Financial Services
Overview
One Minute Read
Financial Services represents over 20% of the global economy. Technological innovation, regulatory reforms and the increasing digitalisation of people’s daily lives are reshaping the financial services landscape. The COVID-19 pandemic has accelerated this with a cross-generational shift to digital. Rising interest rates, volatile markets and economic downturn create opportunties and risks as well as underline the need to accelerate transformation. The financial servcies industry is also a critical enabler for tackling climate change and sustainability. In response, the industry is transforming towards to a digital financial ecosystem.
Industry Description
The global financial services market was valued at about $25.6 trillion in 2022 [1], and constitutes at least 20% of the global economy [2].
Businesses and institutions within financial services provide the infrastructure, products and professional services that fuel the financial system. This involves the investment, lending, and management of money and assets.
The industry segments within financial services include
- Retail Banking (which includes mutuals/building societies)
- Corporare or Commercial Banking
- Asset Management (including hedge funds)
- Wealth Management
- Capital Markets and Investment Banks (this includes financial market infrastructure such as exchanges)
- Insurance, and
- Payment providers.
Banks play a central part in the financial services system. Over the years banks have developed from being licensed, by the national government or central bank, to receive deposits and make loans, into financial services providers offering wealth management, payment services, investment banking, capital markets and insurance. Some banks seek to address all markets through being universal, whereas some choose to specialise in a particular area e.g. private banking.
As the financial industry has digitised the scope of players has also evolved to include BigTech and FinTech companies. This will continue as the industry evolves into a truly digital financial services ecosystem.
Sectors
Banking
Segments: Retail Banking, Corporate Banking & Wealth Management
Capital Markets
Segments: Asset Management, Investment Banking & Market Infrastructure
Insurance
Segments: Brokers, Insurers & Reinsurance
Payments
Segments: Payment Networks, Payment Service Providers & Transaction Banking
Demographics
Diverging global populations
The world’s population is projected to grow from 7.7 billion in 2019 to 9.7 billion in 2050 (26% growth) [1]. The make-up of this population is changing fast; we are getting older, we are getting richer, we are migrating to cities and our patterns of work are changing.
Financial Services will need to expand its offering to meet the needs of an expanding global middle class with growing assets. It will also need to support the financial and healthcare costs of an older population. The shift in working patterns (e.g. gig economy) will also drive a need for more flexible financial products.
Globalisation
Increasing multipolar world
Economic power is shifting east. However, increasing geopolitical tensions are reversing globalisation. The emergence of a more diverse mixture of major economic powers may complicate trade, security and global governance. The pandemic and the Russian invasion of Ukraine have created more challenges.
Financial Servcies will need to support the growing regions and manage the growing complexity (and possibly declining trust) of global trade. Regulation is likely to be even more fragmented. Financial market centres may shift to the eastern economies or fragment between different political hegemonies.
Sustainability
Operating within planetary limits
The world is getting hotter; impacting climate, weather, sea levels, resources (e.g. water) and human health. There is also a growing need to conserve all world resources. Serious action needs to be taken before 2030 in order to keep global temperature rise below 1.5-2 degrees [1].
Many institutions have well developed internal sustainability programmes but they will come under increasing pressure to focus investments on sustainable projects both from a climate and resources perspective (ESG, sustainable or green financing). Extreme weather and rising sea levels will impact the risk associated with investments especially in property.
Technology
Accelerating technological change
The pace of technological change, particularly in information, communication, and bio-technologies, is unprecedented. Cycles of technology-induced societal and economic change have accelerated in past decades, and are likely to accelerate further (especially after COVID-19).
Digitisation is already disrupting Financial Services (e.g. mobile banking), this will continue driven by customer expectation, new entrants (e.g. BigTech and FinTechs) and regulation (e.g. Open Banking). COVID-19 has accelerated the shift to digital payments away from cash. Inflexible legacy technology is a major barrier to change for some traditional players. Cybersecurity, money laundering and financial fraud are major risks.
Transformation
The industry is transforming towards to a digital financial ecosystem where the primary channel is digital & mobile, money, assets and products are digital on digital platforms, artificial intelligence is used to complement human interactions and manage risk, and where finance is embedded seamlessly into everyday life and other industries.
According to the seventh annual global banking survey conducted by The Economist Intelligence Unit, 45% of respondents said their strategic response was to build a “true digital ecosystem [1].”
Digital Technology
Fundamentally banks will need to adopt three key technology approaches:
Digital/Mobile-first for the new normal digital experiences
Cloud-first for digital platforms, leveraging artificial intelligence, for operational efficiency and time-to-market gains
API-first for effective ecosystems collaboration.
Plus the need for continual focus on cybersecurity, data privacy and fraud.
Green Technology
Beyond the need to deliver sustainable finance solutions to their customers, most financial services companies are adopting plans for net-zero operations which have three main focus areas:
Datacentre centre transformation with migration to the cloud and green energy
Building sustainability including green energy and building management
Reducing travel through remote working and collaboration tools.