Is Fintech killing the I-bank?

I-banks are seeing their historical profit centers destroyed by technology and regulations. Core processes are being automated or commoditized. From IPOs, to M&A, to research and trading, I-banks are getting smaller, and scrambling to keep up with innovations.

For instance, in 2006, I-banks were at the top of the financial sector. With heavy growth and ROI driven largely by the trading of complex financial instruments, Lehman Brothers, Bear Sterns, Goldman Sachs achieved record profits.

As we know, over the next couple of years, everything fell apart. This gave rise to the non-traditional and innovative methods of banking. For instance, Spotify’s $1B DPO (Direct Public Offering) and Filecoin’s $257M ICO (Initial Coin Offering), and other alternative exchanges like IEX (Investor’s Exchange) and LTSE (Long Term Stock Exchange) which have already received approval as registered stock exchanges. Moreover, because of the abundance of cash being offered by venture capitalists and sovereign wealth funds, more and more startups are opting to stay private indefinitely.

As a result, all these factors contributed to a 43% reduction in revenue from underwriting IPOs in 2017 since 2000. Once where IPOs accounted for 25% of I-bank revenues, now it has dropped down to 15%. Public offerings from US tech companies dropped from 33 a year to 19, between 2014 and 2018. More and more companies are seeking alternative solutions to IPO or choosing not to go public at all, partly because of the heavy fee that I-banks charge for underwriting IPOs.

On the M&A side, there’s a surge in deals y-o-y that take place without outside financial advisors like I-banks. If we take example of big companies, Apple’s acquisition of Beats, Comcast’s acquisition of DreamWorks, Facebook’s acquisition of WhatsApp, and Oracle’s acquisition of Micros Systems were all done without an I-bank’s involvement – all four deals being worth more than $31B. Now there’s also a “Tinder for M&A” – Axial Networks, offering M&A-as-a-Service or call it as a “DIY M&A”. Since their inception in 2010, by 2018 they had facilitated $25B worth of deals.

Now comes the boutique banks like Qatalyst Partners and Centerview Partners – finished just behind Goldman Sachs, Morgan Stanley and JP Morgan in FT’s 2017 fee rankings. Leaving aside the topic of fixed income deals for later - which have been declining since a decade now and more I-banks are closing their fixed income divisions.

On the other hand, Fintechs are also killing the I-bank’s lending business by offering low-interest, collateral-free alternative lending solutions.

So, a major question up for discussion is – WILL I-banks be able to grow back to the size they were or will fintechs and other tech companies eat away chunks of I-bank businesses over the coming years?