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"The stirrings of optimism represent a significant turnaround given the flat and falling optimism that has beset the past four years. An uptick in hiring, investment in systems, and better profit expectations for the first three months of the new year are driving the positivity in the sector, following the general election. However, this year in particular, firms will need 20/20 vision in order to maximise performance. Not least as there is still work needed to bring clarity on Brexit transitional arrangements. Encouragingly, PwC has already observed firms responding to the current environment of long-term low interest rates, intense competition and continuing regulation by resetting strategy, changing their business models, and investing in technology and their people."
Turning the tide
Participants expect business volumes and profitably to head upwards over the next three months. Yet, it should be noted that financial services sentiment is coming up from a low base.
Hiring is up and this trend is expected to accelerate in the coming quarter. As digital transformation gathers pace, the survey also highlights increasing investment in upskilling and systems modernisation.
Competing for customers
More than a third of participants report that the cost of customer acquisition has risen in the past 12 months and will continue to increase in the coming year. Participants see the main barrier to acquisition and retention as customer switching behaviour, closely followed by technology.
Bottoming-out of sentiment among banks and building societies suggests that the sector is beginning to move forward with greater confidence. As the survey was carried out before the general election, confidence may be further bolstered by greater political certainty.
Squeeze on investment
Investment is flat for now. Yet as banks strive to create a more competitive customer experience and drive down stubbornly high cost-income ratios, the need for major investment remains acute.
Challenging the challengers
The pressure on operating models is heightened by the challenge from digital-only rivals, which are harnessing new technology to set the bar for innovation and customer experience, while operating at a fraction of the cost of legacy-reliant incumbents.
General insurers and insurance brokers are increasingly bullish about their prospects as premium rates and returns continue to strengthen. However, they also anticipate a rise in costs, which will be hard to absorb in the face of tight margins. Life insurers are less optimistic, though they expect profits to rise.
Hiring is up. Systems investment is also increasing, which is matched by extra funds for upskilling within the workforce. Yet, with margins constrained, investment decisions demand exceptional precision.
Competing for customers
General insurers are the most likely to anticipate rises in acquisition costs over the coming year of any of the financial services segments in the survey. Insurers see customer switching behaviour as the main constraint on policyholder acquisition or retention, though technology is close behind.
Investment managers expect business volumes to rise over the coming three months. However, participants are also looking ahead to significant cost increases, which are set to hold back profitability. This underlines the need for greater efficiency, with both systems modernisation and economies of scale set to be crucial.
Investment managers are planning to increase systems investment to make operations faster and more efficient, while enabling them to launch new products and expand market reach. They are also stepping up hiring and spending on upskilling and training.
Attracting new business
Investment managers report that technology and regulation are the biggest constraints on customer acquisition and retention. These challenges look set to increase as reporting, cyber security and other regulatory demands mount the one side, while client engagement becomes ever more digitally-enabled on the other.