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Confidence amongst financial services firms fell for the fourth consecutive quarter in the 3 months to December, making 2016 the gloomiest period for financial services firms since the 2008/09 crisis. Recent findings from our UK CEO survey supports this decline in confidence compared with 2013 where CEO’s were far more optimistic. Uncertainty over Brexit and the related negotiations continued to be a strong factor here.
Business volumes fell flat, particularly within the banking sector, alongside profitability, although this is expected to increase significantly next quarter. The pace of hiring amongst the sectors varied, with life insurers and asset managers investing proportionately more in employment and training expenditure to build on regulatory and technology skillsets.
Competition remained a constraint on business growth as financial services firms became fearful that the increasing maturity of new entrants could impact the industry at a much higher rate over the next 12 months, compared with last year. This led to an increase in investment around technology to transform their front and back office operations, as well as a focus on attracting new customers and investing in new product development. There was also a greater focus on firms forming strategic partnerships and alliances to grow their competitive advantage.
As we move into 2017, preparing for the impact of Brexit remains the largest challenge facing the financial services industry.
Confidence hit a real low point in the banking sector at the back end of 2016, falling at the fastest rate we’ve seen in over a year. This is down to continued economic uncertainty around the UK’s decision to leave the EU and continuing cost pressures. What’s more, revenues are declining, however with a continued strong focus on cost reduction there is hope this will balance the overall profitability over the next quarter.
Banks are beginning to focus their attention more on their front to back operating model to understand which parts of the business are making money and which are not. A bigger focus on investing in digital and technology is essential here to improve processes and operations; we are likely to see FinTech companies developing more solutions in the areas of process automation.
Interestingly, there has been a switch in focus from targeting existing customers to acquiring new domestic customers and launching new products. Whilst in a recent citizen’s jury with Britain Thinks we found that people want good service and low prices from their existing suppliers, they also want other companies to offer better deals to attract them. This shift in focus for banks could be a response to an ever growing competitive environment; a concern we are seeing across all sectors.
Process automation, data and analytics and cyber security are the focus for investment over the next 12 months, which supports the view that banks are focused on back office developments and cost reduction. In the midst of this, banks feel that preparing for the impact of Brexit is the biggest challenge facing their business over the coming year, alongside regulatory compliance and combating security threats.
Optimism in the insurance sector fell last quarter due to underlying concerns around the economic and trading environment. Rising claims costs and falling profits add to growing concerns around return on investment.
Moreover, we saw continued investment across the industry in technology to increase efficiencies and speed and to reach new customers. Spend on marketing increased to attract these customers and retain the insurer’s position in a competitive environment, particularly with rising concerns over the threat of new entrants and InsurTech start-ups. This mirrors a recent PwC blog in which we reviewed the changing InsurTech landscape where we are now seeing wave 2 of mature start-ups entering the field with a stronger experience of the insurance sector coupled with innovative ideas from outside of the sector.
Insurers, and in particular life insurers, are further looking to partner with start-ups to address challenges around back office processes, customer service and recruiting talent to build a workforce fit for a digital future.
Competition is the single largest challenge facing the insurance sector over the coming year. In order to address this, insurers have identified cyber security, process automation and data and analytics as having the greatest potential for investment in FinTech over the next 3 years.
Insurers recognise the intensity of their interactions with regulators will be affected by ongoing brexit negotiations; we expect to see a continued focus on regulation for the foreseeable future.
The investment management sector reported its best quarter in a year. Business volumes slowed a little but expectations for growth over the next 3 months were the strongest for a year and half. Overall profitability also expanded, although not particularly fast.
Employment numbers have made a good recovery on last quarter, with investment managers spending more on training and development, likely as a response to increasing regulation.
There was a strong focus on sales to new customers supported by an increase in marketing expenditure and investment in new product development. This could be attributed to the concerns over level of demand and retaining existing customers that we’ve seen in previous quarters of 2016.
Investment managers highlight the top 3 challenges facing their business over the coming year to be; security threats, macroeconomic uncertainty and managing reputation and conduct risk. They are particularly concerned over the effect that the process of negotiating the UK’s EU exit will have over the intensity of dialogue with the regulators in the next 12 months.
The greatest potential for investment in FinTech over the next 3 years for investment managers comes from process automation and data and analytics, suggesting a continued focus on back office operations and improved customer service.