Speech by Isabelle Jenkins, Head of Financial Services at PwC UK at The CityUK’s National Conference
Speaker: Isabelle Jenkins, Head of Financial Services at PwC UK
Event: The CityUK’s National Conference, Bristol
To be delivered: 16 November 2021
Note: this is the speech as drafted and may differ from the delivered version
Financial Services emerged from the pandemic having demonstrated they were a critical enabler to delivering relief measures to the real economy, even in the face of unprecedented social change.
Financial Services was an industry that was in urgent need of transforming prior to the crisis and Covid has only exacerbated that.
What is critical now is that the Financial Services sector builds upon that success to truly deliver on its purpose and we believe there are four key areas that they need to focus on.
One, holding its nerve on strategic purpose - the UK and European governments, central banks and regulators deployed a series of exceptional measures designed to help banks maintain credit to companies and keep financial markets open. Yet these actions have also hidden the true state of bank balance sheets, and regulators have warned of an expected deterioration in credit quality. Future volatility will impact the industry unevenly, as it always does and that volatility is coming from multiple sources at once
Two, technology is more than an upgrade - focusing only on tech change is missing the point - any investments must be made in service of broader strategic goals. Successful digital banks aren’t just about well designed products and services but about how customer insight drives constant innovation across the organisation.
Three, change won’t be driven by incumbents alone - there is no doubt that fintech disruptors are having a major impact on the industry, but they are doing so more often by cooperating with incumbents rather than displacing them.
Four, delivering on ESG commitments should be fair and just - much is spoken about the E side of ESG, however social responsibility is one of the most impactful areas of ESG, and is creating pressure on the industry to act with purpose and to understand the role that Financial Services plays in the infrastructure of society.
Financing the future. It’s time for radical change across the industry
Financial Services emerged from the pandemic having demonstrated they were a critical enabler to delivering relief measures to the real economy, even in the face of unprecedented social change. Seven in ten Financial Services organisations believe that public perceptions of the Financial Services industry has improved as a result of the pandemic.
What is critical now is that Financial Services builds upon that success to truly deliver on their purpose. We believe there are four key areas that they need to focus on.
Holding the nerve on strategic purpose
Technology is more than upgrade
Change won’t be delivered by incumbents alone
Delivering on ESG commitments to be Fair and just
Taken in isolation, each of these areas could lead to significant change in the way a firm operates. In practice, they are interdependent and should be considered holistically.
The forces of change
I want to start with reflecting on the forces of change for Financial Services. Financial Services was an industry that was in urgent need to transform prior to the crisis and Covid has only exacerbated that. Long term interest rates made it hard for some to make margins, cost income ratios were high and competition was coming from fintechs, neos and non traditional competitors.
The Covid crisis drove many, even those who didn’t want to to use digital channels, and they found they liked them - one banks stated they were delivering 9,000 video banking sessions a week at the end of 2020 compared to 100 a week in Jan 2020, by 2024 cash will be just 7% of in store payments, digital payments are increasing 14% every year
Incumbent Financial Services organisations traditionally tend to be slow to make change and their governance processes were not the most agile. Financial Services organisations found during the crisis that they could make change quickly and follow governance to make that happen in a risk appropriate way.
Our research in the Consumer Markets sector is showing us that businesses, including Financial Services, need to think about and influence their consumers in a different way.
Traditional segmentation models around socioeconomic demographics don’t accurately depict consumer choice behaviours.
Our research has uncovered that consumers can be segmented in a way that reflects more accurately how they choose to interact with and consume brand(s), products and services.
In Financial Services we have found 80% of customers say the customer journey or experience is as important as the products and services.
Our 24th Annual CEO Survey shows that 64% of global AWM organisations are concerned about changing customer behaviours. This will take on increasing importance as wealth shifts through from baby boomers to their millennial children. The next generation expects a different relationship – typically a more active, personalised and digitally-enabled one – than their parents.
We are seeing similar changes in the Corporate side whether that is SME or major Corporates in terms of their expectation of ease of use and ability to communicate and transact digitally
Holding our nerve on strategic purpose
Prior to the Covid crisis we saw a move to purpose driven strategy on Financial Services. The crisis gave Financial Services an opportunity to demonstrate they could deliver on that purpose, but will they have the nerve to follow through on purpose as we potentially move into a credit downturn?
The Covid-19 pandemic brought economies around the world to a virtual standstill in the spring of 2020. Governments jumped in with emergency packages designed to support jobs and shield their economies from the worst of the fallout.
The UK and European governments, central banks and regulators deployed a series of exceptional measures designed to help banks maintain credit to companies and keep financial markets open. We also saw relaxed rules for provisioning bad loans. This unprecedented policy response allowed companies to survive temporarily and banks to maintain the flow of credit to the economy.
Yet these actions have also hidden the true state of bank balance sheets, and regulators have warned of an expected deterioration in credit quality. As emergency measures run out, more companies will default and force banks to recognize the losses.
According to our recent survey on risks in the Insurance sector, Insurance Banana Skins, not surprisingly, interest rate risk featured as a much higher concern than in previous years.
Future volatility will impact the industry unevenly, as it always does. But that volatility is coming from multiple sources at once: geopolitical, climate change, market volatility, and corporate responsibility to enable societal fairness.
Technology needs more than just an upgrade
Technology has dramatically changed the financial services landscape in the past decade.
New and nimble competitors are emerging regularly. These challengers have more efficient cloud-based platforms, allowing them to add on new products and services demanded by increasingly digitally oriented customers.
Successful digital banks aren’t just about well designed products and services but about how customer insight drives constant innovation across the organisation. It is about their speed and agility and a different mindset to releasing product
But focusing only on tech change is missing the point - it is how that technology is embedded and leveraged.
First, they must continue to digitize their own platforms and modernize IT systems. Most legacy platforms that have been built piecemeal over decades and need an overhaul. Cloud-based platforms allow firms to pick and choose vendors, making it more flexible, secure, and importantly, scalable.
Streamlined and data-rich IT platforms enable firms to anticipate the demands of their increasingly digital customers and offer them highly personalized and relevant services in response to their needs that I have talked about before
Organisations leading the way on this are also harnessing artificial intelligence, data analytics and agile cloud capabilities to target emerging investment opportunities, develop bespoke offerings and better understand their portfolio exposures.
Our research shows, applying an “agile” method of working can increase efficiency by 20 percent and productivity by around 30 percent, and drive cultural change.
To make this work, it’s critical that upskilling the workforce and talent development is a strategic imperative.
The technological advancement described before and the changes to the way businesses operate and people work is driving rapid change in the skills requirements for the financial services workforce.
Analysis from PwC and BEIS on the impact of automation highlights that Financial and Professional Business Services (FPBS) will be impacted more than any other sector over the next 20 years. Some roles will disappear entirely and new ones will be created, but crucially almost all roles will change in some way
According to the Financial Services Skills Commission, over 20% of the UK workforce in the sector are at risk of displacement. Where new roles are generated, suitable candidates need to be found. What is needed is to be able to reskill the current workforce against these new skill areas. Despite an awareness of this challenge, research shows businesses are not launching reskilling programmes at the scale required.
Only 14% of Financial Services CEOs have made significant progress establishing an upskilling programme to tackle this issue. There are many potential reasons for this stasis of activity, not least the urgency of responding to the Covid-19 pandemic. There is a clear business case in favour of reskilling and strategic workforce planning. Reskilling helps reduce people costs and mitigate important risks, with a positive impact on the bottom line..
As those of us here today are well aware of, almost three quarters (73%) of jobs in the FPBS sector are located outside the capital.
If navigated effectively, the sector’s response to the skills needed across the UK could provide an unprecedented opportunity to grow the sector, create more high-quality jobs, and support levelling-up across the regions and nations.
As those of us here today are well aware of, almost three quarters (73%) of jobs in the FPBS sector are located outside the capital.
Change won’t be driven by incumbents alone
The moment for fintech?
We expect that the traditional model of one organization owning the full front to back customer journey will become less usual
Customers are demanding services that are more relevant, more connected, and more embedded in everyday experiences.
To meet these expectations, collaboration through partnerships is fundamental for the industry, and we firmly believe that the right partnerships between the right players have the power to completely transform financial services.
There is no doubt that disruptors are having a major impact on the industry, but they are doing so more often by cooperating with incumbents rather than displacing them.
However, according to the World FinTech 2020 Report, 70% of FinTechs say they are frustrated with the processes and barriers of incumbent institutions when collaborating.
The ability to manage change in a fast-moving era remains a critical business imperative with incumbents losing share to more agile entrants to the market.
By partnering with these FinTech, InsurTech, WealthTech, Tech Fin incumbent providers can invest nimbly and accelerate the pace of change. Pairing innovation with well-regulated established businesses ensures that risks are properly regulated, while driving forward with much needed change.
Sustainable, Fair and Just : Investing for the future
The worldwide focus on climate change as part of the wider ESG agenda is resulting in a step-change across the industry. My colleague Elizabeth Stone is going to explore this further in her panel following this. But some brief stats on this:
Climate risk is the fastest rising risk in our market surveys. It is clear that the impact of climate change is a much nearer-term risk than previously perceived and in many cases, the effects are already being felt. Particularly due to a rise in catastrophic events, it is now seen as an immediate threat to insurers rather than a longer-term one.
$30 trillion investment in decarbornatisation required over next 20 years with a significant proportion funded by commercial FIs.
In the retail market, HMT Net Zero Strategy will require 11 million homes to have heat pumps, how will those be financed and what are the implications on mortgage approval processes?
In European markets that are leading the way on embedding ESG, our analysis indicates that ESG assets will make up between 41% and 57% of total mutual fund assets by 2025.
And more than 75% of European institutional investors surveyed this year by PwC said they plan to stop buying European non-ESG products within the next two years.
However, although much is spoken about the E side of ESG, social responsibility is one of the most impactful areas of ESG , and is creating pressure on the industry to act with purpose and to understand the role that Financial Services plays in the infrastructure of society. Around eight in ten Financial Services organisations cite diversity and inclusion and corporate social responsibility and/or progressing a meaningful role in wider society as priorities within their ESG agenda.
Financial literacy, fair access to financial services, diversity and transparency of working practices are all inherent in the two way relationship between the industry and the wider society.
Some Financial Services organisations believe that there is an inevitable conflict between yield and doing the right thing, but the two may be more compatible than you would think.
A study by the Peterson Institute of International Economics also shows that diverse companies, in which more than 30% of leaders are women, are, on average, 15% more profitable than those that aren’t diverse, and businesses that score highly on sustainability tend to outperform those that don’t.
Our own analysis shows that ESG-aligned funds cumulatively outperformed their traditional counterparts by 9% from 2010 to 2019.
A combination of the pace of modernisation and financial services’ key role in driving social and environmental change has brought the industry to a fresh inflection point. Success demands a fully customer-centric vision for the future. The big risk is trying to revert to pre-pandemic norms that are no longer viable or relevant.
The Financial Services industry has a real opportunity to redefine its role and purpose in the world. While it must take steps that protect customers, meet broader responsibilities and remain compliant with regulation, it must also recognise that it has the power to drive meaningful change that can make a difference.
The industry has proven resilient in the face of the Covid-19 pandemic, but the need for transformation is as urgent as ever. The pace of the economic recovery remains uncertain, and the landscape continues to change rapidly.
By modernising operations, fostering closer digitally-enabled customer relationships and developing purpose-driven strategies with the power to shape the future, the industry can play a vital role in driving the UK’s green recovery and help address some of the biggest social problems facing the world.
I want to leave you with three imperatives for your business that we confirmed through our latest CBI Survey
Understand the shifts in public perception and increased societal responsibilities: These represent a turning point for Financial Services as the industry moves towards a purpose-driven, customer-centric vision. The enablers are a clear understanding of customer expectations and the engagement, data and analytics to deliver on this mission.
Look at the big picture: The evolution of Financial Services business models doesn’t just relate to narrow financial criteria, but also what this means for their workforce, their role within society and how they judge performance and success.
Determine how customer and wider stakeholder priorities have changed in the wake of the pandemic: Techniques such as zero-based budget analysis can support this. The results can help to judge which services are still (or more) relevant in this new world on the one side, or no longer relevant and hence can be switched off on the other. Starting with this clean sheet will help to target resources more effectively and avoid simply reverting to pre-crisis norms.
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