The Diversification Of The Investment Banking Industry
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JP Morgan’s expansion into the UK Consumer Banking Market
Hoping to expand into the UK Consumer banking market, JP Morgan is currently discussing with UK regulators the possibility of opening a digital bank, offering loans and personal saving services. However, it seems like the implications of Brexit are forcing international banks to relocate their EU trading and lending operations out of the UK. Citing Brexit as the main cause, German neobank N26 and Fidor Bank have left the UK, bolstering local competition while simultaneously degrading confidence in international digital banks.
JP Morgan will be entering a crowded marketplace, with several prominent neobanks with cutting-edge digital offerings have already established themselves in the UK market, including Starling, Monzo, and Revolut (which boast 1.25 million, 3.8 million, and 10 million customers, respectively). Stiff competition, low confidence in international digital banks, and their recently failed digital banking initiative in the US, Finn, would appear to bode poorly for the success of JP Morgan's forthcoming digital service. However, Finn’s main challenge was offering services similar to existing digital banking offerings provided by JP Morgan. Without no presence in the UK, at the time of writing, similarity to an existing offer won’t be an issue. Additionally, the bank could use the lessons learnt from its failed endeavour to form a stronger blueprint for its new digital offering.
In addition to the challenges posed by entering a densely populated market, the bank will need careful legal advice to comply with the FCA’s regulations, the UK’s complicated banking laws, GDPR, and preventative measures for cyber-security risks.
Further expansion into wealth management by Morgan Stanley
On the other side of the Atlantic, investment banking behemoth Morgan Stanley recently acquired discount broker ETrade for $13 billion. This acquisition allows the bank to expand it’s target audience from the very affluent to include the less-wealthy, but significantly younger members of society.
The customers Morgan Stanley will be acquiring will allow them to complement their base of delegators with more self-directed investors. Currently, their customer base comprises mainly of delegators - people who rely on financial advisors to make investment decisions for them. By including self-direct investors, which make up 48% of ETrade’s customer base will result in significant growth in the number of active traders.
Additionally, Morgan Stanley will inherit the USD$56 billion e-trade in deposits. This will enable them to fund loans for its wealthier clients. By utilising their own deposits, this creates cheaper credit lines, which could drive profitable growth in the long term. Moreover, the deposits will soften the blow of any economic downturn, providing stability to counterbalance the volatility of the investment banking and trading business.
However, with this deal being the largest acquisition attempt since the 2009 crisis, the US Federal Reserve and the Office of the Comptroller of the Currency will closely scrutinise the deal. M&A lawyers will now have to persuade regulators that the acquisition will not breach the relevant competition laws.
Future of the investment banking industry
As regulations imposed on the banking industry only grow increasingly stringent, and technology continues to develop at unprecedented rates, the future of investment banking looks bleak and could see investors moving their businesses to more passive forms of investment such as through private equity firms.
By Marcus Cheung