More than 10 years after the outbreak of the global financial crisis, the financial services industry is still reeling. Some of the big players continue to find themselves under intense scrutiny and old ailments, like non-performing loans and liquidity issues, are harmful in the context of macroeconomic trends.
The financial services industry has been, and still is, in a process of transformation. Fintechs are bringing new competition to the sector at the same time as costs are rising – largely driven by regulation. Technology is also shifting the goal-posts. Banks now have new tools like artificial intelligence, machine learning, predictive analytics, robotic process automation and blockchain to work with.
But regulators are not making it easy to exploit these new technologies. While they offer the potential for huge cost savings, their ability to manage risks has not been sufficiently proven. Regulators view new technology with suspicion. Unchecked, it can create new risks of service outages or information security incidents. In addition, regulators need the assurance that the data used to calculate risks is reliable; if not, it could lead to false decisions. It’s a double-edged sword; big data sets can detect suspicious patterns, which can help financial institutions fight financial crime. But this increased automation, for example in online based services, can also open the door to those who are able to exploit weaknesses in the system.
With tech comes data
From both a regulatory and a business point of view, data plays a key role in the financial industry. However, it also brings fresh attention to the question of data governance. The processing capability of many IT departments still cannot match the potential of big data. A recent study by Reply shows that companies are still reluctant to invest in quality data governance systems, even though there are well established technologies on the market. Nonetheless, external bodies are intensifying the pressure to conduct proper data governance audits. Regulations such as GDPR, IFRS 17 and BCBS 239 demand considerably more insight into the company’s own data landscape than existed before.
Smart data governance can only be truly beneficial when used in conjunction with other data management tools. Companies must focus on both the proper analysis and management of data, which produces better compliance and more reliable and faster decision-making processes. It will also minimise risks associated with incorrect or incomplete data sets. As such, prioritising data governance solutions is an investment worth making.
Of course, we can’t ignore blockchain. The Reply study predicts a further integration of blockchain across the financial sector. In addition, it forecasts that blockchain will gain further significance in the context of asset tokenization, the division of assets, such as real estate, into tokens stored in a blockchain which facilitates more efficient trade on a secondary market. In connection with Know Your Customer/Anti-Money Laundering (KYC/AML) protection, blockchain provides more security through improved identification management. Costs can also be kept low through Blockchain-as-a-Service (BaaS) offerings which should further increase acceptance of the new technology.
Skills Gap as a fundamental risk
The Reply study has uncovered many potential opportunities in the financial sector, each with their own potential risks. However, one of the major challenges faced by financial institutions is the looming skills gap. The modernisation of the IT landscape will act as a basis for more innovation and agility as well as the development of new Cloud services, which requires a skilled workforce. Skills and innovation go together and in a competitive landscape, known as “Digital Darwinism”, enterprises need to make sure that innovation is part of their DNA. Innovation is needed both in employees and in the processes that empower change towards a more customer-centric and efficient organisation.
In the context of this multidimensional risk landscape, the Reply Financial Services Outlook 2019 gives a 360° overview from Risk Management to Digital Transformation. This can aid decision makers seeking to prepare for the integration of new technology driven concepts such as AI, Big Data or Blockchain while keeping macroeconomic and geopolitical currents that will impact the journey ahead in mind.
The full whitepaper is available for download here: https://www.reply.com/avantage-reply/en/financial-services-outlook-2019
UNBANKED AND UNCONNECTED: SUPPORTING FINANCIAL INCLUSION BEYOND DIGITAL
Darren Capehorn, Director, Icon Solutions
Many of us take it for granted, but accessing basic financial services is fundamental to our economic and social development. It is hard to ‘get on’ if you are forced to hide life savings under the mattress, or rely on predatory loan sharks for credit.
Yet an estimated 1.5 billion adults around the world do not have a bank account or access to formal finance systems – making 40 percent of the global population ‘unbanked’. This limits opportunity and stifles potential. Indeed, research by EY has shown that financial inclusion could improve some countries’ GDP by up to 30 percent.
Given the transformative benefits (and yes, revenue opportunities), promoting financial inclusion has been a key priority for banks and fintechs over recent years and as a result, significant progress has been made. But with COVID-19 plunging the world into a period of unprecedented uncertainty, it is imperative that these gains are protected.
Banking on financial inclusion through technology
Undoubtedly, enabling financial inclusion has become significantly easier in the wake of technology-led innovation. Take increasing smartphone penetration, which has allowed banks, fintechs and telecom operators to offer highly accessible, low-cost digital financial services to previously underserved populations.
These initiatives have had a huge impact. Sub-Saharan Africa, for example, has become the global leader in mobile money, with competition between different providers driving rapid innovation and promoting financial inclusion at scale.
This success provides a blueprint for the power of technology. But despite the huge long-term potential, we must be realistic about the current limitations. Although mobile connectivity is increasing, over half the world’s population remains unconnected. To rely solely on digital interventions is to leave billions of people behind.
Beyond digital: Establishing community banking systems
Where there is no digital infrastructure, establishing safer financial systems is the first critical step to transitioning out of poverty. This is where organisations such as WeSeeHope, a charity committed to creating community-led change for vulnerable children in Southern and Eastern Africa, play a crucial role in laying the foundations for a sustainable future.
WeSeeHope’s Village Investors Programme (VIP), for example, has established a community banking system enabling parents and guardians of vulnerable children to access savings and loans. By providing training and tools, communities have been able to establish self-funded and self-regulated savings and loans groups, helping members to start and expand small businesses.
It may not be complicated, but this simple, sustainable and scalable approach delivers tangible benefits and supports a range of positive outcomes. Since the start of the programme, nearly 24,000 members have been trained as part of the VIP.
As a result, 67,000 children have directly benefitted from access to financial services, as their parents and guardians can afford school fees, improve their homes and invest in naturally reproducing assets to secure future income. This creates a virtuous circle, with economic prosperity driving better infrastructure to enable the delivery of more advanced financial services.
In 2018, I was fortunate enough to see these benefits first-hand in Malawi where, on average, members of VIP see their income rise from $1 to $3 a day. As you drive through this beautiful country, it is easy to spot a community where WeSeeHope has made a difference simply by counting how many homes have upgraded their traditional straw roofs with tin sheeting. Literally a shining example of improved financial prosperity!
A call for global financial inclusion
Unfortunately, we are at risk of taking a significant step back. We have all been impacted by COVID-19 in some way, but the crisis is set to extend and exacerbate extreme poverty and financial insecurity for some of the world’s most vulnerable people.
As part of a global financial community, we must consider the long-term impact and see financial inclusion as a fundamental priority as we look to re-build a fairer, more sustainable world.
Technology will undoubtedly be integral to this effort, but as the International Monetary Fund notes, “to tap the high potential of digital financial services in the post-COVID era, many factors need to fall into place.” This will take time.
We must therefore take a holistic view and ensure that organisations like WeSeeHope, which are playing a crucial and immediate role in promoting basic financial literacy and service availability, do not slip through the cracks themselves. Immediate short-term funding and long-term income projections across the entire third sector have been decimated, putting vital initiatives at risk.
These are challenging times for everyone, but we must trust that in acting now the rewards will be worth it.
TIME TO FOCUS ON YOUR ‘WEALTHBEING’
Tony Mudd, Divisional Director, Development & Technical Consultancy. St James’s Place
FIVE WAYS TO SAFEGUARD YOUR FINANCIAL FUTURE
The financial and economic impact of the coronavirus crisis has thrown up a host of issues for families to consider.
Above all, the experience has reinforced the importance of always being prepared.
The pandemic’s effect on jobs and incomes has underlined the value of having a robust financial safety net in place. And it’s never too late to take control and start planning. It’s time to focus on your ‘wealthbeing’.
Here are some positive steps you can take to safeguard your financial future.
- Income security
With almost nine million UK employees of around one million businesses1 placed on furlough since the coronavirus crisis unfolded, there is potential for large numbers of redundancies as employers examine their reopening plans and contemplate the future of their business.
If you’re in employment and still being paid, look at how long that is likely to continue. As far as you are able, try to budget appropriately. Also look longer term at other sources of finance that you would be able to access if needed (such as savings, existing investments or, perhaps, borrowing), as well as the gaps that insurance policies could help fill.
If you are facing redundancy, make sure you understand what you can expect from your employer – your notice period, redundancy entitlement and statutory redundancy cover – as well as the government support that’s available.
Ask yourself – Where do I stand? What do I need? Can I continue to pay my bills? What are my responsibilities?If you do need to dip into your savings or investments, be careful about where you take it from – and when. The right choices here will help you preserve your capital by helping you minimise your tax, reduce charges and get the best from your assets.
If you don’t have savings or investments available, check whether you’re entitled to state support. The Money Advice Service website is a good source of information and guidance. If you’re struggling, or think you might soon be, don’t hesitate to seek free, impartial debt advice from the likes of StepChange and Citizens Advice.
- Create an insurance buffer
Do a risk audit on yourself. Ask what the financial implications would be – for you and your family – if you get sick or lose your job. Ascertain what potential risks you might face as a family and as an individual. It will be different for everyone, so it’s about considering your personal circumstances and those of the people who rely on you to work out what you need. There’s nothing to stop parents or grandparents from paying income protection premiums for a younger member of the family, particularly if they are renting or starting out on the property ladder and can’t afford them.
- Prepared for later-life care?
It may seem a long way off, but the Covid-19 outbreak has shown us all that our lives can change in an instant. A will is something that should be reviewed on a regular basis, as it sets out not only who your assets will go to, but also when. Power of attorney (POA) can be especially important, and it’s essential in long-term care. This is an area where financial advice is enormously valuable. Long-term care planning is difficult, and too often people ask for advice when they are already in or approaching a crisis, when it’s likely too late to make a significant difference.
- Avoiding gaps in inheritance and legacy plans
Inheritance Tax legislation changes frequently, and because you don’t know when you are going to die, it can be difficult to cover every possible gap, even with a will in place and some form of legacy planning. The closest option is often ‘whole of life’ cover, which can pay out in trust as a legacy or help family cover any Inheritance Tax liabilities. One of the great things about protection policies is that they can be the solution to a range of different problems.
- Involve your partner and family
Many families remain reluctant to talk about money issues. Consider working with a financial advisor who can bring the family together to ensure that all the necessary issues are discussed among the people who need to be involved. An advisor can facilitate the discussions (without emotional involvement) and offer guidance.
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