Q3 2020 Results
Confidence within financial services (FS) overall is up and returns are stabilising after the falls in Q2. But these headline figures mask considerable divergence in the performance and prospects of different FS sectors. New survey questions on dealing with disruption and progress on transformation also reveal marked differences between the front runners and the businesses with more to do.
“Financial services organisations have done well to sustain operations during a challenging past six months, but keeping the lights on isn’t enough. As the pandemic accelerates shifts in customer demand, it’s important to keep new products coming and find more effective ways to engage. Digital transformation and the talent to support this are critical. As the new questions in our survey highlight, some organisations are pulling ahead while others need to find ways to catch up before it’s too late. We will be tracking progress in future surveys and it will be fascinating to see the results.”
FS organisations in our survey report that business volumes are 6% down on what they would have expected in the absence of the coronavirus (COVID-19) pandemic.
However, there are substantial variations between FS sectors. At one end are finance houses (19% fall) and banks (12% fall). At the other are investment managers who report stronger business volumes.
The next few months present risks over which FS organisations have little or no control. Beyond the fortunes of the real economy, these include political risks such as Brexit and the US elections. While FS organisations can’t control these developments, they can plan for them to make sure that their operations are agile and resilient, and that they can respond positively.
Disruption continues to be an increasingly important feature within the FS industry. The key drivers of disruption that companies anticipate include the acceleration in digital technologies, as well as changes in customer preferences and behaviour.
Our survey reveals a marked split in the pace of digital transformation. Less than 30% have completed cloud adoption. The benefits for the front runners include the operational agility to respond to new and fluctuating customer demands.
Similarly, advances in artificial intelligence (AI) and analytics could help to improve understanding of customers’ needs and enable FS organisations to respond proactively. Yet less than 20% of the organisations in our survey cite understanding the customer and their interactions as the main value of these advances.
FS would appear to be ripe for high levels of deal-making, with margins tight and firms seeking out fresh openings for growth and ways to boost their tech capabilities. However, less than a quarter of the organisations in our survey are planning acquisitions or forming partnerships in response to the disruptive trends they face.
Collaboration with FinTechs is now firmly on the agenda. More than 40% of organisations have or are looking to partner with emerging FinTechs over the next 3-6 months, and around a third with established FinTechs.
Banks have seen an uptick in volumes over the past three months, largely as a result of the surge in mortgage demand. But they expect volumes to fall back in Q4. They also anticipate a continued dip in profitability and further job cuts ahead.
Both banks and building societies already anticipate a sharp increase in the value of non-performing loans over the next three months. Defaults and write-downs could rise still further as and when the government support for many businesses is eventually reduced and then withdrawn.
The survey reveals a big gap between the banks, building societies and finance houses setting the pace on digital transformation and the trailing pack.
Some 40% of banks have implemented the cloud and around half of these are now realising benefits such as improved agility in responding to customer demands. However, a similar proportion have yet to get started on adoption or aren’t considering it at all.
Nearly 60% of banks see the main value of advances in artificial intelligence (AI) and analytics as managing financial risks. Only around 20% cite understanding the customer and their interactions. Banks have a goldmine of customer data, much of which is underused. New technology could help them to anticipate customer demands and have offers ready. For example analysis of customer behaviour to anticipate major life events and therefore pre-empting customer financing needs.
More than 80% of banks report that environmental, social and governance (ESG) issues form part of their business objectives and almost all the rest have plans to review and incorporate them.
Regulation is one of the drivers. However, even bigger motivators include attracting talent and aligning with their business purpose and customer priorities. Banks are also notable in their emphasis on climate change and diversity and inclusion within their ESG priorities.
General insurers are the most optimistic about their business situation of any financial services sector. While optimism among life insurers is flat, this is a significant improvement on the sharp dips seen in recent quarters.
Insurers are facing disruption on multiple fronts. The impact of coronavirus (COVID-19) is clearly pressing. While the pandemic leads the list of disruptive drivers for the coming 12 months, general insurers rank two trends just behind it: shifts in customer preferences and behaviour and the acceleration in digital technologies. These drivers feature strongly in their strategic response to disruption and priorities for transformation ahead.
Cloud adoption would help insurers gain the flexibility they need to meet changing customer demands. However, most have yet to move beyond the transition stage.
Advances in artificial intelligence (AI) and data analytics could also help insurers to improve customer understanding and interaction. Brokers lead other FS sectors in recognising the potential. However, most life and general insurers see the main benefit as managing financial risk.
Skills are as important as technology in driving transformation. Upskilling and reskilling feature strongly in general insurers’ transformation priorities. Life insurers are primarily focusing on recruitment rather than upskilling to meet skills demands, though this could raise costs. Brokers are prioritising a combination of recruitment and upskilling.
Strengthening diversity and inclusion can provide the fresh perspectives and breadth of experience needed to steer through disruption and change. This is reflected by the prominent focus of diversity and inclusion within insurers’ response to disruption. The key now is turning this appetite for change into progress on the ground.
Investment managers report relatively strong business volumes, compared to an average 6% fall across financial services as a whole.
The outlook for the coming quarter continues to be positive. However, credit risks look set to rise as government support for businesses and jobs is gradually scaled back.
The acceleration in digital technologies ranks alongside coronavirus (COVID-19) and changing regulation as the main drivers of disruption over the coming year. Changes in customer behaviour and preferences are just behind.
Investment managers recognise the importance of workforce upskilling as well as technology in driving transformation. However, most may need to go further and faster in harnessing the full potential of cloud adoption and advances in artificial intelligence (AI) and analytics. The survey also highlights the need for more effective safeguards against cyber threats.
By becoming more agile, informed and operationally resilient, the front runners will be better equipped to steer through disruption and capitalise on the opportunities ahead.
Nearly three-quarters of investment managers report that environmental, social and governance (ESG) issues form part of their business objectives and the remainder have plans to review and incorporate them. Investment managers stand out in the extent to which they see ESG as aligned with their business purpose, rather than simply a compliance requirement.
As occupiers of commercial real estate across the FS sector pragmatically reassess their future space requirements to comply with Government advice and meet changing work practices, demand and usage shifts will most certainly have significant impacts to the investors who own the spaces they occupy.
In the wake of the coronavirus (COVID-19) crisis, real estate investors are feeling increased pressure on their portfolios, as their ability to collect commercial rents or exercise rights under the Commercial Rent Arrears Recovery procedure remain restricted until January 2021.
Furthermore, existing market trends, such as - repurposing of real estate assets to meet the changing needs of end users; increased collaboration between real estate and infrastructure investors across both the private and public sectors; and the emergence of increased regional working in a “de-urbanisation” effect - have significantly accelerated across the industry since the onset of the coronavirus (COVID-19) pandemic earlier this year.
When considering real estate as a cost lever, occupiers should strategically consider the optimal footprint needed to accommodate new working practices, whilst still maximising the impact of operations and collaboration.
Investors of real estate assets - particularly across those sectors most impacted such as office and retail - should be tracking the overall impact of demand and usage shifts on portfolio resilience and return.
Landlords should proactively engage tenants to gauge impacts on their ability to recoup rents, and proactively collaborate with tenants to reach mutually beneficial agreements regarding lease and payment terms.