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Transparency, Trust and Technology: The Future of Financial Services

The financial services landscape has changed dramatically over the past decade, with multiple economic crises, a global pandemic and wave upon wave of regulatory change, designed to make the sector stronger, fairer and fit for the future. We anticipate the future of financial services, across all its sub-sectors and related fields, rests on three pillars: Transparency, Trust and Technology.

1. Covid-19: Complication or Catalyst?

The implications of the Covid-19 pandemic for financial services are clear. Saving has become more popular than it was pre-pandemic – out of necessity rather than a growing trend. The need for specialist guidance and advice, access to finance, genuine customer support and service – whether B2C or B2B – has spiked during the coronavirus crisis. Better client service has been enabled through fast, efficient ways of moving money, which have evolved via quicker adoption and development of technologies. Times were changing even before Covid-19, in line with changing societal values and behaviors.

Price, returns and wealth are still top of the triangle. But more and more important variables are emerging as society evolves, such as doing the right thing, stronger ethics and commitment to environmental and social good; tech innovation to make life simpler and speed up financial processes. Consumers want much more control over their finances, such as insurance, savings accounts, pensions and investment products. Being able to do everything from a smartphone or device is the norm and is expected by today’s consumers and increasingly, by investors. There is a fine balance to be struck between regulatory paperwork requirements and the ease of accessing financial information and advice.

2. Building, Re-Building and Sustaining Trust in Challenging Times

According to Guy Anker of Money Saving Expert, the financial services industry has, for the most part, weathered the coronavirus crisis admirably and been more of help to consumers than a hindrance. The sector has performed better than others, such as travel, in their communication, service and ability to weather the storm. People don’t just rely on the website as a source of information in 2020. Financial services firms have provided regular, easily accessible updates on what’s going on throughout the pandemic, getting information out as quickly as possible to the media and across social media. Finance providers across the sector have demonstrated depth of knowledge and understanding through their communications, content and thinking.

Compare this to the 2008 financial crisis and “double dip recession” of the previous decade, when lack of transparency and ethics in the financial services industry were causes and focal points of the economic crashes, with widespread communication failures.

Service Sells…

Strong service to customers and clients now, quite rightly, sits high on the agenda alongside financial success for financial services companies, both B2B and B2C. The companies that set the tone for service excellence are helping shape that shift. While service levels across the industry, particularly on the consumer side, have dropped due to unprecedented pandemic demand, people seem to be accepting that to a certain extent, under the circumstances. They may put up with being on hold for longer, for example, in the short-term. Patience in this regard will not last much longer, however. Companies will need to find longer-term solutions. PwC’s pre-pandemic report on US customer experience highlighted that 17% of consumers would walk away from a company – even one they love – after one bad experience, rising to 59% after several poor interactions with even a much-loved brand.

Those financial services organizations that are more agile and seek solutions sooner rather than making excuses for slips in service speed, responsiveness and quality, have an opportunity to win new customers and delight existing ones, in turn transforming them into advocates.

Hanging out with the Cool Kids

Big brands still dominate – possibly even more so now, as clients seek organizations they can depend on in difficult times. This can be traced back to the 2008 crisis, when many banks and financial providers dropped off a cliff. This (understandably) spooked markets, investors and consumers, leading to continued concerns about their money being safe. Ever since then, the bigger the brand, the more likely someone is to switch to them – or stay.

Recent years have shown that you can create and become a big financial service or fintech brand and be a household name relatively quickly. Challenger banks like Monzo and Starling have risen on service propositions and being a “cooler” alternative to traditional banking, quickly gaining advocacy and valuable word of mouth recommendations, despite their respective issues in 2020, including security and fraud concerns and overdraft fee hikes. Customers of non-traditional banking and financial services really like them and appear happy to spread the word.

It seems that UK retail banking customers are undecided about their willingness to switch to a challenger brand, however.

Their use of and access to innovative tech, despite their own respective problems amid the current crisis, have made for a better customer experience and sense of community, of hanging out with the cool kids on the block. Take Monzo as an example. Monzo customers are more likely to say “I’ll Monzo you” than “I’ll transfer the money.” Monzo has managed to make themselves a big brand quickly. Trust, transparency and technology are a critical part of building a brand in that way. Yet concerns over fraud and interest risks in challenger banks and incumbent financial institutions alike have raised questions about the safety and security provided by various banking services and, combined with the COVID-19 pandemic, have had an effect on profits for some of the FinTech challengers, too. Building robust security and anti-fraud measures and communicating these effectively with customers will be key to building and retaining trust in the turbulent months ahead.

3. Resilience, Agility and Tech Capability

Technology will be the biggest future driver in financial services. Companies that embrace new technology and don’t let Covid-19 get in the way of that have a clear opportunity. Customers have short attention spans and are now even less happy to waste time standing in line, waiting at the other end of the phone, or filling in endless pages of paperwork.

Howard Yu, IMD Business School, recently spoke on Beyond Disruptive Technologies: How to Prepare for What’s Coming Next. Yu reiterates that seeing businesses still in crisis mode is concerning. “The world will look very different post-pandemic and will not just return to how it was in the past. Businesses must build capability and resilience for real scenarios. The biggest danger is assuming business that will return to usual. You need to shape the business for what it will look like in the future.”

Clear Communication

Being an adaptable and agile leader and communicator is vital, now more than ever – a business cannot rely on technology alone. People and processes are the key success factor here, enabled by strategic adoption and use of tech and the strength of relationships inside and outside the company.

The need for genuine human interaction cannot be ignored and has become ever more important during Covid-19 pandemic restrictions.

Security

Security of finances and financial information are also paramount, and technology can be an enabler and gatekeeper of greater security in the sector. Howard Yu adds, “Right now, everyone is concerned about data storage security, but wider cyber security issues are coming to the fore and companies are working to anticipate them and put measures in place to mitigate risk. We are also going to see a whole raft of regulation and regulators playing a far greater role in keeping consumers safe. Companies therefore need to stay agile, but have level of commercial discipline, too.”

4. Do the Right Thing

A key driver is “doing the right thing”. Looking after the environment, playing a fairer role in society and supporting community and social initiatives have brought about a massive shift in demand for green energy and ethical and socially beneficial finance – particularly when it comes to investment. “Going green” hasn’t quite permeated the whole financial services industry as much as it may do, but we will certainly see more of it.

The Covid-19 pandemic also appears to have contributed to increased take up of more ethical and sustainable investments and supported already evolving attitudes, particularly as the positive environmental impacts of worldwide quarantines have come to light.

ESG and sustainable investing

There has been a big shift towards more sustainable and ethical investments in recent years, with 2020 coronavirus crisis acting as a catalyst for change and increased take up. You can see progress in all areas of financial markets.

Mona Naqvi, head of North American ESG product strategy at S&P Dow Jones Indices, says sustainable investment has been here for many years, but flows are now gaining momentum, as advances in data collection have made ESG more accessible and innovative.

HSBC’s recent Future of Sustainable Finance report of investors and issuers globally shows the scope of that changing market. The survey found that there are now fewer obstacles to wider environmental, social and governance (ESG) investing and a growing appetite, with 90% of the 2,000 survey respondents stating the importance of environmental and societal issues. In 2019, 61% of global investors reported obstacles to sustainable investing; this figure is now down to less than half (46%). HSBC says in their report: “Covid-19 has also brought a reckoning and reassessment in the thinking of issuers and investors.”

Covid-19 has clearly been a catalyst in encouraging attitudes to responsible investing and ESG investment continues to pick up the pace, moving from niche to mainstream. Nearly 30% of all investors – rising to 40% in Asia – report that the pandemic has strengthened their commitment to considering ESG. 41% of issuers now believe even more strongly that becoming sustainable is important.

Banking on a Good Investment

UBS surveyed over 5000 investors in 10 markets on sustainable investing. They found that there was still confusion about sustainable investing, but better education on the approaches and benefits is leading to higher adoption. Emerging markets have higher levels of adoption, where there is clearly an opportunity to grow sustainable investing markets, compared to far lower uptake in the USA. UBS found that multiple sources influence the decision-making process of sustainable investors, from professional advisors and media, to friends and family. Importantly, 9 out of 10 of the investors surveyed in the report noted the impact of their advisor on their sustainable investment decision. Investors in sustainable finance also expect good returns: 82% of survey participants believe sustainable investing returns will equal or reach beyond returns offered by traditional investment opportunities.

Market Momentum

Institutional Investors are increasingly looking for investment opportunities with demonstrable social impact. The focus of ESG is widening in financial markets to include real estate investment with social benefits. According to an October 2020 research report by Alpha Real Capital, this could be a $50 billion secure income opportunity. In the report, some 30% of pension funds and other institutional investors plan to increase allocation to funds offering social benefits over the next two years.

Survey respondents from the UK, Netherlands, Germany and Ireland identified that secure income assets can deliver high-quality, inflation-linked cashflows and attractive returns – 80% of these professional investors now consider social real estate on their radar as an investment opportunity. Given strong investor appetite, finding opportunities outside the traditional sectors is a secure and speedy source of capital deployment and could unlock hidden value in areas otherwise overlooked.

Another recent survey from Octopus Investments found that 80% of institutional investors plan to double allocations to renewables over the next 3-5 years, with over half citing stable and predictable cash flow as a key reason to invest.

Passive investors are also getting involved in sustainable investments – Morningstar noted in their September 2020 Passive Sustainable Funds report that, as of June 2020, there were 534 sustainable index mutual funds and exchange-traded funds (ETFs) worldwide, making up some $250 billion.

Venture capitalists are taking steps towards a more sustainable future, too, through including specific sustainability clauses and accountability measures. This is an increasing trend in tech investment with leading start-up backers signing up to initiatives such as Leaders for Climate action, the not-for-profit organization based in Berlin.

Financing the Future

There is clearly increased confidence in sustainable and greener investments, which appears to be shared across investors, markets and policymakers. Take green bonds, for example. Green bonds issuance reached $270 billion in 2019 and notched up some $200 billion between January and September 2020, according to Bloomberg, on track for another record-breaking year for sustainable finance. Moody’s found that figures went up by 65% April-June 2020, compared to the first quarter of the year, as the global Covid-19 pandemic highlighted emerging economic, environmental and social issues, and therefore new areas of risk.

The UK government announced a green bonds program as part of their “Build back better” steps in November 2020. Thomas Archer, Nikko Asset Management’s green bond product specialist, said following UK Chancellor Rishi Sunak’s announcement of green gilts to strengthen the UK’s carbon reduction commitment and position as a sustainable financial center in November 2020 that it marks a “major step forward for the UK in its aspiration to be a leader in green finance” and will “further the UK’s reach in funding other projects with positive climate benefits”.

Mr. Archer continues: “As we go into 2021, the UK will want to take world leadership in green finance… as the country emerges from the COVID-19 induced recession, it will be essential to use green bonds to kick-start investment and provide the capital to fund their investment agenda. Nikko Asset Management became carbon neutral themselves in 2019, further demonstrating that investment firms are putting their money where their mouth is.

Circular Economy

New government regulations may require companies to have local suppliers, so they will need to focus on how this will impact on their business models and supply chains. The financial sector has a significant role to play in supporting a more circular economy. ING published their report on moving away from a linear economy to a circular economy and how this can present greater growth and profits for businesses in January 2020, for the third year running. It will be insightful to see what impact the coronavirus crisis has had on their findings in 2021, as the drive for sustainability in all sectors continues at pace.

Accountability, Reporting and Governance

Banks have never been more in the firing line when it comes to investing in companies that are sustainable. In times gone by, qualifying whether a company is up to ESG standards has been difficult and a bit of a grey area. Banks are now being required to create new guidance and regulation to deem whether a business is up to ESG standards. Part of this is sense checking these companies against new criteria that businesses must align with for investment. The other side of the equation is planning, accountability and disclosure on climate and sustainability commitments across all areas of the business.

The landmark report from Eversheds and KPMG on Climate Change and Corporate Value sums it up succinctly: “The message is clear: In addition to disclosure, investors and other stakeholders want to see information on company climate change plans.” Effective strategic planning that involves the whole company and engages stakeholders at all levels will be crucial in delivering on sustainability objectives.

New reporting requirements will come into play. This is being driven by investors and global policymakers for improved social good and to narrow the gaps and eliminate the many inconsistencies across sectors and corporates in ESG reporting. Implications for accountability, reporting, and transparency are clear, but there is also an overt opportunity for technology innovation and implementation to improve these areas and reduce opacity in financial markets and the corporate world. Chris Varco, managing director, Cambridge Associates Sustainable Capital, comments, “Solving global challenges at the interface between technology and sustainability is a huge investment opportunity”.

Diversity and Inclusivity

European banks and IT companies ranked well in recent FT research on diversity. While the number of women in leadership roles has remained the same in this annual report, the companies that ranked highly in the league tables tend to have more women in senior positions. A 2020 Oliver Wyman report shows there is progress being made in the industry, but not enough. In the report, Stephanie Cohen, Chief Strategy Officer, Goldman Sachs, observes, “Having a diverse workforce is not only the right thing to do, it’s a business imperative. You will lose the war for talent and business if this isn’t a top priority.”

As PwC points out in their diversity report, words are not enough. Companies with greater diversity of race, ethnicity and gender are more profitable, according to 2020 studies. This makes sense – the company has access to a wider pool of talent, skills and approaches and a more inclusive environment encourages collaboration and co-operation. Consumers and investors increasingly expect the companies they choose to provide their services in any sector to be inclusive, rewarding them in turn with their trust and their money. Ensuring diversity in every sense, with a genuinely inclusive working environment and ethos across gender, ethnicity, disability, across the company will be critical to secure a successful future for financial services.

Remembering the Three T’s – Trust, Transparency and Technology

Ultimately, the financial services organizations that will be most successful – both institutional and retail – are those that genuinely put customers and an ethical approach at the heart of everything they do, spanning business models, workforce, strategies, service levels, marketing and communications. Firms need to plan to include the Three Ts now, if not already. Transparency to build and sustain Trust and be a force for good. Positive, accessible user and stakeholder experiences at every stage, enabled by innovative and agile Technology. This will also encourage another key ‘T’ for all sectors throughout 2021 and beyond: Trade.

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