Macroeconomic uncertainty, Gen AI and ESG requirements are just some of the themes and factors financial institutions were forced to consider throughout 2023.
Many of these challenges have inevitably spilled over into the new year, but long-established businesses and startups alike can expect their priorities to continue evolving.
In an attempt to answer the big questions, FinTech Magazine asks a host of industry leaders for their insight and expertise on what the future holds for financial services.
- Anurag Bhatia, SVP and Head of Europe at Mphasis
- Emma Bickerstaffe, Managing Director of ESG and Sustainability at Apex Group
- Ash Botten, Vice President, Europe at Tipalti
- John Stephens, Industry Principal, Banking and Financial Services at Workiva
How difficult is predicting the future of financial services given today’s geopolitical, economic and technological factors?
Predicting the future of financial services in a world of complex geopolitical shifts, economic uncertainties and rapid technological advancements is immensely challenging and a risky strategy that many businesses do not make bets on.
Emerging technologies will continue to shape how financial services firms operate in 2024, but this can create unpredictable market dynamics and new challenges for firms to contend with.
What we do know is that businesses attempting to navigate the future of financial services in such a dynamic environment will require a nuanced strategy to remain competitive. They must remain laser-focused on driving efficiency, modernising with technology and establishing sustainable growth in the year ahead.
This will allow them to be better placed to adapt and remain agile enough to combat the challenges of a fast-moving, changing economic environment. This is particularly important for the finance team itself, which will need visibility and control to inform long-term strategic decisions.
With the ever-changing environment, and new macro trends influencing the financial services sector every day including the introduction of AI, climate change and the turbulent geopolitical landscape, it’s becoming a lot more difficult to predict the future.
Geopolitical tensions, for example, tend to overcome economic growth across the major developed economies, which could have spillovers into several of the sub-market systems, such as the commodities market and the credit system.
There could also be a downstream impact on consumers in particular. These situations make it harder to predict the trajectory of the financial system given the number of uncertainties.
In the face of geopolitical unrest and its immediate repercussions on commodity prices, the financial services sector remains resilient and is not suffering from any structural deficiencies. As such, there is only a prospect of upside when we look at the future.
The recent wave of digitalisation and the coming wave of AI will only add to its prospects as financial services become more democratised, available and inclusive. The evolution towards digital financial solutions signifies a shift towards greater availability and a commitment to inclusivity, promising a future where financial services are not only robust but also more widely distributed and accommodating of diverse needs.
What springs to mind when you consider the future of financial services?
The financial services space will continue to evolve. If we take a look at banks, they’ll continue to partner with non-bank fintech companies to expand their reach for offering traditional bank products and services, such as deposit accounts, payments and consumer lending.
A trending topic at the moment is the use of third-party risk management, as this will have significant potential benefits for fintech companies. In years to come, this will also introduce additional layers of risks to the banks, in terms of safety and soundness, as well as to consumers.
In the future, the financial services industry will continue to show considerable and growing interest in a wide range of uses for data analytics and broader machine learning.
We’ll likely see banks using AI to strengthen safety and soundness while enhancing consumer protections and improving the effectiveness of compliance functions.
Banks could also use AI to enhance bank customer services and products in areas such as chatbots to aid in directing customer inquiries, assisting with online account openings and supporting more efficient credit underwriting.
We’re also beginning to see banks explore newly developed kinds of Gen AI that are trained on large data sets and can be used to generate text, images, videos or other outputs from a given prompt.
Within these institutions, the audit and compliance departments will start to look for opportunities where they can be more agile in their reviews, to keep up with the pace of change. They’ll also likely start to explore avenues to automate some of the control testing processes to ensure speed in the review and reporting processes.
The future of financial services will be dictated by finance leaders modernising with technology to remove manual processes while increasing visibility and control – especially in periods of tough economics. Businesses have an AI charter on them, meaning that AI tools are now a competitive differentiator for many finance teams.
As businesses continue to digitally transform and rely on technology to inform strategy, the future of financial services will demand a new hiring profile for the finance team. It will become less about traditional finance studies and more about being analytical.
The pull of working in a more dynamic environment will give rise to a new wave of strategic finance talent and the finance office will become a more attractive place for graduates.
Key thoughts associated at the moment are increased digitalisation, centralisation of services and regulation of certain shadow areas of financial services like crypto.
The emphasis on increased digitalisation underscores the growing reliance on advanced technologies, while the centralisation of services points to a trend of consolidating financial operations.
Simultaneously, regulatory measures need to be explored to address certain unregulated facets, especially in the realm of cryptocurrencies.
How quickly will the crypto market grow in the next few years?
Predicting the exact pace of crypto market growth is challenging, given its dynamic nature. But we know cryptos are a reality and need to be included in mainstream finance at a much more rapid rate.
For that to happen, we need more robust regulatory frameworks. Given its decentralised nature, there needs to be more cooperation between countries to make such regulations effective. That is the only challenge I foresee in the way of the mass adoption of cryptos as an asset class.
However, with increasing institutional interest, regulatory developments and technological advancements, a substantial growth trajectory is anticipated in the next few years, as cryptocurrencies continue to evolve.
The crypto market is a highly dynamic and uncertain domain, and its future growth depends on various factors such as technological innovation, regulatory environment, consumer adoption and market sentiment. Therefore, it is difficult to make precise and reliable predictions about crypto market growth in the next few years.
What is the future of regulation in financial services?
Focus on ESG has grown rapidly in recent years as new generations of investors and consumers have come to demand business does its part to protect our shared environment. This is undoubtedly a good thing, however, we are now seeing the fallout from a lack of consistency, global standards and regulation.
Regulation is necessary, but diverse regulation can be difficult for investors to navigate, especially those who might be working across multiple jurisdictions.
Over time, we will likely see a degree of regulatory convergence across different jurisdictions, for example with the EU’s Corporate Sustainability Reporting Directive (CSRD). While this regulation only applies within the EU, its impact will nevertheless be felt globally as businesses from outside the EU fall within scope.
The best approach for businesses looking to navigate these intricacies is to build internal knowledge, put the operational foundation in place to monitor ESG data, ideally set targets and consider what initiatives you might embrace to improve performance year after year.
The UK has already established a new way of creating financial regulatory policy and implementing regulatory rules. Under the Financial Services and Markets Act 2023, there is a clear division of responsibilities between Parliament and the financial regulators, which helps to enhance transparency and accountability requirements for the Financial Conduct Authority (FCA).
With this in mind, the regulatory environment continues to evolve, and the expectation is that there will be more regulatory involvement in not only the traditional areas such as capital and liquidity but also emerging areas such as innovation and financial technology.
We can already see this taking place through regulatory agencies in the US, including the Federal Reserve Board (FRB).
The current areas of focus going into 2024 include matters involving bank-fintech partnerships, AI, digital assets and tokenisation, as well as other new and changing technologies and business models that affect federally-supervised banks.
According to the (UK-based) Federation of Small Businesses, 52% of small businesses experience late payments, causing 37% to apply for credit to manage their cash flow. This is threatening jobs and damaging the economy.
Over the last few years, the UK Government has introduced many reforms to the Prompt Payment Code, an initiative designed to speed up cash flow, increase compliance and stimulate business growth.
But, despite almost 3,000 companies signing the code, poor payment practices run rampant. In 2022, SMEs were owed, on average, an estimated US$28,000 in late payments.
With opportunities to boost the economy by US$3.2bn by paying small businesses on time, the future of regulation in financial services must address late payments. Whilst these new Prompt Payment measures will help to some degree, ultimately the solution lies at the root of the issue: manual finance operations.
Often, it’s not the case that large firms making payments to small businesses don’t want to pay on time – it’s that they are operating manually and cannot keep up with the workload.
To what extent is the fight against climate change set to impact financial services?
Climate change is a major challenge for the financial services sector, as it poses both physical and transitional risks to the stability and performance of the industry.
Physical risks are the direct impacts of climate change on the environment, such as extreme weather events, sea level rise and biodiversity loss. These can affect the value and viability of assets, loans and insurance products, as well as the operational resilience of financial institutions.
Transitional risks are the indirect impacts of climate change on the economy, such as policy changes, technological innovations and shifts in consumer preferences and behaviour.
These can affect the profitability and competitiveness of financial firms, as well as the demand and supply of financial services. We would recommend financial services firms take a comprehensive and holistic approach to climate risk management.
This is likely to be the elephant in the room. While the vast majority of the ‘sell’ side still views the market in terms of opportunities and profits to be made, the ‘buy’ side is increasingly tilting towards greener options. Younger fund managers are keener on investing in projects that secure their environment along with their financial well-being.
As global awareness and regulatory frameworks around environmental sustainability continue to strengthen, financial institutions are compelled to reassess their practices and investments.
Climate-related risks, such as physical impacts and transition risks associated with shifts to a low-carbon economy, are becoming integral considerations in risk management.
Financial institutions are adapting by incorporating environmental, social and governance (ESG) criteria into their decision-making processes.
At Mphasis, one of the growth pillars for ESG is implementing innovative green practices and minimising ecological footprint. Also, according to our ESG report, at Mphasis 48% of energy needs are fulfilled through renewable energy and we saw a 148.69% increase in total waste recycled in 2023.
In the future, we will see a lot more of this creeping into mandates from clients as well. As such, capital flows will support transition plans made by governments across the world.
In the years to come, the financial services sector is likely to be significantly affected by both the physical and transitional risks associated with climate change.
Some of the physical risks include the harm to people and property arising from acute, climate-related events such as hurricanes, wildfires, floods and heatwaves, whereas transitional risks refer to stresses impacting certain banks or sectors arising from the shifts in consumer and business sentiment.
Losses from natural disasters are already increasing, resulting in insurance increasing or even being unavailable in at-risk parts of the world. Consequently, climate change can make banks, insurers and reinsurers less diversified, because it can increase the likelihood or impact of events previously considered uncorrelated, such as droughts and floods.
Going forward, it will be important for insurers to understand that their physical risks are essential on the asset side, but risks also arise from the liability side as insurance policies generate claims with a higher frequency and severity than originally expected.
What benefits and dangers can you foresee Gen AI bringing to financial services?
While Gen AI and financial services might seem like strange bedfellows, there are a host of ways the technology can enhance operations, productivity, innovation and decision-making within the finance function.
Currently, a third (33%) of finance time is still being spent on manual processes – time that could be better spent on strategic initiatives contributing to growth. From data entry and report generation to financial modelling, ChatGPT is increasingly accurate in its ability to perform some of the more manual responsibilities.
For example, the ability to analyse real-time financial data allows finance teams to better detect patterns and identify potential risks, which can be of great benefit in creating strategic risk models.
Gen AI models can also be used to automate many tasks that were previously done manually by human analysts.
Instead of sifting through spreadsheets and reports, AI models can take on the brunt of the workload – especially crucial in saving time for finance leaders who are now being tasked with the strategic delivery of growth.
However, leveraging Gen AI in finance isn’t without risk, even if you only use it to create a better customer experience or improve your team’s productivity. Data privacy and confidentiality implications must be considered. Given prompts can be included in the public model, there could be a risk that team members inadvertently disclose proprietary data.
Gen AI has the potential to bring many benefits and some dangers to the financial services sector, depending on how it is used and regulated.
It can generate personalised financial advice, optimise portfolio allocation, and detect fraud and anomalies, but it can also enable financial innovation, such as creating new financial products, strategies, markets and platforms.
Gen AI can also create misleading or harmful content and manipulate or compromise data – something we take seriously in ESG – and evade or violate rules and standards. It can also create new sources of uncertainty, volatility and complexity in the financial system.
Financial services firms need to be aware of the opportunities and threats that Gen AI can bring, and adopt a comprehensive and holistic approach to risk management, governance and innovation.
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