Each year we get further away from the events of early 2020, and it gets easier to forget just how uncertain that period was. As the COVID-19 pandemic swept the world and governments closed borders, people stayed at home and businesses closed their doors, there were genuine fears we were about to witness an unprecedented crash as each day brought new headlines about plunging stocks, job losses and economic turmoil.
Then something unexpected happened. The market rebounded, so much so that the Dow passed 30,000 for the first time in history by the end of the year1. There were many factors at play but what it showed is that the financial services industry has a remarkable ability to navigate periods of uncertainty and that is just as well because uncertainty has been a recurring theme for the sector across the past three years.
From insurance and investment management to banking and capital markets, financial services businesses around the world continue to face geopolitical and economic challenges that will make 2023 another uphill climb. Inflation is on the rise. The war in Ukraine rolls on. Supply chain disruptions remain a concern. There is continuing talk of regional and even global recessions.
Of course, such pressures are felt differently by each country, industry, business and individual so it is worth taking a closer look at the impact being felt in key global markets.
The United States
The fallout of the pandemic has inspired inflation levels in the U.S. not seen in 40 years, with the Federal Reserve tightening monetary policy at the quickest pace in three decades. By doing so, it has pushed interest rates higher and created an environment where many financial institutions are benefiting from boosted earning-asset yields and margins.
On the flipside, higher rates and elevated inflation typically sees the ‘R-word’ enter the conversation – recession – with the prospect of significantly higher loan losses for banks, slower growth for life insurers and a potential end to the US property industry’s longest run of calendar-year underwriting profitability in decades. Arguably the greatest impact of the changing environment is being felt by fintechs, with investors demanding discipline from growth-oriented companies and start-ups across the sector rushing to cut costs from labor expenses to advertising spends.
Canada
In recent weeks, the Bank of Montreal released an analysis that shows the Canadian economy is “bracing for impact”2 due to developments in the banking sector putting credit conditions on households and businesses. This is despite the nation recording strong figures for the early part of the year, with employment on the rise, home sales in February climbing the most in a year and real GDP jumping half a percent in January3.
The concerns arise because global financial stresses will likely have an impact on domestic businesses. While interest rates have not risen as much as their neighbors south of the border, Canadian households are more sensitive due to larger debts, shorter mortgage terms and a generation of younger mortgage holders who have never faced high borrowing costs. With discretionary spending likely to fall, analysts are tipping real GDP growth to decelerate.
The Canadian financial services industry has a hard-won reputation for successfully navigating tough economic times, with its response to the 2008 global financial crisis and 2020 COVID-19 pandemic two prime examples. With a relatively strong and stable banking sector, the signs are once again positive but the financial services sector should not be complacent. Experts are tipping potential challenges in the months ahead and businesses need to keep a close eye on credit conditions.
The UK
2022 was a tumultuous year for the UK financial services sector, with soaring prices dominating the economic narrative. In a difficult period though, headlined by a war in Europe, the nation was relatively resilient and the economy remained stronger for longer than many experts anticipated. Better still, central banks appear to be winning the inflation battle and there is now a belief that interest rates may not hit the peaks previously predicted.
The latest forecasts suggest a drop in UK real GDP between 0.4% and 1.4% during 20234, which would result in a shallow recession but not the devastating contractions felt during the global financial crisis and COVID-19 shutdowns of 2020. KPMG has gone as far as to say the likelihood of a recession has fallen but indicated structural issues such as skills shortages, slowing workforce participation and population aging will dominate the longer-term risks to the outlook5.
With 1.1 million people employed in the UK’s financial industry – increasing to more than 2.3 million if related professional services are included6 - the financial services sector is a major driver of the UK economy and its strength is critical for future prosperity. With a reputation for being somewhat slow to adapt to change compared to other countries, the UK financial world must be increasingly agile in 2023 when it comes to digital transformation, cybersecurity and customer experience.
Australia
The Australian financial services sector has entered the year with a sense of trepidation as the nation awaits the potential fallout of eight successive interest rate increases in 2022. While the repeated increases boosted the four major banks’ net interest margins, there is a genuine sense of concern about the impact on mortgagees who have overextended and may soon find themselves incapable of repaying their loans.
The Commonwealth Bank is forecasting gross domestic product growth to be 1.1% this calendar year, much lower than the past two years as the country was emerging from the impacts of the COVID-19 pandemic7. House prices are also continuing to weaken but there are also positive signs, with low levels of unemployment, low under-employment and high participation rates. Exports and non-mining investment is also holding strong and the devastating toll of recent labor shortages is expected to ease on the back of a return to net overseas migration.
Four financial service trends to watch for in 2023
Amid such pressures, it is no surprise that financial services businesses are keeping a close eye on the trends and developments set to shape the sector this year.
- Adoption of AI: once the purvey of forward-thinking organizations, artificial intelligence (AI) has now gone mainstream in financial services as large and small businesses alike search for efficiencies and cost benefits. According to Accenture, AI capabilities will lead to a 35% boost in productivity by 20358 and there are many examples of how it is being used to benefit the financial services sector. This includes powering Advanced Call Routing to ensure customers reach the best channels to solve their needs and the likes of machine learning helping improve loan underwriting and reduce financial risks.
- Increased focus on compliance: the past few years has seen various financial institutions earn the wrath of regulators for failing to adhere to key requirements, putting them and others on notice about the need to achieve compliance and manage risks across all touchpoints. This will be an even greater priority in 2023 as the rise of a more remote and digitally connected workforce means financial services providers are sharing more sensitive data and information across locations and platforms. Expect a growing investment in safety protocols such as multi-factor authentication and end-to-end encryption to protect not only customers but their reputations.
- Outsourcing opportunities – with the financial services sector bracing for potentially tough times in 2023, every dollar is going to count and there is no better way to save a few of those dollars than outsourcing. Partnering with offshore partners that are experts at finding highly qualified talent at cost savings of up to 70% is a tried and tested strategy for many organizations and more firms are likely to look outside their own four walls for such assistance this year. From accountants and claims analysts to underwriters and back-office support staff, countless roles can be outsourced and allow in-house staff to focus on more valuable and rewarding tasks.
- Customer service excellence: consumers are increasingly demanding more personalized service from their financial services providers but many traditional operations are hamstrung by spreading the personal data that can facilitate it across many and often old databases. Look for more firms to use machine learning to analyze and connect customer information, data and content, which in turn will allow customer service agents and channels to provide them with more relevant experiences. Banks, insurers and other financial services providers need to realize that modern customer service is not only about answering customer questions but presenting them with precise information and products that they may not even know they want or need.
Summary
The financial services sector has displayed incredible resilience and adaptability during the past few years. From the dark days of early 2000 to the current economic uncertainty hanging over the world, banks, insurers, investment firms and other industry players have overcome many hurdles to still be standing. The battle is not over though and while it will be interesting to see how the next few months plays out, there are positive signs for those businesses that continue to evolve.
Traditional banks are increasingly being forced to meet the needs of tech-savvy consumers who consider online banking not just one option but the only one. Discover the six top trends driving the financial services digital revolution.
