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How the UK banking and capital markets sector can create sustainable change and progress a meaningful role in society

As difficult as the past year has been, further challenges and new opportunities lie ahead for banking and capital markets. The sector has broadly passed the digital ‘stress test’ with the accelerated switch to digital banking and remote working during lockdown, and returns have largely proven robust. 

But more tests lie ahead as further impacts of the COVID-19 pandemic are felt, including a potential increase in credit defaults as government support schemes tail off. The challenged state of the economy likely means more years of low base rates and depleted net interest margin income for banks. Ongoing Brexit complexities add to what is already a tough business environment for the competitive future of financial services in the UK, particularly around inbound banking activities and capital markets.

However, with challenges come opportunities for the banking and capital markets sector to rethink business models, transform capabilities and reinvigorate growth in a way that has been difficult for more than a decade. In doing so, the sector has the chance to emerge stronger – embedding financial wellbeing, supporting vulnerable customers, building trust and reasserting a wider purpose in society.

“Supporting the economy during the COVID-19 crisis provided the banking and capital markets sector with an opportunity to further enhance trust levels eroded during the 2008 financial crisis. Playing a pivotal role in driving the economic recovery and in financing the transition to Net Zero and the UK’s levelling up agenda will provide further such opportunities.”

The financial services ecosystem

Sustained low interest rates have challenged net interest margins, putting pressure on business models and profitability. Some incumbents have performed relatively strongly following the 2008 financial crisis, for example in the US, where scale has been key; scale and transformation can lead to strength. 

Organisations can scale up operations, either through collaborations, mergers or partnering with fintechs and other non-traditional players. By reaching new businesses and growing the customer base, opportunity exists even with interest rates at sustained lows. In our 24th Annual CEO Survey, 28% of global banking and capital markets CEOs say they plan to form a new strategic alliance or joint venture in the next 12 months, while a similar number (29%) plan to collaborate with entrepreneurs or startups. 

To stay relevant in this dynamic marketplace it’s important to pinpoint what you can offer that others can’t and direct resources towards these strengths. 

Scaling up is not the only option though. The evolving financial services ecosystem promises benefits for both smaller players and established incumbents. Smaller organisations can profitably focus on doing what they’re best at and carve out specialist niches, whether directly to customers or through deals with others. Larger organisations can use partners to deliver non-core or low margin offerings, paving the way for divestment and a refocusing of resources to drive optimisation of the banking value chain.

“To stay relevant in this dynamic marketplace it’s important to pinpoint what you can offer that others can’t and direct resources towards these strengths.”

Scaling up is not the only option though. The evolving financial services ecosystem promises benefits for both smaller players and established incumbents. Smaller organisations can profitably focus on doing what they’re best at and carve out specialist niches, whether directly to customers or through deals with others. Larger organisations can use partners to deliver non-core or low margin offerings, paving the way for divestment and a refocusing of resources to drive optimisation of the banking value chain.

Tackling legacy transformation

Data, and the people and technology needed to use it, are key enablers and differentiators in today’s market. Our CEO Survey shows that 91% of global banking and capital markets organisations plan to increase their investment in digital transformation. Tackling legacy transformation of technology architecture to deliver future potential needs to be absolutely central to this.

Incumbents have a wealth of data that can help them understand what customers want, design better offerings and deliver a better experience. What’s working against them are complex legacy systems, evolved over many years, that make it hard to access, share or analyse data across their business to drive any value from it.

Cleaning up legacy and modernising systems, which includes moving them to the cloud, will enable organisations to more easily integrate their functionality and content with third parties to deliver outstanding customer experience, develop a deeper understanding of customers and move nimbly and quickly to develop targeted solutions. Addressing the legacy issue will also bring cost benefits in operations, finance and regulatory reporting.

Making bold decisions around technology and data is absolutely critical. Those organisations that set a clear strategy which tackles legacy, develops a plan for leveraging assets and prioritises digital upskilling will be the winners.

However, increases in digitisation, remote working and platform delivery means heightened vulnerability to cyber threats. This is also an area in the regulators’ focus, both from a data protection and operational resilience perspective. Addressing this challenge by building cyber security into business strategy and transformation plans is essential. 

“Making bold decisions around technology and data is absolutely critical. Those organisations that set a clear strategy which tackles legacy, develops a plan for leveraging assets and prioritises digital upskilling will be the winners.”

Keeping up with changing customer behaviours

The evolution of the financial services ecosystem through Open Banking makes owning the customer more difficult. Organisations can collaborate to provide different parts of the customer experience, each providing a product or service that forms part of a seamless customer experience. New ways of working, new technologies, improved data analytics and new customer expectations all come together to make this possible.

Keeping pace with customers is a key challenge, with 73% of global banking and capital markets CEOs admitting they are concerned about changing consumer behaviours.

“Keeping pace with customers is a key challenge, with 73% of global banking and capital markets CEOs admitting they are concerned about changing consumer behaviours.”

The accelerated move to digital has increased this dynamic. With branches shut during the COVID-19 lockdown, customers had no choice but to shift to digital banking and reduce their use of cash. To get ahead, banks need to continue developing innovative ways of replacing the physical element of banking in a branch, both to improve the customer experience and also to enable cost efficiencies through a reimagined real estate footprint. This might include greater use of video banking sessions or offering a wider range of services through other technologies.

Collaborations can also enable organisations to offer a broader range of products and services to customers who now demand greater choice. This is seen as a key growth driver, with 56% of organisations in banking and capital markets planning to launch a new product or service this year.

Stakeholders matter

Stakeholders are increasingly putting pressure on organisations to improve focus on environmental, social and corporate governance (ESG). For the banking and capital markets sector, ESG provides an opportunity to further define its purpose and role in society, while increasing relevance to a new generation of customers.

“For the banking and capital markets sector, ESG provides an opportunity to further define its purpose and role in society, while increasing relevance to a new generation of customers.”

ESG demands will affect what kind of businesses organisations choose to finance and where they invest. The UK also has a chance to emerge as a leader in green finance worldwide. But the strategic imperatives run much deeper than asset policy or the development of green funds. Those that take a lead on ESG and embed it at the heart of their strategy will benefit most in terms of reputation, the bottom line, and attracting and retaining talent. Our recent upskilling research found that 57% of people would prefer to do a job that makes a difference over maximising their income, reiterating the importance of creating a purpose-driven organisation. 

Turning ESG intentions into actions is a complex challenge. Using a framework to consider and introduce practical initiatives that address ESG ambitions, while identifying growth opportunities, meeting stakeholder needs and creating value, is important.

Taking a broader perspective

The COVID-19 pandemic has crystallised the fact that traditional business models need to evolve. Familiarity and comfort with the new digital banking environment has broken down previous barriers between traditional and non-traditional banking relationships. Transformation has to be high on the agenda to meet ever-increasing customer expectations, whilst capital markets organisations have to contend with additional challenges around a heightened reform agenda as they seek to cement their standing post-Brexit.

The organisations out in front are looking beyond short-term priorities, focusing on how to sustain relevance in today’s fast-changing marketplace. The evolution of their business models doesn’t just look at narrow financial criteria, but also what this means for their people, their wider role within society and how they judge performance and success. 

By taking a broader perspective, the sector has the opportunity to fire up innovation, carve out fresh revenue streams, break out of the cycle of no and low growth and most importantly, create sustainable change that makes a difference and delivers lasting impact.

“Organisations must act now and accelerate their transformation plans to offer the improved digital experiences and hyper personalisation required to meet customer expectations, whilst the sector as a whole continues to play a key role in the economic recovery and drives the sustainable change agenda.”

Contact us

Mark Batten

Mark Batten

Banking and Capital Markets Leader, PwC United Kingdom

Tel: +44 (0) 7740 242449

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