Issue 06 / April 2015
The financial institutions industry – including banks, asset managers and financial technology companies – is currently faced with a paradigm shift caused by a number of key mega trends.
Infographic detailing the 6 mega trends redefining the financial institutions industry/media/attachments/RM06_Mega_trends_infographic.pdf
Institutions are focusing ever more on regulatory capital requirements, while digitalisation and technological advances are challenging the way traditional players interact with clients. Meanwhile, new market participants are inducing changes in investment and capital sources and returns, while demographic and behavioural changes are creating a new generation of customers with different expectations of financial institutions. Traditional business operating models are being challenged more by increasing customer and product-offering segmentation.
The complex needs of financial institutions will demand increasingly sophisticated leadership in the future. So in early 2015 Willis undertook research into the evolution of the financial industry’s risk landscape over the next ten years – founded on a quantitative survey of 150 C-suite individuals within the financial institutions space globally and in-depth interviews with senior figures from across the sector. The full report is available on willis.com. We present a snapshot of the key findings here.
Since the financial crisis, regulatory pressures have increased the cost of capital, prompted banks to divest themselves of 'risky' or capital intensive businesses or departments, shaped bank attitude towards risk and redrawn the boundary between retail and wholesale banking. Banks have withdrawn from lending to certain constituents, such as SMEs and infrastructure, whilst investing and recruiting heavily in compliance to meet new regulatory requirements.
Amidst this regulatory pressure, non-banking financial institutions, especially FinTech firms that are not subject to the same financial pressures, are offering competing services to bank clients, establishing specific funds or investing in new challengers.
Technological advancement is changing financial institutions and the ways people interact. It has created opportunities for new challengers to disrupt traditional business models and penetrate new markets. The ubiquity of technology across the globe, such as the World Wide Web, mobile phones and Apps, has created FinTech companies who offer lower cost services for traditional services, such as e-payments and online trading.
Technology is changing the way that customers interact with financial institutions. Although investment in IT infrastructure has increased massively over the last few years, many traditional banks remain behind the curve. Social media companies such as Facebook, Twitter and Google have a huge user base and are moving into the financial sector, bringing new sources of capital and investment.
Regulatory capital requirements are causing a drag on returns and taking significant management time. Banks are complying with stress tests, responding to regulatory investigations or managing increasingly punitive regulatory fines. Some non-bank financial institutions are more profitable than banks and are as large and significant in terms of global stability. Entrants with lighter regulatory burdens are moving into areas (insurance, lending, ownership of hard assets) traditionally undertaken by banks, in a search for yield, and are creating or exploiting opportunities. Non-bank financial institutions are investing in new challengers to banks. New FinTech firms, providing financial solutions, are investing heavily and online only banking ventures, or other platforms, are attracting investment and gaining traction.
There is a new generation of young people (millennials) with different expectations and ways of interacting with financial institutions: through online and social media based platforms. They are using social media to connect, communicate or complain and do not have traditional customer loyalties. Mature customers and retirees are demanding improved returns from investments and moving against intermediaries due to a perception of a lack of transparency.
There is government and regulatory pressure upon pension funds and asset managers to reduce management fees yet maximise returns for the 'grey market'. High net worth and ultra high net worth individuals and families are growing outside of the UK/US/Europe, in new regions, such as LatAm, the Middle East and parts of Asia. This is in concert with improved education, skills and a rising middle class in these areas creating a new 'mass affluent' class, potential client base and work force.
Why banks should go back to basics and leverage new technologies./articles/2015/04/17/why-banks-will-go-back-basics-21st-century/
Regulatory pressures, risk management and technological advances are creating a new and challenging environment which risks driving out some of today’s leaders. Financial institutions will need new leaders who can identify, understand and manage new and emerging risks. New leaders will be sought by traditional banks, NBFIs, FinTech firms and regulators. Competition will become fierce as the talent pool decreases but demand increases for those who can keep pace with the changing financial landscape.
Emerging markets such as LatAm and Asia will offer new consumers and a highly skilled labour force, creating new outsourcing hubs in regions outside the UK/ US and Europe. Technology will diminish the geographical divide but only new leaders will bridge the cultural differences. There will be a renewed focus on risk management but, as regulators improve their understanding of risk and compliance, there will be a skills gap as firms try to recruit new staff, up-skill existing teams and rely on specialist risk advisors.
Traditional business operating structures are under pressure from regulators demanding transparency over fees and greater competition for consumers. There is pressure on the efficacy/profitability of the universal bank model and a return to the wholesale/retail banking division, driving down returns and potentially stifling innovation. The financial sector is becoming increasingly segmented.
Regulatory pressures and the cost of capital is pushing financial institutions to focus on core consumers, creating opportunities for specialist service providers, such as infrastructure or SME focused funds or through online platforms. There is a rise of specialist retail and wholesale competitors, or successful regional banks in the US or Multilatinas. These pressures are also driving disintermediation as intermediaries are displaced and/or specialist providers cater to specific sectors and take market share from traditional FIs. New challengers are obtaining market share through innovative uses of technology, such as P2P lending, crowdfunding and mobile payment.
Jagdev is the director of risk and regulatory strategy within the Financial Institutions Group at Willis. He regularly advises clients on financial regulation, emerging risks and trends. Prior to joining Willis, Jagdev worked in the enforcement and financial crime division of the Financial Services Authority (now Financial Conduct Authority), investigating investment banks and senior directors and officers within the financial services industry. Before joining the FSA, he specialised in international arbitration, dispute resolution and litigation at a law firm in the City of London.
Infographic details the 6 mega trends redefining the financial institutions industry
Willis Group Holdings plc is a leading global risk advisor, insurance and reinsurance broker. With roots dating to 1828, Willis operates today on every continent with more than 18,000 employees in over 400 offices. Willis offers its clients superior expertise, teamwork, innovation and market-leading products and professional services in risk management and transfer. Our experts rank among the world’s leading authorities on analytics, modelling and mitigation strategies at the intersection of global commerce and extreme events.Find more information at our website, www.willis.com
Resilience is the risk management magazine from Willis for business leaders around the world. Each issue explores the latest trends and issues facing multinational businesses as they compete in an increasingly dynamic and interconnected threat landscape.Subscribe today.