The primary role of a traditional bank providing financing and capital is set to be challenged further by non-banks, according to a 2020 PwC’s report, Securing your tomorrow, today – The future of financial services. According to the report, alternative providers of capital are set to become an even more important part of the global financial system.
For insurers and asset and wealth managers, the challenges are equally daunting. PwC’s report points out that a combination of near zero interest rates and the rise of digital-only players will create tighter margins across product portfolios, thereby emphasising the need to digitise rapidly, gain cost efficiencies and register real gains in productivity.
“The COVID-19 pandemic has led to unprecedented challenges for the financial services industry, creating massive new disruptions and dramatically accelerating others that were already underway. Despite these challenges, the future of the industry looks promising. Significant upheaval also creates new opportunities for innovation. The challenge for leadership teams is to look forward, understand the scope of changes underway and be bold in responding to them,” according to Costa Natsas, Financial Services Leader for PwC Africa.
The report highlights 7 macro trends that financial services firms need to consider to properly plan for the future, as well as focuses on four key areas for recovery (Repair, Rethink, Reconfigure, Report) in financial services.
Macro trends that matter and their impact in a post–COVID-19 world
1. Low interest rates will continue wreaking havoc on margins and business models
The response to COVID-19 will likely significantly prolong ultra-low or even negative interest rates, fuelling further margin compression in the short term for the banking sector and asset-price distortions in the long term.
What will the impact be in South Africa with the “South African Reserve Bank expected to hold the repo rate steady in 2021, and then raise it by 25 basis points in January or March 2022, with another quarter percentage point hike in the second half of next year, economists forecast.”
2. The COVID-19 recession and asset impairments will reduce risk-bearing capacity for regulated industries to support the real economy as it enters the recovery stage over the next year
The asset impairments resulting from the COVID-19 pandemic will ultimately further constrain lending and the risk-bearing capacity of regulated banks and insurers to support the real economy during the recovery phase.
For insurers, a combination of low interest rates, asset impairments, and the potential for increased pandemic pay outs for business interruption are all serious concerns regarding the ability to fulfil obligations and underwrite new business. As such, additional risk-reduction efforts, footprint reductions and an increase in run-off books (and, in some cases, insolvency) will be the result of these challenges. Therefore, insurers will need an increased focus on rebuilding capital, rationalising product portfolios and maximising per-client profitability.
3. Alternative providers of capital are set to become an even more important part of the global financial system.
Post-GFC regulation increased the cost differential (and availability) of regulated versus unregulated capital, thus significantly boosting the role of nonbank providers of capital. In fact, the role of alternative financing has been on a dramatic rise since 2010. PwC see this trend accelerating as the rebuilding of the economy post–COVID-19 will require fresh sources of capital.
4. COVID-19 will not delay, and may accelerate, the implementation of current and planned regulatory measures in many countries and regions.
Regulation has been, and will be, a significant trend in the industry. Relief measures put in place by regulators as part of the COVID-19 reaction have been modest and temporary in nature, and they will eventually be scaled back. Regulatory initiatives that had been planned or temporarily postponed will be implemented in short order.
In the South African space, the COFI Bill, with the second draft published in September 2020 forms part of the government’s financial-sector regulatory reform process. The Bill aims to significantly streamline the legal landscape for conduct regulation in the financial services sector, and to give legislative effect to the market conduct policy approach, including implementation of the Treating Customers Fairly (TCF) principles.
5. Continued de-globalisation will further align the size of financial institutions to the GDP of their home countries while continued offshoring will increase operational risk across the industry.
De-globalisation could lead to a renewed focus on nearshoring and the diversification of offshore locations. Asset and wealth management that is not viewed as affecting systemic risk has followed a different path, with greater globalisation in some cases, and, in others, more localisation or regionalisation.
6. Firms face unrelenting pressure to boost productivity through the digitisation of the business and the workforce.
It is unlikely that adopted digital behaviours will revert after the crisis, and digitally enabled solutions will become an increasing differentiator.
7. The client-driven shift to a platform and ecosystem-based financial services industry will create a new wave of disruption and disintermediation.
The shift to a more platform- and ecosystem-based industry, including more digitised client interactions, will create a new set of challenges and opportunities for the industry.
In an environment with big tech companies pushing into arenas formerly exclusively owned by banks (such as payments and credit), increasing client satisfaction and trust with a wider and evolving set of products and services is an important anchoring factor.
“The post–COVID-19 world brings many challenges and uncertainties, but these can also yield business opportunities for financial institutions. Changes in the geopolitical setting, the structure of the global financial system and a difficult credit environment provide banks, insurers and asset managers with opportunities to support clients in navigating these challenges, adjusting portfolios and developing new investment opportunities,” Francois Prinsloo, Banking and Capital Markets Leader for PwC Africa concludes.
According to the PwC’s latest SA Major Banks Analysis, South Africa’s major banks already feel the effects of an unprecedented operating environment.” Operating under severely constrained macroeconomic conditions and considerable uncertainty, the major banks delivered a financial performance in FY20 that reflects the challenges of an unprecedented year.” Click here to read more.