Where Banking and Financial Services Are Headed in 2021

“Out of the chaos of 2020 come reasons for optimism.”

It looks like the Banking and Financial Services industry’s strategy of just-get-through-summer worked. In ISG’s fourth-quarter Index™ call, we learned that annual contract value for BFSI’s combined market of managed services and as-a-service reached an all-time high of nearly $12 billion for the quarter, and for 2020 as a whole it rose 4 percent from the prior year.

Of course, each region and institution felt the impact differently (for example, their degree of exposure to interest rates for income), and some adapted better than others to the chaos of the past 12 months. Financial institutions felt the challenge in revenue, profit and stock price, and as you would expect, those exposed to high-risk sectors such as hospitality and travel fared the worst. With a more diversified set of income sources, investment banks were not as badly affected by the pandemic as retail banks, which helps to explain why the U.S. market (with its heavier mix of investment banks) performed better than Europe in terms of contract awards.

When businesses temporarily shut their doors as COVID-19 spread around the globe, markets panicked. In the U.S., Global Gross Domestic Product fell 5 percent and unemployment went from 3.5 percent in February to 15 percent by April, while federal debt ballooned $4.5 trillion, up 20 percent from 2019. Stock prices of Wells Fargo, Citigroup and Comerica plunged by as much as 60 percent. Some stocks have partially recovered, but there was a lot of lost ground to make up.

In the scramble to set up work-from-home models and technology, banks faced the added scrutiny from regulators interested in ensuring that compliance standards were maintained. The all-important customer engagement had to take place over digital channels, which meant greater emphasis on mobile application functionality, online experience and contact center effectiveness.

But we shouldn’t lose sight of the fact that, even before COVID-19, every financial institution was undergoing some form of transformation, whether that was automation, cloud migration, enterprise agility or something else. As we head further into 2021, organizations are trying to understand where they are on those journeys – both as compared to internal expectations and as compared to their industry peers. They also need to measure the value of that transformation – and likely increase it – in the context of a post-pandemic future.

Given this backdrop, the C-Suite’s top priorities for the year will be in response to the following trends:

1. Challenger bank shake-out. Last year, we witnessed the salutary tale of U.K.-based online bank Monzo, and despite the attraction of new logos and better customer experience, many consumers are still creatures of habit. We are simply not switching full services to new firms en masse. In fact, the average balance in a digital bank account is less than $350. Investors also understand the other major problem for start-ups/scale-ups; most of them don’t make a profit. In normal times, investors are prepared to wait for the expected returns, but in a wildly volatile market, funding is harder to secure. This is prompting many new entrants to articulate business strategies and show an early profit (or at least a plan to get there), such as Dutch start-up mobile bank bunq’s subscription-based fee model.
2. Finding high-potential candidates for automation technologies such as machine learning and AI. Driving customer intimacy and engagement, combating financial crime and making better use of data are just three of the use cases we are familiar with, but many more will likely emerge over the course of the year, especially in relation to customer preferences and spend management. These technologies are in their infancy, but the pressure of competition will force accelerated adoption.
3. Further disintermediation in the industry caused by firms acting as a financial services broker or “concierge.” These new entities are offering customers a best-of-breed “one stop shop” experience, threatening established institutions’ hold on primary customer contact and data and forcing them to compete on price in the background, much as we have seen in the Utilities sector. The Deputy CEO of a new bank in London told me his institution wants to be seen not as a bank but as a “financial lifestyle advisor” because he believes that’s what today’s generation of customers wants. This reshaping of the industry will be exacerbated by the continued encroachment into financial services of the big tech companies like Apple and Google.
4. An acceleration in the adoption of platforms for increased capability. The adoption of platforms such as Mambu, 10X and the FIS/Google Modern Banking Platform likely will become more prevalent to drive end-to-end process effectiveness and increase speed to market. This will go hand in hand with a push toward newly evolving ecosystems that allow financial institutions to partner with (or acquire) FinTechs and InsurTechs to enhance their customer propositions and embrace third-party service providers in the middle and back offices. Focusing internally on what differentiates an institution from its competitors and engaging experts in all other areas will be the predominant business model.
5. A resurgence of the merger and acquisition spike we saw in 2018 and 2019, especially among U.S. firms. In uncertain, chaotic times, scale is your friend and so is synergistic cost reduction. This means we will likely see more examples like Truist (the combined new entity of SunTrust and BB&T banks), Franklin Templeton/Legg Mason and Charles Schwab/TD Ameritrade. In fact, we are already seeing evidence of this upturn in S&P Global’s announcement that it will acquire financial data provider IHS Markit for $44 billion.
6. Further divergence in global regulation. While the more centralized U.S. bodies are concentrating on new challenges like digital currencies, Europe is meting out slower, more considered regulation to manage a deeper financial shock and is wrestling with a lack of coordinated alignment across the continent.
7. A laser focus on the customer-employee axis to drive productivity and higher revenues. The Holy Grail for financial institutions is enabling employees to leverage insightful data in creating a seamless experience for customers so they buy more products and services. This quest is perhaps most acutely felt in the contact center of the future, which will act as a crucible for all these important employee-oriented and customer-facing elements.

ISG helps banks and other financial services institutions assess the current state of their transformation journeys and make strategic plans for the future. Contact us to discuss how we can help you.

About the author

Owen Wheatley is Lead Partner for the Banking & Financial Services (BFS) Practice with responsibility for senior client relationships, business growth, go to market strategy and delivery excellence through the management of high-performance advisory teams across multiple regions. He sits on the Executive Committees in both the USA and Europe, has served major banking & financial services clients around the world and continues to be a widely published thought leader in the industry.