Predicting finance industry trends for 2021 will be a task like no other in history. The COVID-19 pandemic has changed the face of every industry across the globe in one way or another. However, as stated by PWC, financial services isn’t just another industry and will play a crucial role in the commercial ecosystem and in the reboot of the economy. After all, the industry is the “keeper and allocator of capital, the enabler of savings, investment and commerce, and the transferer of risk”.
While coronavirus has impacted everywhere, its impact has been felt differently by each country, industry, business and individual so let’s take a closer look at the current situation in key global markets:
According to Fitch Ratings, the sector outlook for U.S. banks has moved from negative to stable for 2021. While it takes into account the risks of second and third wave infections as well as renewed lockdowns, there is much optimism around COVID-19 vaccinations. The banks themselves on the other hand have a negative outlook with approximately 60% holding this view. The financial services industry will need to contend with lower for longer interest rates and lower loan demand which will put pressure on top line revenues. However, all going well, the latter half of 2021 will see a general pick up in economic growth and result in modest loan growth, along with positive revenues and earnings performance.
With newly-elected President Biden taking the reins for the next four years, his financial policy is likely to be guided by the nature of the country’s economic recovery. If financial institutions continue to maintain their capital levels and support hard-hit customers, it’s unlikely that action will be taken to unwind reforms or institute significant new capital or liquidity requirements. It’s anticipated that the focus will be on incrementally strengthening consumer protection as well as environmental, social and governance (ESG) standards. Climate change risks will also be high on the agenda and most voters will be focused on issues around the pandemic, healthcare, climate change and racial injustice.
The Canadian financial services industry has proven its strength over many years, most notably in its response to the 2008 financial crisis. Collaborating closely with the government, a swift and strong response to the COVID-19 pandemic in 2020 has ensured a smooth and cohesive response to the economic fallout of the crisis in Canada.
However as government assistance and loan forbearance programs expire, it is expected that higher impairments will occur well into 2021. In addition, stringent underwriting standards which were mandated in 2018 will largely offset a correction in the market particularly within urban markets. With low interest rates into the foreseeable future, smaller, less diversified institutions are likely to take higher risks in business mix, loan underwriting and investing. However, it’s also creating favorable conditions for smaller players to consolidate in order to increase diversification and improve technological investment capacity. Larger Canadain banks may also look to acquire US institutions.
In October 2019, the IMF forecast a 5.9% GDP growth in 2021. However, its latest forecast has downgraded expectations to 4.5% - illustrating the severe impact of the pandemic on the UK economy.
COVID-19 has also expanded the percentage of vulnerable customers in the UK and this will test both the financial services industry and the government. FCA survey data shows that there are approximately 12 million people in the UK with low financial resilience and who may struggle with bills or loan repayments.
The finance services industry in the UK is also still in a Brexit transition period with a focus on meeting regulatory requirements and transition plans. The transition will also require continued efforts into improving efficiencies - Brexit projects have in many cases introduced (or increased) operational, capital or liquidity inefficiencies through duplication: Deloitte. Data protection is another issue brought about by Brexit and in general the future is still relatively uncertain with many possible outcomes still on the table.
In the months before COVID-19 hit the country, Australia also weathered catastrophic bushfires which destroyed communities and infrastructure. However, the country ranked 8th in the world in terms of handling the pandemic, and is now focused on recovering from the huge events of 2020. The government has provided over AU$507 billion in funding through schemes such as JobKeeper which is due to wind-up at the end of quarter one in 2021. Other strategies include the extension of the First Home Loan Deposit Scheme and a number of superannuation reforms under the Your Future, Your Super banner.
The financial services sector is however still recovering from the fallout of the Hayne Royal Commission which has resulted in a big hit to the reputation of the industry. We’re also seeing the rollout of a number of regulatory changes. These changes involve further education requirements and increased compliance administration which has been viewed as a large burden to carry, especially for smaller operators.
While all global markets have slightly different influences, regulatory environments and outlooks, there are some common themes that are presenting as trends across the board as we move into 2021:
Digital transformation in the financial services industry was always on the cards and in fact, the industry would not have fared well during the height of the pandemic if digital services hadn’t already been in play. As with most other industries, the pandemic has accelerated digital adoption by both businesses and consumers, and in the process, has highlighted some of the areas where technology was lacking. Companies need to provide a simple, user-friendly, digital-first experience for customers. And customers want similar levels of service no matter which channel or device they use.
In Canada, after spending over $100 billion on technology since 2008 and urging customers to use their latest innovations, banks are finally starting to see record shifts of customers adopting their digital platforms. We’ve also seen the adoption of conversational AI to help service customers especially via phone when branches and offices were closed.
NeoBanks enjoyed a strong growth up until 2020 but it may well be set to stall with low customer profit margins and reduced revenue. Meanwhile the big banks are starting to close the digital gap and we’re seeing the banks and other large financial institutions collaborating with Fintech companies in order to meet customer demands for fast, efficient and digital services. Meanwhile, companies such as Apple, Google and Amazon are also making a grab for market share - on a global scale.
From banks and financial advisors to insurance companies and mortgage brokers, entire economies will be relying on the financial services industry to provide the knowledge, tools and access to vital funds that are needed to kickstart recovery.
Charles Randall, Chair of the FCA and PSR, saw the pandemic as an opportunity “to reshape our financial system to make it fit for the recovery and provide more sustainable investment and credit in the years beyond”. Collaborating with government agencies has, and will continue to be vital in the process of recovery with a focus on adopting practices and technologies that will better suit an uncertain future. Continued consideration will need to be given to those experiencing financial hardship and to the natural environment.
When you consider that up to 40% of customers would switch financial institutions for more personalized service, it’s not hard to imagine the role that data will play in the future. More importantly it’s the analysis and application of this data that will continue to change the way financial services and products are delivered.
And with most services now operating in the cloud, data sharing across organizations and with third parties is becoming increasingly seamless - helping to streamline operations and improve levels of customer service. However with increased data sharing comes increased risk of data breaches and cybercrime and as a result, cybersecurity will become a non-negotiable priority for all organizations.
Data analytics will allow financial institutions to create a complete view of a person’s finances leading to better personalization of products and services as well as being able to incorporate aspects such as gig economy earnings which have previously been put in the ‘too hard basket’.
With personalization comes a raft of opportunities to develop innovative products and services to suit individual needs. For instance, insurance agencies can match policies based on data gained from an individual’s wearable electronic device. And products or services can be bundled together to form unique packages.
The current economic and environmental climate is also dictating a change in offering through the need for such things as financial hardship and business interruption clauses. Financial service providers will also need to be able to work with clients on an individual basis so as to provide the right advice and services to suit their needs and assist them in navigating potentially difficult financial times. Risks related to climate change catastrophes such as the Australian bushfires will also require ongoing assessment and adaptation.
With an uncertain, ever changing future ahead, financial service providers will need to be agile and efficient. From digital solutions to human resourcing, the future will be about implementing the best options to ensure efficient product delivery and customer service. Customers will become increasingly reliant on being able to contact their financial services provider when and where they need to and will require constant flexibility and changes.
Regulation will also continue to add extra layers of work to already cumbersome administrative processes, so cost efficiency will be vital to business success. Many organizations are already looking to offshore markets for cost effective, highly trained staffing solutions. From administration through to software development, offshore outsourcing is proving to be an effective way to improve efficiencies, meet workload requirements and improve customer service levels.
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