The Challenges Ahead: SOFS 2014

This year’s report focuses on the growth challenge for the industry and identifies several “blind spots” that could impede the industry’s recovery and growth.

It briefly analyzes the road the industry is on and considers the trends observable across the world’s major economic regions: North America, Europe, Asia Pacific, and Latin America.

The blind spots assessed in the report are:

The role of central banks – many countries are asking too much of central banks
Stress testing – a vital new tool which will improve bank management and regulation, as long as the risks of over-standardization and regulatory capture are avoided
The importance of digital – potential changes in payments, branch banking, financial advice and the use of social media will accelerate change in the industry, most likely to the benefit of fast-moving incumbents
Talent management – as financial services has lost its cachet, the industry needs to up its game in finding, motivating, and developing its people
Growth in insurance – the challenges and importance of returning the industry to healthy and profitable growth
De-risking pensions – the closure of defined benefits pensions and resulting pension buyouts, moving risk from corporate balance sheets to individuals and insurers

Drivers of Changes in Banking Returns

Some challenges are global, others differ according to region, here’s why:

North America: well-capitalised firms with low risk; for banking regulation is the central challenge; moderate economic recovery; life insurers benefiting from demographic characteristics
Europe: firms are undergoing heavy restructuring; decoupling from sovereign credit risk and transition to European Banking Union are unknown; insurance industry potentially hampered by regulation
Asia Pacific: solid growth in most markets; concerns about credit quality and impact of regulation; potential benefits if industry adjusts form “old industrial” model to a new economic model
Latin America: focus should be on long-term investment needs that require funding, more access to financial products and prudent expansion of credit growth

1What is the State of the Financial Services report?

This is the 17th State of Financial Services industry report. It is a chance for us to step back and examine trends hitting the industry globally. In recent years we have examined the role of data in transforming how the industry serves clients, the challenges of meeting the world’s long-term saving and borrowing needs, and the robustness of the financial system.
2How would you describe the road the industry is on?

The industry faces a range of challenges – some of them global, some local. The common global challenges include new technologies that threaten to disrupt existing models in retail financial services; the pressure of increased operating and capital costs reducing capacity in wholesale banking; and, a struggle for growth and profitability in insurance. But at the moment local issues predominate. Sovereign frailty, regulatory action and cost and capital pressure have contributed to the industry becoming more tied to national fortunes than any point in the last fifteen years.
3So where will growth come from?

Five themes drove the last period of growth in financial services: credit expansion (on balance sheet and in the capital markets) linked to the long period of economic growth, financial deepening, demographic shifts, globalization, and technology. Emerging markets will continue to experience these trends. In developed markets the story is more challenging. Both credit expansion and greater uptake of financial products will continue but will be bounded by leverage limits and conduct rules. Aging in the developed world also poses challenges for the industry. Globalization is in reverse, and with larger players constrained, consolidation will benefit only the mid-sized. Finally developments in technology and data will challenge firms that are slow to adapt.
4It sounds a tough slog; what bright spots exist for the industry?

We are cautiously optimistic about the outlook overall. The industry is reshaping itself and overcoming the problems of the last decade. The players that adapt fastest can start to return to the challenge of future growth. Society has unmet needs that financial services can fulfill.