieved through independently auditing the findings, comparing and refining the interpretations among the authors.

Semi-structured interviews were conducted with participants that had key positions in all four divisions (see the Appendix – Table 6 ). The participants were asked questions on their banks’ goals and strategy, followed by a set of questions focusing on BM activities relating to value proposition, operational value, human capital and financial value, and questions on the their responses to current internal and external challenges. Interviews were recorded and transcribed to develop the full cases. The data was triangulated (Jick, 1979 ; Gibbert, Ruigrok, & Wicki, 2008 ) by cross checking the data with internal documents and publicly available information including the Capital Market Authority (CMA), the Saudi Arabian Monetary Authority (SAMA), the Saudi Stock Exchange (Tadawul) and the Ministry of Finance. In total, we conducted 29 interviews, each of which lasted between 46 and 140 min.

Using the validated transcripts, case studies were compiled for each investment bank. Then, the data was coded by two researchers independently (Mayring, 2014 ). After that, each case was analysed using thematic content analysis to explore how firms adjust their BMs. By analysing the content relating to challenges and the associated changes in activities, the authors were able to link what makes firms change their BMs and how they adjust them. Cross-case analysis (Eisenhardt, 1989 ) was conducted with two researchers present looking at comparing BMs as well as the challenges and activity changes for each division. The researchers went through several iterations between literature, data and findings until a consistent map was drawn for all BMs. Using the resilience perspective, a repertoire of activities was developed to show all possible activity changes.

One of the main findings of this paper is a map that describes the various options available to investment banks to respond to internal and external challenges. Table 2 presents this repertoire of specific activities for all four divisions. The first column shows the BM four dimensions starting with value proposition. The second column shows the four sub-dimensions for each of the four dimensions. For instance, the first sub-dimension for Operational Value is “Key Assets”. The remaining four columns show the actual activities available as a means to respond by adjusting their BM to potential challenges. For example, a Brokerage division under the “Distribution Channels” sub-dimension has four activities (online, mobile, direct calls and branches). This means that if an investment bank identifies that a threat can best be dealt with from the ‘Operational Value-Distribution Channels’ side, it can use the online activity alone or in combination with the other three tools (mobile, direct calls and branches). Of course, the managers can see a solution as a combination of many dimensions, sub-dimensions and activities.

Table 2 reveals three important aspects of resilience. First, we note the richness and diversity of activities that can help BMs to navigate through difficult terrain. Although some cells (as represented by an individual cell in the table) have one or two activities only, the vast majority of cells contain five activities. The second aspect is the specificity of various activities to the division and BM sub-dimension. Except from a single case (Direct communication under “Perceived Customer Value”), activities do not repeat across divisions or across sub-dimensions. The third aspect is that some divisions have a richer set of activities than others. The highest is Asset Management with 59 activities, followed by Investment Banking and Brokerage with 49 and 46 activities respectively. Custody Services has the least activities, with 31 activities only.

Table 3 summarises the main findings of this paper. The rows of the table show the BM dimensions and sub-dimensions that have been impacted. The columns show the challenges influencing each of the four divisions. Finally, the cells show whether, for a particular cross between BM sub-dimension and challenge, the firm uses activities intensively, moderately or not at all. In the following, we focus only on the most utilised activities.

We begin by highlighting the type of challenges to which divisions are subjected to. First, different divisions have different types and numbers of challenges. For example, the Asset Management and Investment Banking divisions have the highest number of challenges (five each). Custody Services has the least challenges with two only. The type of challenges varies across the four divisions, with two divisions sharing no more than two types of challenges. For example, Asset Management and Brokerage share “Client Demands” which no other division has. There is one exception. The “Crises” challenge is shared by three divisions, which makes it the most important challenge to investment banks. Second, out of the 16 challenges reported by interviewees, only three are internal (shaded columns), and these are found in Asset Management and Investment Banking divisions.

The pattern of results shown in Table 3 can be summarised as follows. First, different divisions deploy different sets of activities even for the same challenge. For example, if we take the “Client Demands” challenge, Asset Management uses “Revenue Stream” activity, while Brokerage uses “Key Assets” activities (but they use the same three other activities). Second, different divisions have different intensities of activity. By far the most activities deployed are for Asset Management, which totals 44 different activities. This division outshines the other three divisions, with the closest being Brokerage with 14 activities only.

Third, there is a significant difference as to what dimensions of the BM are given priority in overcoming the various challenges. Here we notice one dominant BM dimension and two dominant sub-dimensions. The most important dimension is Value Proposition with 31 sub-dimensions involved throughout the firm. Operational and Financial Value dimensions are also important with 19 and 16 sub-dimensions respectively. The human capital dimension is virtually inexistent, having only 3 out of the possible 64 sub-dimensions involved.

The most important sub-dimension is “Core Offering” which is involved in 15 out of the possible 16 challenges throughout the firm. The second and fourth highest sub-dimensions are “Customer Needs” and “Target Customers” with 9 and 7 challenges respectively. All three sub-dimensions form the core “Value Proposition” dimension. The third most important sub-dimension is “Revenue Stream”, with involvement in 8 challenges. The table also reveals that there are five unimportant sub-dimensions (zero challenges), and three weak sub-dimensions (3 or 2 challenges in total).

Overall, depending on the challenge faced, investment banks respond by adjusting their BM through deploying alternative combinations of activities from the repertoire. In Asset Management division, Table 3 shows that investment banks respond to the six challenges by altering eight sub-dimensions with a total of 44 activities.

To obtain further insights as to what kind of specific activities are used by investment banks, we produce detailed activity responses to the challenges faced by each division. We will focus here on presenting the activity responses to challenges in the Asset Management division (highlighted in Table 4 ). Activity responses to challenges faced by other divisions are included in the Appendix. Within the Asset Management division, two main sub-dimensions are dominant, namely the “Core Offering” and “Revenue Stream”. Within “Core Offering”, innovative investment is used as an activity against all five threats, whereas under “Revenue Stream” the fees-based model is dominant.

In the Asset Management division, investment banks respond to five challenges with a repertoire of activities. Top management push asset managers to create new investment products and alter both current revenue streams and overall margins. Asset managers respond to clients’ demands by creating new investment products to meet needs for new categories of customers, and adopting a new revenue model that is based on sharing the returns. In response to financial crisis, asset managers created a new offering with low margins and low returns to meet the demands of the new customer base that have fixed income and low-risk profile. To adhere to regulations and maintain the division’s performance, asset managers created new funds to target international investors and modified the fee structure of some funds to absorb the regulator’s imposed costs. Finally, asset managers responded to competitive pressure by hiring new asset managers, expanding the portfolio of investment products, charging lower fees for niche investment products.

For the remaining divisions, the repertoire of utilised activities is detailed in the Appendix (Tables  8 , 9 , 10 ). The Brokerage division responds to four challenges, namely competitive pressure, new technologies, client demands, and crises. As the competition intensifies this division invests in its brokerage system to approve margin lending (loans for trading) online, and deploy multi-brokerage models where clients are charged either through trading commissions or lending revenues. The technology challenges were dealt with by improving the brokerage system to allow clients to trade via online platforms or through smartphones. Investment banks also deployed multi-channel communication tools as a means to change some of the key processes such as opening online accounts. This led to reducing the staff and branch costs, but increased the IT costs. Clients’ demands were responded to by improving their brokerage systems to facilitate access and transactions for active traders. After the 2008 financial crisis, investment banks introduced margin lending to encourage trading. However, after the market stabilised, investment banks changed the parameters for margin lending to increase returns by charging trading commissions.

Investment Banking divisions face both internal and external challenges, including top management, service providers, organisational culture, new technologies, and crises. The response to top management challenges led to diversifying portfolio of investment services to attract new customers internationally such as corporates and government institutions interested in buying family-owned businesses. This meant that revenue streams (such as fixed, transaction-based, and success fees) were negotiated depending on the deal. One of the teams responsible for IPOs suggested changing a labour intensive process. A software was developed to automate the process, which led to reducing staff costs, quickening the process of delivering services, and finishing the deal faster for corporates in order to go public. Because banking advisory services depends on the participation of other parties such as accountants, legal firms, commercial banks, and underwriters, services may not be delivered in a timely fashion. Thus, in response to service providers’ challenges, Investment Banking divisions change their partnerships with legal firms and hire experienced investment banks that are able to deliver reliable services. The response to new technologies focused on new online and mobile distribution channels to make it easier for clients to access services, monitor their progress, and provide them with reports. Finally, during times of fluctuations in the market, this division focuses more on advisory services where non-listed firms prepare their IPOs or preferred private equities and only go public if the market conditions are favourable.

In Custody Services division, investment banks respond to two external challenges, namely industry demands and regulations. Custody Services division responded to industry demands by offering their services to non-listed firms, investment banks, and mutual investment funds. Technical investment banks partners were established to perform custody services at a lower cost and deliver these services to other banks bringing in new revenues. Finally, to adhere to new local regulations, investment banks were forced to assign an independent custodian to carry out safekeeping and administration, which meant that some banks were consuming these services locally through other investment banks or outsourcing these activities to an international partner. By improving their custody systems, investment banks incurred new IT costs.

To assess the performance of each division for 2016 and 2017, revenue growth data is highlighted in Table 5 . Looking at the cumulative growth for each division, the data suggest that divisions responding to only external challenges tend to sustain their performance levels as highlighted in Brokerage and Custody Services divisions. However, divisions responding to both internal and external challenges (i.e. Asset Management and Investment Banking) tend to bounce back in the Asset Management division and increase growth substantially in the Investment Banking division.

Firms respond to internal and external challenges through adaptation and/or resilience. The adaptation perspective focuses on responding to external challenges (Saebi et al., 2017 ), whereas the resilience perspective focuses on responding to both internal and external challenges. All divisions responded to external challenges. This may explain the focus of previous studies on responding to external challenges through adaptation. However, this study shows that resilience can be achieved by responding to both internal and external challenges. As a result, revenue growth bounced back in the Asset Management divisions, and increased substantially for Investment Banking divisions.

In their response to internal challenges, both divisions responded to top management. Asset managers withheld periodical meetings to discuss performance and review new trends in the industry in order to develop new investment products. In the Investment Banking division, financial advisory and arrangements were delivered with guarantees from the top in terms of execution and professionalism. Different management challenges are posed when carrying out BMI (Foss & Saebi, 2017 ). Moreover, Investment Banking responded to the challenge of organisational culture. By embracing an innovative culture, Investment Banking division was able to capitalise on new ideas emerging from internal teams. In short, creative culture has positive effects on firms undertaking BMI (Bock et al., 2012 ).

In their response to internal and external challenges, investment banks maintain a broad repertoire of activities that are used to adjust their BMs. Firms keep a broad repertoire of options to overcome challenges (Boisot & Child, 1999 ; Lengnick-Hall & Beck, 2005 ). Although previous studies claim that firms are able to respond to challenges through continuously adjusting their BMs (Landau et al., 2016 ), it is not clear how such a continuous adjustment of BMs takes place. We demonstrate how investment banks continuously adjust their BM through deploying alternative combinations of activities from the repertoire in response to specific internal and/or external challenge.

To adjust their BMs, investment banks modify a combination of activities. Previous studies in BMI have shown that firms adjust their BMs by changing a single component to replacing the entire BM (Saebi et al., 2017 ). This study shows that investment banks deploy a variety of activities. While the most important set of activities are found within the value proposition, followed by the operational value and the financial value dimensions, the lowest activity changes occur in the human capital dimension. This could be due to the challenges faced, the nature of the industry, and the context. This study shows that investment banks tend to mainly respond to external challenges including clients’ demands, crises and competitive pressure. In their response, investment banks focus more on rethinking their value proposition through expanding their core offering and meeting customer needs. Previous studies have focused on modifying the value proposition due to external challenges (e.g. Demil & Lecocq, 2010 ). Moreover, the nature of the financial services industry could have influenced which activity changes investment banks must focus on. The operational value and financial value activities remain less changeable than value proposition due to the maturity of the industry as well as the stringency of the regulatory environment. Also, it is a well-known practice that investment banks attract the highest talents because they can afford them. This may explain why human capital activity changes are the lowest changed compared to other activities. According to Chivers ( 2011 ), training in investment banks tend to be more “informal and on-the-job in nature”. He argues that this informal learning was “ad hoc, poorly recorded, and limited in scope”. Also, he claims that investment bankers prefer learning by doing. This may explain why human capital activity changes are the lowest changed compared to other activities. Previous studies show the particularity of certain industries (e.g. Aversa et al., 2015 ). Finally, the context of this study might have influenced activity changes. This study is conducted in an emerging economy, where the BMs are usually replications of existing BMs in developed economies rather completely new BMs. This could explain why activity changes focus more on the value proposition to adapt their replicated BMs (Landau et al., 2016 ).

Theoretical implications

By revealing how investment banks adjust their BMs in response to internal and external challenges, this study makes at least four contributions to BMI literature. First, it confirms that firms adjust their BMs not only in response to external challenges (Amit & Zott, 2015 ), but also in response to internal challenges (Teece, 2018 ). In this paper, we summarise and list the internal and external challenges that influence firms to change their existing BMs. Also, we show that resilience can be achieved by responding to both internal and external challenges. Second, this study provides important insights into how firms change their existing BM using a repertoire of activities. Using the resilience perspective, this study provides insight into how firms adjust their BMs by altering specific activities, an area that has not been sufficiently covered. This study captures activity changes by empirically examining the BMI framework. Third, this study brings together internal and external perspectives of the BMI literature, and provides evidence on the challenges and the associated activity changes for each of the four investment banking divisions. Fourth, this study adds evidence to industry-focused BMI by examining BMI in an understudied industry context (i.e. investment banks).

Managerial implications

This study has several implications for senior executives, analysts and regulators. It provides senior executives with a repertoire of activities that can be used to adjust their BMs. The repertoire can be used in conjunction with internal and external challenges to navigate BMI. This repertoire can be used not only by executives working in investment banks, but also by executives in other sectors to develop their own repertoire of potential BMs. Moreover, this study provides analysts and investors with a tool to help them understand investment banks BMs. The repertoire could be used by investors and financial analysts to complement their financial, industry and company analyses. By using this repertoire, analyst could demystify the complexity of activities, identify risks for each activity, and rationalise the different financial and operational performances. Furthermore, this repertoire could be used by regulators to legislate based on informed understanding of activity changes. This repertoire could help regulators navigate activity changes, communicate these changes with investment banks, and legislate accordingly.

Limitations and future research

Apart from the typical limitations that apply to qualitative studies, we highlight three areas for future research. First, this study fills a significant gap in our understanding of the internal challenges (Foss & Saebi, 2017 ) by demonstrating that firms need to respond to top management and organizational culture. Future research should further unravel other internal challenges such as organisational capabilities. Second, this study demonstrates that investment banks achieve resilience through continuously adjusting their BMs by maintaining a repertoire of activity changes. Future studies should explore flexible repertoires of options in other industries and how they compare to the findings of this study. Also, it will be interesting to track the sequence of activity changes, which was not captured in our study. Another avenue for future research is to investigate the levels of resilience among a group of firms facing similar internal and external challenges. Third, although this study showed how firms adjust their BMs in response to internal and external challenges and the associated performance levels for divisions, more research is needed to show activity changes and link them to performance levels. It would be interesting to further examine the association between BM changes and firm performance.

The aim of this study was to explore how investments banks adjust their BMs in response to internal and external challenges. Using the resilience perspective, case evidence from ten investment banks operating in the largest financial market in the Middle East was qualitatively analysed. The findings of this study suggest that investment banks adjust their BM through continuous activity changes in response to internal and external challenges. To overcome challenges, investment banks maintain a broad repertoire of activities that are used to adjust their BMs. Investment banks respond by adjusting their BMs through deploying alternative combinations of activities from the repertoire in response to specific internal and/or external challenges. In their response to internal and external challenges, investment banks deploy a variety of activities. While the most important set of activities are related to the value proposition, followed by the operational value and the financial value dimensions, the lowest activity changes occur in the human capital dimension.

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Fintechs: A new paradigm of growth

Over the past decade, technological progress and innovation have catapulted the fintech sector from the fringes to the forefront of financial services. And the growth has been fast and furious, buoyed by the robust growth of the banking sector, rapid digitization, changing customer preferences, and increasing support of investors and regulators. During this decade, fintechs have profoundly reshaped certain areas of financial services with their innovative, differentiated, and customer-centric value propositions, collaborative business models, and cross-skilled and agile teams.

As of July 2023, publicly traded fintechs represented a market capitalization of $550 billion, a two-times increase versus 2019. 1 F-Prime Fintech Index. In addition, as of the same period, there were more than 272 fintech unicorns, with a combined valuation of $936 billion, a sevenfold increase from 39 firms valued at $1 billion or more five years ago. 2; McKinsey analysis.

In 2022, a market correction triggered a slowdown in this explosive growth momentum. The impact continues to be felt today. Funding and deal activity have declined across the board, and there are fewer IPOs and SPAC (special purpose acquisition company) listings, as well as a decline in new unicorn creation. The macro environment also remains challenging and uncertain. In such a scenario, fintechs are entering a new era of value creation. The last era was all about firms being experimental—taking risks and pursuing growth at all costs. In the new era, a challenged funding environment means fintechs can no longer afford to sprint. To remain competitive, they must run at a slower and steadier pace.

About the authors

This report is a collaborative effort by Lindsay Anan, Diego Castellanos Isaza, Fernando Figueiredo, Max Flötotto , André Jerenz, Alexis Krivkovich , Marie-Claude Nadeau , Tunde Olanrewaju , Zaccaria Orlando, and Alessia Vassallo, representing views from McKinsey’s Financial Services Practice.

In this report, we examine how fintechs can continue to grow in strength and relevance for customers, the overall financial ecosystem, and the world economy, even in disruptive times. Based on research and interviews with more than 100 founders, fintech and banking executives, investors, and senior ecosystem stakeholders, we have identified key themes shaping the future of fintechs. To help fintechs capitalize on these themes, we also provide a framework for sustainable growth, based on an analysis of the strategies used by long-established public companies that have weathered previous economic cycles.

Fintech growth then and now

The fintech industry raised record capital in the second half of the last decade. Venture capital (VC) funding grew from $19.4 billion in 2015 to $33.3 billion in 2020, a 17 percent year-over-year increase (see sidebar “What are fintechs?”). Deal activity increased in tandem, with the number of deals growing 1.2 times over this period.

What are fintechs?

We define fintech players as start-ups and growth companies that rely primarily on technology to conduct fundamental functions provided by financial services, thereby affecting how users store, save, borrow, invest, move, pay, and protect money. For the analysis of this report, we included the following fintech sectors: daily banking; lending; wealth management; payments; investment banking and capital markets; small and medium-size enterprise (SME) and corporate services; operations; and infrastructure (including embedded finance, and banking as a service). The analysis excluded cryptocurrency, decentralized finance, and insurtech.

The industry fared even better in 2021, thriving on the backs of the pandemic-triggered acceleration in digitization and a financial system awash with liquidity. Funding increased by 177 percent year over year to $92.3 billion, and the number of deals grew by 19 percent.

The funding surge proved to be a one-off event. Funding levels in 2022 returned to long-term trend levels as inflated growth expectations from the 2021 extraordinary results were reanchored to business-as-usual levels, and as deteriorating macroeconomic conditions and geopolitical shocks destabilized the business environment. The correction caused fintech valuations to plummet. Many private firms faced down rounds, and publicly traded fintechs lost billions of dollars in market capitalization. VC funding was hit hard globally and across sectors, dropping to $459.6 billion in 2022 from $683.1 billion in 2021. Fintech funding faced a 40 percent year-over-year funding decline, down from $92 billion to $55 billion. Yet, when analyzed over a five-year period, fintech funding as a proportion of total VC funding remained fairly stable at 12 percent, registering only a 0.5 percentage point decline in 2022.

Looking ahead, the fintech industry continues to face a challenging future, but there are several opportunities yet to be unlocked. Investors are adapting to a new financial paradigm with higher interest rates and inflation, which has altered their assessment of risk and reward. At the same time, the once-in-a-generation technology revolution under way is generating more value creation opportunities. Our research shows that revenues in the fintech industry are expected to grow almost three times faster than those in the traditional banking sector between 2022 and 2028. Compared with the 6 percent annual revenue growth for traditional banking, fintechs could post annual revenue growth of 15 percent over the next five years.

McKinsey’s research shows that revenues in the fintech industry are expected to grow almost three times faster than those in the traditional banking sector between 2023 and 2028.

These trends are also coinciding with—and in many ways catalyzing—the maturation of the fintech industry. Based on our research and interviews, three themes will shape the next chapter of fintech growth. First, fintechs will continue to benefit from the radical transformation of the banking industry, rapid digital adoption, and e-commerce growth around the world, particularly in developing economies. Second, despite short-term pressures, fintechs still have room to achieve further growth in an expanding financial-services ecosystem. And finally, not all fintechs are being hit equally hard during the market correction: fintechs in certain verticals and at particular stages of growth are more resilient than their peers.

Radical transformation of the banking industry

Banking is facing a future marked by fundamental restructuring. As our colleagues wrote recently, banks and nonbanks are competing to fulfill distinct customer needs in five cross-industry arenas in this new era: everyday banking, investment advisory, complex financing, mass wholesale intermediation, and banking as a service (BaaS). 3 Balázs Czímer, Miklós Dietz, Valéria László, and Joydeep Sengupta, “ The future of banks: A $20 trillion breakup opportunity ,” McKinsey Quarterly , December 20, 2022.

At the same time, macro tailwinds are powering the growth of fintechs and the broader financial-services ecosystem. Digital adoption is no longer a question but a reality: around 73 percent of the world’s interactions with banks now take place through digital channels.

Moreover, retail consumers globally now have the same level of satisfaction and trust in fintechs as they have with incumbent banks. 4 McKinsey Retail Banking Consumer Survey, 2021. In fact, 41 percent of retail consumers surveyed by McKinsey in 2021 said they planned to increase their fintech product exposure. The demand—and need—for fintech products is higher across developing economies. In 2022, for example, Africa had almost 800 million mobile accounts, almost half of the whole world’s total. 5 The state of the industry report on mobile money , GSM Association, April 2023.

B2B firms’ demand for fintech solutions also is growing. In 2022, 35 percent of the small and medium-size enterprises (SMEs) in the United States considered using fintechs for lending, better pricing, and integration with their existing platforms. And in Asia, 20 percent of SMEs leveraged fintechs for payments and lending. 6 McKinsey 2022 US SMB Banking Survey, 2022 (n = 955).

To capitalize on this demand, fintechs will need to keep up with fast-evolving regulations and ensure they have adequate resources and capacity to comply. Some European Union member states, such as Ireland, are bringing buy-now-pay-later providers under the scope of financial regulation. 7 Miroslav Đurić and Verena Ritter-Döring, “Regulation of buy-now-pay-later in the EU: New regime on the horizon,” Law Business Research, February 8, 2023. Meanwhile, the US Consumer Financial Protection Bureau aims to issue a proposed rule around open banking this year that would require financial institutions to share consumer data upon consumers’ requests. 8 Farouk Ferchichi, “The US is one step closer to making open banking a reality,” Finextra, January 19, 2023. This would make it necessary for fintechs to ensure they have the available resources and capacity to respond to these requests.

A nascent industry in an expanding ecosystem

The banking industry generated more than $6.5 trillion in revenues in 2022, with year-over-year growth in volume and revenue margins. 9 “ McKinsey’s Global Banking Annual Review ,” McKinsey, December 1, 2022. Given the fintech market dynamics, this suggests there is still plenty of room for further growth in both public and private markets.

In 2022, fintechs accounted for 5 percent (or $150 billion to $205 billion) of the global banking sector’s net revenue, 10 Net revenue equals revenue after risk minus direct costs. according to our analysis. We estimate this share could increase to more than $400 billion by 2028, 11 Estimate based on historical growth at regional level and expert inputs from regional leaders in the banking industry (for example, forecast of roughly 80 percent 2021–22 revenue increase in Latin America). representing a 15 percent annual growth rate of fintech revenue between 2022 and 2028, three times the overall banking industry’s growth rate of roughly 6 percent (Exhibit 1).

Emerging markets will fuel much of this revenue growth. Fintech revenues in Africa, Asia–Pacific (excluding China), Latin America, and the Middle East represented 15 percent of fintech’s global revenues last year. We estimate that they will increase to 29 percent in aggregate by 2028. On the other hand, North America, currently accounting for 48 percent of worldwide fintech revenues, is expected to decrease its share to 41 percent by 2028.

While fintech penetration in emerging markets is already the highest in the world, its growth potential is underscored by a few trends. Many of these economies lack access to traditional banking services and have a high share of underbanked population. Fintechs have had some success in addressing these unmet needs. In Brazil, for example, 46 percent of the adult population is said to be using Nubank, a fintech bank in Latin America—double the share two years ago. 12 Oliver Smith, “Nubank turns $141m profit in Q1 as Brazilian market share nears 50%,” AltFi, May 16, 2023.

Moreover, while the market cap of private fintech companies has increased substantially over the past decade, the sector’s penetration of the public market remains small. 13 Michael Gilroy, Chase Packard, and Leslie Wang, Fintech and the pursuit of the prize: Who stands to win over the next decade? , Coatue, October 24, 2022. In the eight years leading up to October 2022, 44 modern fintechs (those that were founded in 1999 or later and went public after 2014) did an IPO, creating a combined market cap of $0.3 trillion. In contrast, during the same period, there were more than 2,500 legacy public financial-services companies (whose average year of founding was 1926) with a combined market cap of $11.1 trillion. 14 Michael Gilroy, Chase Packard, and Leslie Wang, Fintech and the pursuit of the prize: Who stands to win over the next decade? , Coatue, October 24, 2022.

Not all fintech businesses are created (or funded) equal

Last year was turbulent for fintechs, but there were differences in the fundraising performance of firms based on maturity and segments.

Maturity stage

Companies in the growth stage (series C and beyond) showed the highest sensitivity to last year’s funding downturn, with a sharp year-over-year funding decline of 50 percent. Meanwhile, fintechs in the early seed and pre-seed stages were more resilient and increased funding by 26 percent year over year (Exhibit 2). This funding outperformance of firms in the early and pre-seed stages was a consequence of the longer time to maturity, which gives start-ups more time to get through periods of economic uncertainty and recover any losses before an eventual sale.

Funding for B2B fintech segments last year was more resilient than for those in B2C, with smaller funding declines (Exhibit 3). The two B2B verticals that were least affected were (1) BaaS and embedded finance and (2) SME and corporate value-added services. These two verticals recorded year-over-year funding declines of 24 and 26 percent, respectively. In contrast, funding for payments-focused fintechs dropped 50 percent. Even then, payments and lending received the largest shares of total fintech funding.

Funding for B2B segments grew at more than 25 percent annually between 2018 and 2022, driven by an increasing number of businesses adopting off-the-shelf solutions provided by digital-native firms (including payments, open banking, and core banking technology) to address challenges arising from using legacy banking infrastructure—for example, limited flexibility, slower speed, and high costs.

Many businesses continue to rely on legacy banking infrastructure that limits flexibility and speed and can often be more costly. To address these challenges, businesses are benefiting from using off-the-shelf solutions provided by digital natives for services such as payments, open banking, and core banking technology.

For BaaS and embedded finance, demand is led by customer-facing businesses looking to control their users’ end-to-end experience. Meanwhile, SMEs have been underserved by traditional financial-services providers, despite the fact they represent about 90 percent of businesses and more than 50 percent of employment worldwide. 15 “Small and medium enterprises (SMEs) finance,” The World Bank, accessed October 10, 2023. And in developing countries, the finance gap for micro, small, and medium-size enterprises (MSME) is estimated to be approximately $5 trillion, or 1.3 times the current level of MSME lending. 16 “MSME finance gap,” IFC, accessed October 10, 2023. Fintech firms have successfully addressed some of SMEs’ needs worldwide, especially in developing countries.

The path to sustainable growth

The current churn in the markets makes it prudent for fintechs to define their next move carefully. After all, they are operating in a much different environment than in years past. In their hypergrowth stage, fintechs had access to capital that allowed them to be bold in their business strategy. They could make revenue generation their foremost objective; profits were expected to follow.

The narrative has shifted since last year. The time between funding rounds for fintechs increased by more than five months from the first to the fourth quarter of 2022. The average value of funding rounds decreased by 50 percent over the same period. 17 “SVB’s challenges will accelerate valuation down rounds, startup mortality, and layoffs,” CB Information Services, March 15, 2023. These changes are forcing fintechs to find newer ways to extend runways and adjust their operating models to make decreasing amounts of cash last longer.

The days of growth at any cost are behind the industry, for now at least. In a liquidity-constrained environment, fintechs and their investors are emphasizing profitability, not just growth in customer adoption numbers or total revenues. “In the past, the reward went to fintechs that showed growth at all costs, which led to healthy valuations,” said one Africa-based growth equity investor. “Now it is about the sustainability of the business, the addressable market, and profitability.”

In a liquidity-constrained environment, fintechs and their investors are emphasizing profitability, not just growth in customer adoption numbers or total revenues.

So how can fintechs get on a path of sustainable, profitable growth?

In 2019, McKinsey conducted an in-depth study of the growth patterns and performance of the world’s 5,000 largest public companies over the preceding 15 years. The researchers’ analysis identified ten rules for value-creating growth. 18 Chris Bradley, Rebecca Doherty, Nicholas Northcote, and Tido Röder, “ The ten rules of growth ,” McKinsey, August 12, 2022. According to the research, companies that set growth strategies addressing all available pathways to growth were 97 percent more likely to achieve above-peer profitable growth. 19 “ Choosing to grow: The leader’s blueprint ,” McKinsey, July 7, 2022.

This set of rules adopted by public companies that have lived through economic cycles and periods of uncertainty can also be useful for fintechs as they transition to a sustainable growth model. Based on our analysis of these rules and interviews with more than 40 fintech industry leaders, we expect four pathways to deliver the most impact for fintechs.

Cost discipline

When fintechs had access to abundant cash and funding was easy, they placed more emphasis on growing rapidly than on managing costs. Targeted cost savings have become a bigger priority today, as fintechs seek ways to lower expenses and achieve profitability while maintaining customer satisfaction and pursuing customer growth and acquisition. Our research has found that 50 percent of public fintechs (following their IPO) were profitable in 2022. And the key differentiator between profitable and nonprofitable fintechs was cost management, not revenue growth (Exhibit 4). While both categories recorded year-over-year revenue growth of 13 percent, profitable fintechs posted a median 3 percent decrease in costs. Nonprofitable fintechs, in contrast, saw costs rise by 27 percent, which affected their profit margins.

Successful implementation of cost management efforts is the key for fintechs in their next phase of evolution. Several leaders are already making moves: 60 percent of our survey respondents said their firms are significantly managing costs. An executive at an African mobile payments firm said they are now negotiating every cost and making sure the firm is thinking for the long run.

Consider the example of the Indian fintech company Paytm, which specializes in digital payments and financial services. The firm had had a target of achieving breakeven by September 2023 but was able to achieve this six months ahead of schedule. It did so through disciplined cost management, revenue growth across businesses, and a business model with strong operating leverage. 20 “Our discipline in cost management sustains and grows profitability,” Paytm, February 20, 2023.

While fintechs establish a clear focus on costs, they should also consider adjusting how they operate, thereby creating a more agile and flexible organization that can deal with the current environment. Around 80 percent of the interviewed fintechs report that they are currently making changes to their operating models. Of these, 66 percent cite a focus on profitability and a sustainable cost structure as being among their top three reasons. Such adjustments to the operating model are most sustainable when institutions also reinforce the control functions to protect customers and stay on top of regulatory changes.

A shift from hypergrowth to sustainable growth would also result in a greater focus on strong unit economics. To do this, fintechs ensure that the profitability view is embedded across the business. For example, assessment of the value of adding new customers would evolve from efficiency-only metrics such as the customer acquisition cost (CAC) to a more holistic approach. In this example, one way to embed profitability into acquisition investment and decision making is to compare the CAC with the projected lifetime value (LTV) of a customer, using the LTV/CAC ratio to assess the marginal return on investment for acquiring every new customer. In Latin America, for example, 68 percent of fintechs self-reported an LTV/CAC greater than five, which indicates a potential for fintechs to increase spending and further fuel growth without sacrificing profitability.

Measured growth

As leaders develop growth strategies, an important question is where growth should come from. Fintechs can grow sustainably by taking three steps: building a strong core, expanding into adjacent industries and geographies, and shrinking to grow. Identifying which steps will be most accretive to growth will depend on the unique circumstances of each fintech; some might find value in pursuing all three steps, while others could choose to focus on one. Regardless of the circumstances, this decision will have greater longer-term consequences in the current environment, compared with the earlier high-funding phase.

Focus on building a strong core as a precursor for expansion

The first step in cracking the growth code involves focusing on the local market and developing a healthy core business. According to our research, companies that focus on their core business and have a strong home market are 1.6 times more likely to generate peer-beating returns. 21 Chris Bradley, Rebecca Doherty, Tido Röder, and Jill Zucker, “ Growth rules: Which matter most? ,” McKinsey, March 6, 2023.

For fintechs, the key will be to relentlessly focus on growth in their core business. As a North American fintech executive told us: “It’s a bit of back to basics. On a core product or offering, 18 to 24 months ago, you would have built additional pieces on it to upsell and cross-sell. Now, we’re looking to double down on the core business and make sure it’s a stable, viable operation.”

To do this, fintechs must tailor their value propositions to their focus markets. Let’s take the example of B2C fintechs. Our recent research (McKinsey’s Retail Banking Consumer Survey and Global Banking Pools ) quantified the potential drivers for growth at B2C fintechs. Cross-selling will likely drive growth for fintechs in emerging economies, while those in developed countries will likely see greater growth from capturing new customers. Around 72 percent of revenue growth for companies in Brazil, for example, is expected to come from cross-selling, in contrast with 25 percent and 30 percent for the United Kingdom and the United States, respectively, with the remaining growth coming from new customers (Exhibit 5). There is arguably less potential for new-customer development in developing economies, given their high fintech penetration.

Across the competitive landscape, as markets are highly heterogenous, a dedicated strategy for each region is recommended. For example, our analysis found that in the United Kingdom and the United States, fintech revenue share is split almost equally between incumbent digital banks and pure fintech players. In contrast, digital incumbents in Germany and pure fintech players in Brazil could dominate banking’s revenue share in their respective markets.

Expand into adjacent segments and geographies

After building a strong core, fintechs can consider expanding into other segments and geographies as a second source of growth. According to our previously published research, companies that do so are 1.2 to 1.3 times more likely to generate sizable returns than peers that focus solely on their core. 22 Chris Bradley, Rebecca Doherty, Tido Röder, and Jill Zucker, “ Growth rules: Which matter most? ,” McKinsey, March 6, 2023.

Today, however, expansion is no longer a must-do strategy. It may be most advantageous for companies that have strong footholds in their core markets and can use some competitive or ownership advantage to expand elsewhere. The key is to pursue measured, value-creating growth. A case in point is OPay, which started as a mobile money platform in Nigeria and has since expanded across financial-services verticals. OPay now offers peer-to-peer payments and merchant and card services.

Shrink to grow

Fintechs are moving from hypergrowth to sustainable growth, but that growth may not necessarily be consistent across all parts of the business. If fintechs divest from underperforming parts of their portfolios and scale back from regions recording limited growth, they can reinvest that capital into high-performing segments—a strategy we call “shrinking to grow.” In our research, companies that use this approach are 1.4 times more likely to outperform their peers.

“In the past, many fintechs expanded geographically, even if it didn’t make much sense,” an executive at a Latin American fintech told us. “Now they will have to focus on their profitable segment and geography and stop expanding where they are not.”

Some fintechs have been deliberate about using a shrink-to-grow strategy, changing track if an expansion strategy did not materialize as expected or the local market had more potential for growth. German robo-adviser Scalable Capital, for example, announced plans to discontinue its Swiss operations as of 2020 to focus on other markets because the implementation of the Financial Services Act in Switzerland would have required the company to manage two regulatory frameworks simultaneously. Meanwhile, Wealthsimple, a Canadian online investment platform, exited from the United Kingdom and the United States in 2021 to concentrate on its local retail market and expand its product portfolio into new financial-services areas. Similarly, in late 2020, San Francisco–based fintech LendingClub shut down its retail peer-to-peer platform called Notes to focus on other products.

Programmatic M&A

Many companies will conclude they can achieve the steps outlined in this report—launching new features, building new capabilities, and pivoting toward new revenue streams and segments—more swiftly through thoughtful acquisitions and partnerships than by relying on pure organic development. Fintech firm Block, for example, completed its acquisition of the buy-now-pay-later platform Afterpay in January 2022 to accelerate its strategic priorities for its seller and cash app ecosystems. 23 “Block, Inc. completes acquisition of Afterpay,” Block, January 31, 2022. Nearly 60 percent of fintech executives in our survey told us they are considering an acquisition in the next 18 months.

Moreover, with IPO and SPAC (special purpose acquisition company) activity slowing considerably since last year, many fintechs that might otherwise go public are turning to private markets for funding. Take the example of the British fintech Zopa, which intended to list by 2022 but eventually decided to put IPO plans on hold in response to challenging market conditions. In the interim, the firm has been raising capital from its shareholders, including $92 million in February. 24 “Zopa raises £75 million,” Zopa Bank Limited, February 1, 2023.

M&A transactions increase significantly during periods of economic uncertainty, when they also tend to deliver higher returns. During the global financial crisis, around 45 percent of banking M&A deals showed positive excess two-year total shareholder returns (TSR) between 2007 and 2009. 25 As of the year of the deal’s announcement. In comparison, less than 30 percent of banking deals posted positive excess two-year TSR between 2010 and 2020. 26 McKinsey Fintech Quarterly Radar, Q1 2023. Across industries, companies actively making acquisitions worth 10 percent or more of their market cap in total had an average TSR of 6.4 percent between January 2007 and January 2008, compared with −3.4 percent for the less active companies. 27 Brian Salsberg, “The case for M&A in a downturn,” Harvard Business Review , May 2020.

However, not all M&As are successful. Many fail to create value due to contrasting values and cultures, mismatched product–market fit, and inflated revenue forecasts in the pursuit of customer engagement and growth at all costs.

Keeping the culture alive

What has made fintechs so disruptive over the years? The answer lies largely in their ability to innovate and differentiate. Since fintechs are not as encumbered by legacy systems and processes, they can be more agile in using emerging technologies to anticipate and solve customer needs. Typically, they also have a customer-centric and collaborative approach to deliver innovation with cross-skilled teams.

Innovations have happened across fintech verticals. Neobanks like Chime and Monzo, designed around a simple and intuitive user experience, have changed assumptions about the role of branches in traditional retail banking. In the United Kingdom, for example, the total number of bank and building society branches fell by 40 percent between 2012 and 2022. 28 Lorna Booth, Statistics on access to cash, bank branches and ATMs , House of Commons, September 1, 2023. Robo-advisers such as Wealthfront and Nutmeg disrupted the traditional wealth management industry by offering low-cost, accessible alternatives to individuals lacking access to personalized financial advice. Funding Circle introduced the peer-to-peer lending concept to the financial sector, bypassing traditional banks (which had owned this relationship) and enabling direct lending between parties.

Incumbents are fast catching up with these innovations by ramping up investments in new technologies. Around 94 percent of banks in a recent survey said they plan to invest more in modern payments technology to support end user demand for better payment capabilities over the next two to three years. Of these, 65 percent said they intend to make significant or moderate levels of investment. 29 “94% of banks eyeing investment in modern payment tech, to keep pace with fintech innovation,” Finastra press release, March 8, 2023. Many incumbents are also partnering with BaaS platforms to overhaul their digital capabilities. Examples include Fifth Third Bank’s acquisition of Rize Money in May 2023 and NatWest Group’s partnership with Vodeno Group in October 2022 to create a BaaS business in the United Kingdom.

Generative AI and the future of banking

Artificial intelligence (AI) technologies are increasingly integral to the world we live in, and investors are taking notice. Generative AI is among the advanced technologies for which investments are accelerating, thanks to its potential to transform business. According to McKinsey research published in June 2023, generative AI could add the equivalent of $2.6 trillion to $4.4 trillion annually  across as many as 63 use cases.

Generative AI’s impact on the banking industry will be significant, delivering benefits beyond existing applications of AI in areas such as marketing. As our colleagues have written, this technology could generate an additional $200 billion to $340 billion annually in value, arising from around 2.8 to 4.7 percent increase in the productivity of banking’s annual revenues—if the use cases are fully implemented. 1 “ The economic potential of generative AI: The next productivity frontier ,” McKinsey, June 14, 2023. For fintech, we expect a commensurate impact, if not more, given the already high exposure to tech.

Generative AI’s impact—and resulting reinvention—will span three broad categories:

  • Automation. Half of today’s work activities could be automated between 2030 and 2060, according to McKinsey estimates. 2 “ The economic potential of generative AI: The next productivity frontier ,” McKinsey, June 14, 2023. Fintech firm Intuit, for example, has introduced a generative AI operating system on its platform. Its custom-trained large language financial models specialize in solving tax, accounting, cash flow, and personal finance challenges, among others. 3 “Intuit introduces generative AI operating system with custom trained financial large language models,” Intuit press release, June 6, 2023.
  • Augmenting and enhancing productivity to do work more effectively. Generative AI could enable labor productivity growth of 0.1 to 0.6 percent annually through 2040, depending on the rate of technology adoption and redeployment of workers’ time to other activities. Morgan Stanley is building an AI assistant using GPT-4 to help the organization’s wealth managers quickly find and synthesize answers from a massive internal knowledge base. 4 “Morgan Stanley Wealth Management announces key milestone in innovation journey with OpenAI,” Morgan Stanley press release, March 14, 2023.
  • Acceleration. Organizations can use generative AI to extract and index knowledge to shorten innovation cycles, thereby enabling continuous innovation.

To capture these opportunities, fintechs need an ecosystem of capabilities and partners that will allow them to move fast. First movers will accrue competitive advantage as they build their capabilities and mobilize with a focus on value, rather than rushing to deliver pilots. To do this, fintechs should consider investing more in people and change management, given generative AI’s unique potential to influence the future of work. Fintechs could think about developing a medium- to longer-term talent strategy and find ways to emphasize change management and adoption. Fintechs that delay building their capabilities risk becoming the disrupted instead of the disruptors.

To retain their competitive advantage, fintechs must continue to innovate. The next big disruptor is always around the corner. Technologies like generative AI are predicted  to revolutionize the competitive landscape of finance over the next decade (see sidebar “Generative AI and the future of banking”). WeBank’s CFO Arthur Wang is one executive who appreciates the urgency. He told us, “Even though our bank has been around for almost eight years, we consider ourselves a start-up. We’re always exploring better fintech technology. WeBank’s strategy is to provide better, more inclusive financial services—to the mass population as well as small and medium-size enterprises—with leading technology. We do business 100 percent online, so we rely on technology.” 30 See “ Making financial services available to the masses through AI ,” McKinsey, August 9, 2022.

A tight labor market has also made it more challenging for fintechs to attract and hire tech talent. Our survey uncovered a shift in the perception of fintechs as riskier employers. As a Europe-based fintech executive told us: “Fintechs are less attractive now because it is clearer that it is a ‘high risk’ job compared with established institutions. On the other hand, large fintechs are laying off, which can create a new pool of talents to attract.”

In such an environment, fintechs must work toward strengthening their culture and mission and, consequently, their hiring strategy. One European payments fintech, for example, has differentiated strategies based on the profile of open roles. An executive at the firm says it has been easier to recruit people for junior roles, since these workers are more eager to join a growing organization. “It is a different story with experienced profiles—for example, management team or 35-plus years—where recruiting is more difficult and retention is crucial,” he said. To attract such people, the firm offers stock options and other incentive packages. Meanwhile, an Africa-based payments and remittances fintech casts a more global net: “We hire globally, regardless of location, gender, or race,” an executive told us. “We have no quotas and try to just find the best person for each role.”

The fintech industry is undergoing a sea change, so players will have to evolve to survive. Approaches will vary, depending on each fintech’s maturity level and its vertical and geographic focus. The framework for sustainable growth, described in this report, provides a strong foundation:

  • Measured growth based on a stable core. Ensure there is a strong and stable core business with a targeted and proven market fit before expanding, rather than trying to grow while strengthening the core.
  • Programmatic M&A. Pursue M&A strategically and establish mutually beneficial partnerships based on a programmatic strategy rooted in value sharing (with incumbents and other fintechs), as opposed to pursuing M&A only as a response to a low-valuation environment.
  • Cost discipline. Control costs to withstand the new funding environment while remaining flexible, nimble, and compliant.
  • Keep the culture alive. Maintain the agility, innovation, and culture that have been the bedrock of disruption so far.

Decisions taken today will likely set the pace for fintechs over the mid to long term. The present conditions therefore call for a careful evaluation and focused implementation.

Lindsay Anan is an alumna of McKinsey’s San Francisco office, where Alexis Krivkovich and Marie-Claude Nadeau are senior partners; Diego Castellanos Isaza is a consultant in the London office, where Fernando Figueiredo is a partner and Tunde Olanrewaju is a senior partner; Max Flötotto is a senior partner in the Munich office; André Jerenz is a partner in the Hamburg office; and Zaccaria Orlando and Alessia Vassallo are associate partners in the Milan office.

The authors wish to thank Sonia Barquin, François Dorléans, Carolyne Gathinji, Eitan Gold, Carolina Gracia, Sheinal Jayantilal, Uzayr Jeenah, Yelda Kayik, Mayowa Kuyoro, Marina Mansur, Farid Minnikhanov, Bharath Sattanathan, Rinki Singhvi, and Katharine Watson for their contributions to this report.

This report was edited by Arshiya Khullar, an editor in the Gurugram office.

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