We can certainly identify mainly four strategies pursued; global investment banks, banks with focus on financial market services, wholesale banking and boutique advisory firms.
Global investment banks
Global investment banks have a global presence in all major financial centers around the world. In addition, they have expertise in the four areas of investment banking activities, they have the size to underwrite equity and debt offerings, the network to place these securities and the competences to provide advisory services for M&A’s and Restructurings ( HSBC, Citibank, etc. ).
Banks with strong focus on financial market services
On the other side, some banks have a stronger focus for financial market services; corporate lending or stock brokerage. These companies are not that active at advisory services.
Wholesale Banking is another type of banking strategy. Their services are intended for large institutional entities ( governments, pension funds, large corporates and banks ). Some of their services would be cash management, large loans and interbank lending.
Capital availability is an important barrier to entry this business model.
Boutique advisory firms
Boutique advisory firms have become a popular phenomenon in the banking industry over the last 10 to 15 years. These organizations are usually formed by an established banker or a group of bankers. It’s usually easier to set up and less capital demanding, from few to a few hundred employees who specialize in advisory services; mergers and acquisitions, restructurings and corporate consulting.
Relationship vs transaction – based banking
There is a big difference between relationship or transactional banking as both can be the strategies used by investment banks for interacting with clients.
A good analogy to describe transaction banking would be to compare it to a barber shop; very efficient in terms of costs and pricing, and manages to serve many people every day. The business is about a high volume of transactions. Each of these transactions has a moderate, but still healthy profit margin.
In order to make this business really profitable, many people should order their services every day. The number of chairs in the shop is fixed so the only variable to be optimized is the amount of time a barber spends per each haircut. The service offered would be basic in nature involving a limited degree of customization, assistance and recommendation.
Similarly, a transactional bank would also sell a standardized product with less customization. This isn’t really bad, as the bank aims to have a high client turnover and is able to minimize its risk from particular client accounts. In addition, the overall amount of fees will probably be higher due to more deals being closed.
From the client side, they usually prefer a transactional-based approach when they don’t need financial strategic advice and would prefer to keep costs at a minimum. Bankers invest less time when serving a given client account.
Relationship banking can be compared to a hair stylist salon; there is time for fewer people per day, but the ones who come in are truly special and frankly, these are premium clients, willing to pay more. They offer a superb service, would discuss current fashion trends and share opinions about trendy night clubs.
Relationship banking is about establishing contact with important company executives and cultivating that relationship throughout the years to win their business. However, before relationship banking pays off, there needs to be invested a lot of time upfront in arranging calls, meetings, dinners and offering valuable advice. There’s always a risk that the banker would invest a lot of time and ending up with no business from a particular relationship.
Boutique advisory firms serve clients in a relationship banking approach. The idea of relationship banking is more romantic and offers a banker the opportunity to prove their value to a client. Ultimately, these firms aim to stick with an executive for years, knowing their story and how their company works, understanding the industry and observe clients’ though process.
Relationship and transaction-based investment banking
We would like to recommend one book that is one of the best written novels about the industry providing an insight look from a former Goldman Sachs and Morgan Stanley banker, Jonathan A. Knee.
Jonathan describes his own journey starting as an associate and rising up the ranks. He provides a valuable historical overview allowing you to connect the dots and understand what led to the environment surrounding us today, as well as an easy to understand description of what investment bankers actually do.
The Accidental Investment Banker