The Long-Term Future of Banking and Consulting: Thought Experiment based on History

Hi WSO,

"People tend to overestimate the change that'll happen in the next two years, and underestimate the change in the next ten." - usually attributed to Bill Gates.

In that spirit, I thought we could give this a shot, focused more on the ten+ rather than the two. I'm going to imagine a possible future, the goal being the more discussion the merrier; this is not something that we can expect to achieve consensus on.

Tl;Dr Executive Summary The stories of banking's demise are greatly exaggerated. But banking will evolve into a longer term equilibrium that looks kind of like another financial service giant: insurance.

Conversely, the two sides of consulting - the elite strategy houses and the large professional services firm - will converge the way IB and commercial banking did, with similar challenges (mutatis mutandis for the times).

Purposely avoiding getting into large corporates, but see the long term future of Tech going either the direction of advertising (its main source of revenue, and once upon a time an employment bellwether) or Big Oil (with whom it shares systemic importance and influence).

I. General premises and approach + History repeats itself vs this time it's different: definitely leaning towards the former. + "God writes straight with crooked lines." - Spanish proverb. = finding parallels with history, but adapted to circumstances. I've been around the block long enough to have some historical perspective.

II. Sector and Firm landscape Since at least 1998 (legal decision resulting in basic repeal Glass-Steagall) is broadly composed of advising and financing corporates; intermediate risk in financial markets; transforming deposits into loans. Previously, the act of advising corporates and institutional investors was largely done separately from taking consumer and corporate deposits, and transforming them into mortgages and revolving credit facilities.

Goldman Sachs, Morgan Stanley, Lehman Brothers, Salomon Brothers, Smith Barney, Merrill Lynch, Bear Sterns, Donaldson Lufkin and Jenrette, Kidder Peabody, etc - these were the advisory and markets firms. Some of them are still alive today; others were acquired in the 2008 crisis by large banks; others, you may not remember, but were the basis for the US IB arms of today's bulge brackets. Effectively, the ones that aren't around anymore became the IBD, ECM, DCM, Lev Fin and S&T businesses for Bank of America, Barclays, Citigroup, Credit Suisse, Deutsche Bank, JPMorgan Chase, and UBS.

In short, I see something similar happening in the long term for consulting and the large professional services/accounting firms. The strategy side of consulting is already moving into operations and implementation as a natural next step in their business; the large accounting firms - with a stronghold in implementation - are building out strategy and operations practices.

McKinsey, BCG and Bain are the Goldman and Morgan Stanley of their industry; Accenture and the Big 4 are the parallel for the big commercial banks. They've been snapping up the Lehman, Merrill, and DLJ's of the world - Monitor, Booz & Co, Parthenon etc. Deloitte's acquisition of troubled but prestigious Monitor looks a lot like JP Morgan's buyout of Bear Sterns, Barclay's buyout of Lehman and BofA's buyout of Merrill - all distressed. AT Kearney, Oliver Wyman and a few others still hold their ground, but there's continued talk of another large acquisition. Even Bain isn't immune from it, much like even Morgan Stanley hasn't been.

This is the parallel for consulting following banking's footsteps. So what's next for banking? I suggest insurance as the next step. Insurance is essentially market-level risk. It sells policies to customers (collecting puts) - most akin to the commercial banking, deposit-taking, loan-making side of banking. It prices those puts and figures out appropriate risk pricing and hedge strategies via its actuarial arms - and with technology and quant playing out in S&T, that is where I see the parallel for banks; lots of smart people using numbers and technology, but limited growth and leadership perspectives. The institutional front office in insurance is the investment management side, which can still attract high level talent and offer attractive careers, but it's a smaller industry than front office IBD is today.

III. Opportunities and Risks

The risk story for banking doesn't require much elaboration based on the above - it will look like insurance. But will consulting develop risk profiles that look like banking's? IBD isn't a high-risk business; you collect advisory fees; it's no longer the biggest part of banking in terms of revenue and headcount, but it remains so in terms of human capital and prestige. I see the strategy side of a consolidated consulting industry looking like this. Deposits and lending are potentially very risky if there's a major fuck-up, but also very regulated. Kind of like the accounting/auditing side of professional services. Where banks often blew up (lending disasters aside) was in Sales & Trading risk. I would argue that with the advent of Big Data and Analytics, consulting firms could eventually rack up information-related risk much in the same way that all things cyber and tech now carry that risk. Privacy breaches, lawsuits, etc.

This is just one possible future, a thought experiment using finance history and a few basic concepts to drive cohesive. What does WSO think?