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CBI PwC Financial Services Survey
Q2 2020
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- With operations generally stabilised, the strategic focus is turning towards how to compete post-COVID-19.
- Lockdown has shown how much change is possible, and how quickly it can be achieved.
"Having stabilised their businesses, financial services organisations are now working out where they go from here. As the survey highlights, available investment is limited and returns are likely to be hard won. The organisations out in front therefore recognise the need to emerge leaner, bring key functions together to execute change and create a tech-savvy workforce capable of harnessing the full potential of digital investment. The limited timelines for bringing capabilities up to speed is also likely to renew the focus on deal-making and strategic collaboration."
Light at the end of the tunnel
Confidence among financial services (FS) organisations continues to dip, with returns expected to fall further over the next three months. However, FS organisations expect business volumes to almost level out during this quarter. With FS fortunes so closely tied to the economy, much will depend on what ‘shape’ of economic recovery we see: ‘V’, ‘U’ or ‘W’.
The art of the possible
Across the key areas of people, property and technology, many FS organisations are now rethinking what they need, where they need it and how this can be optimised. Highlighting the scale of potential change ahead, our survey reveals that under ‘normal’ circumstances - with no pandemic to contend with - FS organisations believe over half of their staff could feasibly work from home on a regular basis. The resulting potential to reduce real estate costs is reflected in the fact more than 60% now believe 70% or less of their current office space is essential.
Accelerating change
Any change on this scale is hard. That’s why it’s so important for chief finance officers, chief risk officers, chief property officers and human resources directors to work closely on developing and executing strategies.
Training budgets continue to be cut. This may be short-sighted as workforce upskilling is crucial in driving innovation and making the most of systems investment.
We could see an upturn in deal activity later in the year as FS organisations look to acquire ready-made technology and innovation capacity from FinTechs.
Priorities ahead
- Bring key functions together to execute change and create a tech-savvy workforce capable of harnessing the full potential of digital investment.
- Step up investment and acquisition to bridge capabilities gaps.
What the results say
- Banks are speeding up the transformation of their business and operating models as pressure on revenues and returns mounts.
- Gradual change is giving way to a more radical overhaul, from a full rethink of the physical customer-facing presence to the increasing focus on fee-based products and services.
Turning the corner
Building societies are looking ahead to a significant increase in business volumes over the next three months as the mortgage market reawakens.
Banks also expect a modest uptick in volumes. Subdued income in key areas such as net interest margins (NIM) is forcing them to seek out new fee-based sources of revenue.
Following a difficult first quarter, finance houses anticipate a small increase in volumes and fee income.
Close eye on credit losses
As the downturn continues, concerns over the potential for defaults are mounting. The survey highlights a significant increase in non-performing loans, both in the last quarter and in forecasts for the next.
Moving further and faster
The rapid switch to working from home has provided a catalyst for transformation by demonstrating how much change is possible in a relatively short space of time.
Under ‘normal’ circumstances - with no pandemic - banks and building societies believe nearly half their staff could feasibly work from home on a regular basis.
In turn, digital is fast becoming the default way of doing business. Even customers who had resisted change have adjusted their habits.
Priorities ahead
- Accelerate digitisation and workforce upskilling.
- Rationalise products and rethink pricing.
What the results say
- The pandemic has created renewed urgency around digital transformation.
- It’s also driving a reassessment of how insurers work and engage with clients and the physical presence needed to support this.
General insurers outperform the sector
General insurers saw profits rise in the second quarter. Yet, our survey reveals a dip in optimism. Business volumes and pressure on costs will continue to be affected by the fragile economic environment.
Life insurers report a sharp fall in profits and confidence. Following the recent decline, volumes are expected to stabilise over the coming three months.
Having seen business volumes and returns fall, brokers anticipate an upturn in profitability in the third quarter.
Digital capabilities emerge as key differentiator
The pandemic has highlighted the value of digital distribution and agile cloud-based IT. It’s therefore surprising that general insurers, life insurers and brokers are all planning to cut back investment in IT and the workforce upskilling needed to support this.
The move to remote working has highlighted the potential for savings in real estate costs. However, while most brokers and life insurers now believe only 70% or less of their current office space is essential, only 13% of general insurers think such a large reduction is feasible.
Pandemic heightens focus on insurance ‘promise’
The crisis has highlighted both protection gaps and insurers’ vulnerability to reputational risk. In particular, many small and medium-sized enterprises (SMEs) have found their insurance doesn’t cover them for business interruption stemming from the pandemic.
While this situation is clearly challenging, it could also create opportunities for proactive insurers to strengthen their reputation and bridge the protection gap. Examples we have already seen include refunds for policyholders who have used their cars less because of travel restrictions. It might also include developing cost effective ways to include pandemic risk in SME cover. On the life side, the opportunities include targeting renewed demand for protection based products.
Priorities ahead
- Accelerate digital transformation or risk being left behind.
- Step up deal targeting to help bridge capabilities gaps.
- Look at ways to bridge the protection gap.
What the results say
- Investment management is the only sector in our survey reporting an increase in optimism.
- The positive sentiment reflects the sector’s resilience and the opportunities created by accelerating digitisation and the growing appetite for environmental, social and governance (ESG) focused investment.
Revenues and returns dip, but confidence rises
Business volumes and profits fell in the second quarter. Investment managers anticipate a further dip over the next three months. Yet, revenues have held up well given the sudden shift to remote working and level of market volatility seen over the past quarter.
Some funds have been better placed to cope with the crisis, based on the construction of their portfolios and their exposure to specific asset classes. Moreover, firms with more developed digital capabilities have been able to respond with greater speed and agility, while controlling costs.
Changing investor sentiment creates openings for growth
The crisis has provided a catalyst for innovative product development and retirement solutions and engaging new customers.
Further openings include increased demand for ESG investments. The impact of COVID-19 has heightened the focus on sustainability and social inclusion. Interest is also likely to be piqued by the recent performance of ethical investment funds.
Upskilling is as important as technology in driving transformation
Harnessing the digital potential demands appropriate skills as well as technology. While our survey reveals spending on training continues to fall, these cuts may need to be reversed as upskilling becomes more critical.
Priorities ahead
- Success depends on investment in upskilling and technology.
- Purpose-driven strategies are more important than ever as both ESG and customer outcomes come under an increased spotlight.
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Leader of Industry for Financial Services, PwC United Kingdom
Tel: +44 (0) 7703 459 443
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