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"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."
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’.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.