A DARWINIAN VIEW OF THE CHALLENGES FACING THE FINANCE SECTOR TODAY

Mike Hampson explores how Covid-19 has challenged the financial sector, but sees businesses exhibiting resilience and adaptability, pursing a route to recovery.

 

According to Darwin’s Origin of Species, it’s not the strongest that survives but the most adaptable to the changing environment in which it finds itself. Since the pandemic, the banking sector has weathered the storm and shown a remarkable ability to navigate through uncertain times. As the dust now begins to settle, what have we learnt?

 

Cybercrime is not going anywhere 

Extremely concerning is the surge in cybercrime during COVID times. Fending off escalating cyber-attacks is a serious challenge for financial services, given the sensitive nature of clients’ data. According to the VMware Carbon Black Global Threat Report Series[1], almost every UK business (99%) surveyed suffered at least one security breach in the last 12 months. Ninety-eight percent of the CIOs, CTOs and CISOs also confirmed that attack volumes increased in the last 12 months. More than nine out of 10 noted the increase in attacks were related to employees working from home during lockdown.

Hackers are targeting staff working remotely through impersonation fraud and phishing campaigns. This has created primary risks for banks, as they may unwittingly process payments or even provide financing on behalf of fraudulent traders. And there are secondary risks, as perpetrators attempt to launder the proceeds of crime through the financial system. With bank leadership teams focusing on investing in the relevant people and technology to enhance cybersecurity, the big challenge will be ensuring existing workforces have the skills to keep up.

 

Brexit equivalence decisions urgently needed  

COVID recovery will take place against a backdrop of uncertainty driven by Brexit. The financial services sector – a key driver to the economy – was not provided for in the Brexit trade deal. As a result, from January 1, Britain’s financial sector lost access to the UK financial products and services to be sold in the EU[2].

Experts in the Bishopsgate Change Perspective 2021[3] report hope a memorandum of understanding can be concluded with the EU by Easter. If anything, this should improve market access in both directions, but at this point there seems to be little evidence of progress towards a deal. Unfortunately, since the start of 2021 we have indeed seen trading volumes moving to mainland Europe.

One immediate Brexit impact is the loss in London of the euro-denominated share trading derivatives market, going to Amsterdam, Paris, and New York instead. Financial services specialists in the UK will therefore be looking for new revenue streams, and ways to generate income in the absence of this and other channels. A culture of innovation and adaptability will be essential, with strong leadership required to inspire and reassure from the top.

An added complication is that top talent has left UK shores, heading instead to European financial centres and the US. New York is now considered the primary global financial hub and the best location to pursue a banking career. Accountancy firm EY suggesting in September last year that London has lost more than 7,500 finance jobs since the vote to leave the EU. As UK banks plan future strategy, skills will be in short supply for many banking and IT specialisms.

 

Homeworking and the future-ready workforce

The pandemic has certainly accelerated the topic of the future of the workplace and shifted operating models to accommodate new ways of working.  A combination of remote and on-site working, a hybrid virtual model in which some employees are on premises, while others work from home, will become the norm according to McKinsey[4]. This is supported by a recent survey from technology company FIS[5] which found that 75% of the UK’s investment banks would let staff work remotely for the foreseeable future.

JPMorgan[6]  already has a plan for its 60,950 employees to work from home one or two weeks a month or two days a week, depending on the line of business. This will, in turn, enable more flexible working arrangements and access to a wider talent pool, equipped with the tools to be agile, productive and compliant, regardless of their location or environment.

 

Prioritising the wellbeing agenda 

Employee wellbeing remains a hot issue as we face ongoing uncertainty. Financial services leaders we spoke to for the Change Perspective 2021 [7]report credited the power of tools such as apps, social media groups, online workshops, and helplines to support their valued staff through the pandemic.

Banks also recognise their future success hinges on retaining a healthy and resilient workforce, and this is evident in the range of wellbeing programmes implemented. The Barclays’ ‘This is Me[8]’ campaign is a strong example of an innovative approach to managing mental health issues and supporting staff, particularly those working remotely and possibly feeling isolated from the normal buzz of the office.

It’s highly likely wellbeing awareness activities will continue as new working practices bed in, and normality resumes.

 

Sustainability must be prioritised

This is an all-hands-on-deck moment. Climate change will rise up the board-level agenda in 2021, the Change Perspective 2021[9] report explains. It is incumbent on financial regulators to mitigate the systemic risk and take decisive steps to ensure that the financial system can withstand climate-related compliance measures. Environmental, social, and governance (ESG) reporting and carbon-reducing programmes must be planned and delivered, with EU reporting legislation due to come into force this year, and UK legislation expected to follow soon after.

The UN Climate Change Conference COP26[10] is also taking place in Glasgow in November, under the UK’s presidency. Soon regulators will be introducing mandatory carbon-reduction standards for financial firms to meet.

 

Digital transformation mustn’t fizzle out

The global pandemic has expedited the digital revolution, condensing banks’ multi-year digital transformation plans down to a matter of weeks.  Research from Pega[11] found that the pandemic increased organisations’ urgency for digital transformation, with 91% of all respondents admitting changes are now needed for their business to survive in a post-crisis world.

But one UK bank change programme manager in the Change Perspective 2021[12] report warns that ‘growth must come from a digital vision, not from simplification and efficiency’.. Rather than focus too tightly now on cost control, banks must strive to modernise their technology platforms and data storage so they can enable big data solutions such as AI-aided digital transaction processing, which will deliver cost-efficiency benefits in the long term. Consolidating platforms will provide a more efficient, customer-friendly experience across internet, mobile and physical locations.

 

Competition from the fintechs isn’t what it was

At the same time, client expectations are continually rising, thanks to the innovation of new digitally-orientated banking competitors. In a report compiled by PwC[13]77% of financial institutions will increase internal efforts to innovate, with many businesses embracing the disruptive nature of fintech.

Successful challenger banks such as Starling and Monzo, have demonstrated how rapidly innovations can be brought to market, and accepted by digitally-savvy consumers. However, some of the newer fintechs are struggling to maintain profitable growth as incumbent banks continue to improve their offer and roll-out or upgrade their own digital offerings. This may be because of inadequate scale, compliance issues, and limited product offerings, suggests the Change Perspective 2021 report.

 

Recovery of all those COVID loans

British businesses, with the support of government guarantees, borrowed £80 billion between January and November 2020, compared to £20 billion in the equivalent timeframe for 2019, according to the Bank of England’s 2020 Financial Stability Report[14].

 

Recovery of COVID ‘bounce back’ loans will pose an operational challenge, and banks will potentially suffer reputational damage as they carry out this work, the Change Perspective 2021 report says. Banks are already building debt recovery teams to recover loans, ahead of an expected wave of defaults and the exposure of fraud cases this year.

The Change Perspective 2021[15] presents clear suggestions on how to navigate this time of uncertainty.  What’s the key to survival in a nutshell? Resilience, adaptability, and a focus on wellbeing, will be key attributes as the industry grapples with challenges on all fronts.

 

[1] https://www.carbonblack.com/resources/global-threat-report-extended-enterprise-under-attack-index/
[2] https://www.google.co.uk/amp/s/uk.finance.yahoo.com/amphtml/news/uk-presses-eu-finance-deal-180623663.html
[3] https://www.bishopsgate-financial.com/insights/the-change-perspective/the-change-perspective-2021
[4]https://www.mckinsey.com/business-functions/organization/our-insights/reimagining-the-postpandemic-workforce
[5] https://www.fnlondon.com/articles/three-quarters-of-investment-banks-plan-to-keep-staff-home-permanently-20201111
[6]https://www.mckinsey.com/featured-insights/future-of-work/whats-next-for-remote-work-an-analysis-of-2000-tasks-800-jobs-and-nine-countries
[7] https://www.bishopsgate-financial.com/insights/the-change-perspective/the-change-perspective-2021
[8] https://home.barclays/who-we-are/our-strategy/diversity-and-inclusion/disability/this-is-me/
[9] https://www.bishopsgate-financial.com/insights/the-change-perspective/the-change-perspective-2021
[10] https://ukcop26.org/
[11] https://www.pega.com/about/news/press-releases/survey-reveals-most-businesses-overestimated-their-digital-readiness
[12] https://www.bishopsgate-financial.com/insights/the-change-perspective/the-change-perspective-2021
[13] https://www.information-age.com/technology-finance-banking-sector-123471800/
[14] https://www.bankofengland.co.uk/financial-stability-report/2020/december-2020#downloads
[15] https://www.bishopsgate-financial.com/insights/the-change-perspective/the-change-perspective-2021

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