Financial Services
What is the Financial Services Sector?
The Financial Services industry, as its name implies, provides services ranging from financial advice to money management to individuals and corporations. This industry group is comprised of financial institutions, including banks, investment houses, real estate brokers, insurance companies, etc. Financial services can be categorised into three main groups: Personal (individuals' budgeting, saving, and spending), Consumer (helping consumers afford products and services by paying in installments over a fixed period of time), and Corporate (financial activities of businesses). The financial services sector is the primary driver of a country's economy, as it provides the free-flow of capital and liquidity in the marketplace. When the sector is performing well, we see the economy grow, which leads to higher consumer earning, which then boosts consumer confidence and purchasing power. When the sector is not performing well, however, the economy will start to suffer. This can lead to an economic recession, which means rising unemployment, potential wage decreases, and a resulting drop in consumer spending.
COVID-19 Impact on the Financial Services Sector
Banking and capital markets firms around the world, like all other businesses, have been significantly impacted by the pandemic. First, firms in the Financial Services sector began mobilizing and taking steps to minimize COVID-19’s effects on day-to-day operations. They began testing and implementing business continuity/contingency plans, which included alternate workplace arrangements, such as split work sites, working from home, and rotating shifts for all types of employees, even traders. Many also heightened measures to ensure the safety and health of their employees through various means. Moreover, banks also requested that regulators ease capital requirements. Some regulators, such as the US Securities and Exchange Commission (SEC), proactively granted relief for regulatory financial reporting to companies affected by COVID-19. Another impact of COVID-19 is increased digitalisation. Prior to the pandemic, while banks had been increasing their use of data and analytics was relatively conservative. The recent lockdowns, however, have forced banks to take the customer experience almost entirely online – onboarding and servicing customers via digital platforms – with many hoping to maintain this digital customer journey in recovery.
Financial Services Sector Key Trends
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Accelerating Digitalisation: As mentioned previously, the industry is witnessing a continued and aggressive focus on digitalisation and the adoption of new and emerging technologies to bring in operational efficiencies and deliver superior customer experiences. Banks are cutting down spending on branches to invest in self-service digital channels as mobile and online banking become more popular among customers. Digital wearable devices, which pack the power of smartphones, are making it increasingly feasible for banks to offer targeted services to customers.
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Increasing Partnerships with FinTech Companies: Many banks are seeking to exploit the opportunities presented by the digital, either by leveraging in-house technologies or by partnering with FinTech companies. Such companies are able to provide marketing, administration, loan servicing, and/or other services, enabling banks to offer tech-enabled products to their customers. These days, bank-FinTech partnerships are increasingly the norm, with FinTechs acting as the front-end for customers and banks providing the capital support in the background.
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Emergence of Alternative Lenders: The process of securing a loan has always been tedious, involving a lot of self-reporting, paper statements, and credit reports. New alternative lenders, however, are changing the stakes. Using data and modern payment platforms, these lenders are able to make loan decisions in minutes instead of months. Many Point of Sale (POS) companies have started integrating alternative lending into their platform – you can now apply for a POS loan and get approved in seconds. These alternative lenders will set the standard for expectations around lending and compel bigger lenders to follow suit, ultimately transforming the loan experience.
Financial Services Subsectors & Key Players
The Financial Services sector covers a wide range of corporations, and can be broken down into the following sub-segments:
Banking: The banking sub-industry is the foundation of the financial services group. It is most concerned with direct saving and lending. Banking services are provided by large commercial banks, community banks, credit unions, and other entities. Some of the world's largest financial institutions are commercial banks (or have commercial banking operations), many of which can be found in the US. Chase Bank, the commercial banking unit of JPMorgan Chase, and Bank of America are two examples of leading commercial banks that fall under this sub-sector.
Investment Services: Individuals may access financial markets, such as stocks and bonds, through firms that provide investment services. Brokers facilitate the buying and selling of securities and earn a commission for their efforts. Financial advisors may charge a fee based on total assets under management (AUM) and direct trades in the pursuit of constructing and managing a high-performing portfolio. Hedge funds (e.g., Point72), Private Equity firms (e.g., Blackstone), Venture Capital firms (e.g., Sequoia), etc. all fall under this umbrella by investing money in the financial markets and collecting management fees in the process.
Insurance: Insurance companies are important players in the global financial economy, although they may not be as flashy as investment banks or hedge funds. Insurance companies come in many sizes and specialise in different policy lines. Their services are available for protection against death or injury (e.g., life insurance, health insurance, etc.), against property loss or damage (e.g. homeowners insurance, car insurance, etc.), or against liability or lawsuit. Key players in this sub-segment include UnitedHealth Group, Ping An Insurance, and Axa S.A., etc.