Investment Banking Industry

Michael DeMauro

Arthur Park

BUS 497A

Professor Degravel

December 09, 2022

 Table of Contents

I. Introduction

A. Strategic Tools

B. Industry Life Cycle

II. Porter's Five Forces

A. Rivalry Between Current Competitors

B. Threat of New Entrants

C. Threat of Substitutes

D. Bargaining Power of Consumer

E. Bargaining Power of Sellers

III. SWOT Analysis

A. Strengthens and Weaknesses

B. Opportunities and Threats

IV. PESTLE Analysis

V. Industry Attractiveness

A. Key Success Factors

B. Ongoing Future Development

VI. Conclusion

VII. References

VIII. Appendices
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Introduction

Between a company intending to sell new securities and potential investors, investment

banks operate as brokers. Therefore, a firm engages an investment bank when it wishes to issue

new bonds, say to raise money to repay an earlier bond or to pay for an acquisition or new

project. To price, underwrite, and ultimately sell the new bonds, the investment bank assesses the

worth and risk of the company. Through an initial public offering (IPO) or any subsequent

secondary (as opposed to initial) public offering, banks may also underwrite other assets (such as

stocks). When an investment bank underwrites a stock or bond issue, it also makes sure that

institutional investors, mainly mutual funds, or pension funds, commit to buying the issue of

stocks or bonds before it ever enters the market. Investment banks act as go-betweens for the

investing public and securities issuers in this regard. Several investment banks will negotiate a

price with the issuing business to purchase the new issuance of securities, and then market the

securities to investors. The method for doing this is known as a road show, and it involves

pitching investors on the foundations of the company. The investment banks organize a syndicate

(a group of banks) and resell the issue to its clientele, primarily institutional investors, and the

investing public, while the company walks away with this fresh source of funding. By

purchasing and selling the assets on their own behalf and earning money from the difference

between the bid and ask prices, investment banks can help facilitate this trading of securities.

Making a market in security is what is referred to as in the "Sales & Trading" department. For

gathering, evaluating, and publishing statistical data pertaining to the American corporate

economy, Federal statistics agencies classify commercial establishments according to the North

American Industry Classification System (NAICS). This code for the investment bank industry is

5231.
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 Strategic tools

The Life Cycle Model will be used to describe the sector. A company's or an industry's

life cycle stage can be determined using the model. Development, growth, maturity, stakeout,

and decline are the model's five stages. In the development stage, where there is little

competition, a small number of participants, and differentiated products, industries are still

merely experimenting. The expansion stage follows the development stage, and this is the time

where we often observe that the industry is economically useful and where there is less

competition. Three strategic methods will be applied to this analysis to determine the industry's

attractiveness and the potential difficulties a new firm might encounter. The Porter's Five Forces

Model will be used to assess and identify the industry's profitability potential based on market

attractiveness. To effectively capitalize on strengths and opportunities, a SWOT analysis will be

carried out to identify threats and weaknesses. Therefore, this model is self-explanatory; it

merely aids in identifying the positive aspects of the sector and aids in our analysis of its

difficulties. The decision to employ this technology was made since doing so will enable a more

thorough analysis of the sector. I'll learn all kinds of things, both good and terrible. The

industry's legal and political aspects as well as its overall effects on society and the environment

will be broken down by a PESTEL analysis. The information needed to reach an understanding

regarding the attractiveness of the investment bank industry will be provided by these tools taken

together. We found these topics to be interesting and important to get the full understanding of

investment banking.

● Industry Life Cycle

The investment banks that we would like to mainly discuss are Goldman Sachs,

JPMorgan Chase, Ernst Young, Deloitte, and KPMG. Companies now need to focus heavily on
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the product's promotion. This is due to the lack of current brand loyalty or affinity. The main

objective is to increase consumer awareness of the service and its advantages. In terms of

pricing, businesses can either set a high price at first and gradually lower it as their subscriber

base grows. Alternately, businesses may start out cheaply to gain market share, then gradually

raise prices to recoup their initial investment. They may surge when financial products take off.

The rate of acceleration may resemble a start up in the digital economy. The services are

currently in the growing stage as their popularity increases with time. The sales figures rise

because of marketing initiatives or terms. As unit volumes rise, economies of scale start to take

place. The services are becoming more accessible, but as copycat services or competitor

promotions emerge, competition is also growing. Consumers recognize the advantages of your

offerings at this level of development; therefore, you do not need to underprice the product to

make it appealing. Wall Street analysts anticipate a decline of 22.9% in 2022 earnings for five of

the largest U.S. investment banks, including Goldman Sachs (GS. N), Morgan Stanley (MS.N),

JPMorgan, Citigroup (C.N), and Bank of America (BAC.N). This is according to data gathered

by Refinitiv, which also shows expectations for a 27.4% decline for the second quarter. In July,

U.S. banks disclose their earnings. The mature stage of the banking industry is about maintaining

order. With so many sophisticated analytics at our disposal, identifying underperforming client

categories is simple. In contrast to other industries, banks can turn off specific segments at this

time. The reduction of mobile banking apps is due to technical developments. But because

banking has a relatively low churn rate overall, there may be room to consider the long term

when making some design choices for banking apps. A growth in mobile banking is the cause of

the branch network's demise, which has been the foundation of retail banking for decades.

According to a recent study, mobile banking usage increased by 34% during a five-month period
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in the US in 2020, while branch coverage decreased by 12%. Substantial amounts of time can be

spent by mobile banking products in each of the four stages of the product life cycle. The

demand for apps with alternative solutions, such as always-on, integrated account access, may be

clearly seen in market trends. It is up to banks to gather this market information and make the

greatest use of it given the stage in which their products are presently located.

Porter's Five Forces

An industry's competitiveness and attractiveness are assessed using the Porter's Five

Forces Model. The model's creator, Michael Porter, asserted that a sector's potential for profit is

low if its competitive pressures are strong. Each force has the potential to affect profitability

positively or negatively and can have an impact on how fiercely competitors compete. The chart

or figure given will be included into the appendix. The five forces in the model are supplier

power, buyer power, threat of new entry, and threat of substitution. Competitive rivalry, which is

influenced greatly by the first four forces, is the final force. This tool is frequently used to

examine any business because it helps lay out all the market data, which is why I chose it.

● Rivalry Between Current Competitors

Rivals Goldman Sachs Group Inc. and JPMorgan Chase & Co. are advising their bankers

to meet brash corporate clients as soon as possible, before others do. These companies have

already returned their personnel to the office faster than the rest of Wall Street. One example I

would like to focus on which brings out the same aspects in most of the other investment banks

is JPMorgan Chase. Along with the three other main money center banks in the United States,

the corporation also must contend with threats from foreign banks like HSBC and Barclays. We

keep in mind that JPMorgan faces hard competition from domestic rivals as well as major
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international banks on the global scale. The importance of internal industry competitiveness is

increased by the comparatively low switching costs between banks, particularly in the retail and

commercial banking sectors. Closing an account at one bank and opening a new one at another

doesn't cost much in most circumstances, it doesn't cost anything at all. The following categories

can be used to group Goldman Sachs' rivals. Like the competitors previously mentioned, there

are United States based players who operate internationally. Additionally, there are businesses

that are headquartered in other nations that operate on a global scale, such as the German-based

Deutsche Bank. Most of these businesses share a similar value offer, and they all enjoy strong

brand equity. In other circumstances, switching costs are also minimal, which makes it simple

for clients to switch to a competitor. Due to this, the competition is tougher, but Goldman Sachs

has enough brand equity that it can easily win. Most banks deal and follow the same completion

processes in the industry. They all distinguish themselves based on experience or history; they

work around low edges to offer low cost to the customers convenience and acquire smaller banks

to remove potential competition in the marketplace.

● Threats of New Entrants

New competitors from the banking sector pose only a little danger. It is difficult for a

new bank to enter the market and attempt to compete with JPMorgan on an equal footing. A new

rival would encounter a few substantial challenges, including the enormous money needed, the

time needed to build a strong brand name, and the government regulations that apply to the

running of banks. The visible components of a brand, such as its color, design, and logo, serve to

distinguish it from competitors in the minds of consumers. Brand image is different from brand

identity. Potential entrants may not constitute much of a danger, but JPMorgan still needs to

prepare for some competition from internationally recognized institutions. For instance, the
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business must keep a watch out for significant banks in emerging markets like China that will

eventually engage in international competition. According to the FDIC1, an average of 214 new

banks opened between 1977 and 2002, exceeding the regulatory and capital requirements of

opening a new bank. The threat of new entrants should be very significant given the number of

new banks that enter the market each year. Nevertheless, the estimated number of banks declines

by about 252 each year because of mergers and bank failures. One of main causes of this is trust,

which is possibly the biggest barrier to entrance for the banking sector. It is challenging for new

banks to get off the ground because the industry deals with other people's money and financial

information.·

● Threat of Substitutes

In the banking industry, the threat of replacement products has risen as businesses outside

the sectors have started to provide specialized financial services that were previously only

available from banks. Online peer-to-peer lenders (P2P) like Prosper.com or LendingClub.com,

PayPal and Apple Pay, prepaid debit cards, and other choices cost JPMorgan and other major

banks a lot of money. How then does JPMorgan stay current? One of the bank's projects is a

section that specializes in financing small businesses. Additionally, it launched its own digital

wallet service, Chase Pay. It is challenging for any bank to progress since technology is

advancing and individuals can access more financial features faster and easier. Advertisements

and promos provide exclusive discounts that, when shared with others, can raise your net worth.

Inviting individuals to join programs that enable you to receive free services or money in some

other manner is another way that it has become more competitive. Financial start-ups have

created technology that may someday replace the relationship-based work that investment banks
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currently conduct. More individuals are likely to invest in Spotify, Twitter, or Facebook rather

than making money afterwards by investing in banks.

● Bargaining Powers of Consumer and Seller

In the investment banking industry, the majority of customers are high net worth

individuals and corporations who work with huge amounts of money at once. Due to the amount

of money that is being moved the customer has a lot of bargaining power compared to the bank.

The banks must accommodate the customers' needs and offer the best price that will satisfy the

customer, but also make some profits to the company. In the end, the customer will pick to work

with the bank who gave them the best deal. Then, it will be a loss for the bank who could have

possibly done better. These banks cannot risk losing these customers especially if the bank is a

small one. When you are comparing to the smaller investors, the small investors would not have

that much bargaining power. With the case of suppliers, they are pretty much similar to the

customers. The depositors are the source of capital for the firm. So, there will be less capital for

the firm if one of the investors decides to leave.

SWOT Analysis

A SWOT analysis' main goal is to assist enterprises in fully understanding all the

variables that go into choosing a course of action. Before you decide to take any corporate

action, whether you are investigating new projects, updating internal policies, assessing

possibilities to pivot, or changing a plan midway through its implementation, do a SWOT

analysis. With a focus on utilizing strengths and chances to overcome weaknesses and threats,

use your SWOT analysis to find suggestions and methods.

● Strength and Weaknesses

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A SWOT analysis is used to identify the strengths, weaknesses, opportunities, and the

threats of the company. Then, the company uses the results to identify a path that the company

should take. Some strengths in the investment banking industry are helping or giving advice to

clients depending on the service that is requested by the client, handling wealthy clients, and

researching for the client to increase their wealth. Due to the current economic situation, many

people have started to invest due to the inflation. Since, the cost of everyday products are on the

rise. Compared to commercial banks, they can only help clients save money by opening checking

and savings accounts. They can also help clients increase their money by opening them a

certified deposit account, however, the returns on these accounts are very small due to the rate.

Unfortunately, working in the investment banking industry comes with a possibility of a great

amount of loss. Any mistakes from the research of any investments will lead to a huge sum of

loss to the client and to the bank. In this industry, any mistakes that cause a substantial amount of

loss or any non-legal issues created by the banker will affect the banker’s reputation in the

industry for life.

● Opportunities and Threats

When it comes to working in any industry there will always be threats and opportunities

in the investment banking industry. Some of the opportunities are new service, returning of

current clients, the creation of a new market like the cryptocurrency market, interest rates, and

increasing income. In the investment banking industry, entering into the crypto-market was a

huge deal. This allowed the banks to make more money by investing into the new market and

creating new portfolios for new and old clients. After bitcoin became hugely popular, the market

started to get bigger due to the release of other coins. Eventually, non-fungible tokens or NFTs

became huge in the market. If interest rates are low then, it is an opportunity for investment
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banks to have clients invest more into the market. If income increased, people would have more

money to invest into the market and have a higher return on investment.

There are also threats to every business or industry. In the investment banking industry,

the threats are inflation, current economic conditions, a pandemic, and a lot of competition.

When inflation is high, people will not invest as much into the stock market. If inflation is low,

people will invest more into the market. Due to the current economic conditions, the economy

has affected the stock market. My friend who works at an investment bank has confirmed to me

that there is less work to do now compared to this past summer. A pandemic will also affect the

economy negatively. The effect will cause less people to invest in the market due to the price of

stocks falling. The longer the pandemic lasts, the more time it will take for the economy to

recover. Just like any other industry, there will always be a lot of competition in the investment

banking industry.

Pestle Analysis

Another useful analysis that companies may use is the PESTLE analysis. Which is used

to track the environment they are working in or used before a launch of a new service or product.

The letters stand for politics, economic, social, technology, legal, and environment. Politics will

affect everything in the country whether it is a small business to an industry like investment

banking. There are laws that affect the investment banking industry, however, they may either

harm or keep the industry in check. We need these laws in order for the country to not go into a

depression or to prevent a certain entity from controlling the whole market. When everyone is

making investments it stimulates the economy and keeps it going. When money is being

circulated in the economy it helps everyone in the country. When there is a large amount of

money circulating in the economy, it makes items around us cheaper to afford. Technology is
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always advancing in every industry. In the investment banking industry, advancements make

communicating with clients easier and helps the banker do more research faster. By reaching the

clients faster it may help the client do more good for the environment. If the client is in a non-

profit organization that, for example, plants trees or helps fund tech companies building new

technology to prevent carbon emissions.

Industry Attractiveness

● Key Success Factors

From our research online, the investment banking industry has a few key success factors.

Which are trust, the ability to price risk, and efficiency. In this industry, trust is the most

important factor because of the amount of money that is being invested. If the company decides

to misuse their trust to one another, once the clients find out about it. The clients will take legal

actions against the company. Eventually, the company’s reputation will go down the drain and

eventually go into bankruptcy. The bankers must have the ability to price risk by using the data

given in order to manage risk for the company and the client. That way the banks can attract new

clients and keep the existing clients.

● Ongoing development

Since the start of the pandemic, covid had major effects on the industry and the market.

The pandemic has made working remotely mandatory at first, but now companies have been

asking their workers to come back in. It also forced us to have rapid technological advancements,

whether it is funding to make the covid vaccine or the creation of Zoom to help connect people

to one another easier. This would help clients and the bankers connect to each other to figure out

what would be the best step in order for the client to achieve their goals in investing. Every

business has been impacted by technological progress, and investment banking organizations are
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no different. In order to redesign their operations and business models, major financial

institutions have employed top-tier technology teams who are dedicated to developing and

implementing innovative technological solutions. Technology is now pervasive in the financial

industry, with capital market corporations traditionally being early adopters of digital

innovations. The relatively cheap cost of creating technology platforms and improvements in

computer power allow investment banks to take advantage of a number of new disruptive

technologies to boost productivity and profitability.And for good reason a company needs to

embrace technology if it wants to succeed in such a cutthroat sector. Since there are constant

changes in the environment, businesses will have to adapt to a new way of conducting their

businesses.

Conclusion

In any industry, between the consumer and the seller, there will always be a side who

would have more power than the other depending on the situation. In the case of investment

banking, there will always be strengths and weaknesses that the company can control to achieve

their goals. Additionally, there will always be opportunities and challenges from threats that will

always follow. The investment banking industry will help any business or company to achieve

their financial goals, whether it is increasing wealth or saving money. We learned more on how

banks may also support other assets through an initial public offering (IPO) or any later

secondary (as opposed to original) public offering (such as stocks). Investing will help the

economy, by making some people more money. They can spend it on necessary items, since the

prices for products are rising. Based on market attractiveness, the Porter's Five Forces Model

will be utilized to evaluate and pinpoint the industry's profitability potential. A SWOT analysis

will be done to determine threats and vulnerabilities in order to successfully capitalize on

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strengths and opportunities. The investment banking industry is run by trust since large amounts

of money are on the line. In the end, there will always be a future in the industry.

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Appendix

1. Five Forces Model