Podcast
18 November 2020

2021 Financial Services Industry Outlook

Notes from the new normal for investment management, insurance, commercial real estate, and banking and capital markets

18 November 2020

Deloitte financial services leaders Monica O’Reilly and Jim Eckenrode discuss how the financial services industry has adapted to the new normal, their initiatives on employee well-being, and the sectors' future outlook.

Tanya Ott: When COVID-19 hit, industries around the world had to scramble to adapt. There were some bumps along the way, but they’ve also learned some things about themselves that may set them up better for “the next normal.”

I’m Tanya Ott and this is the Press Room. Today, we’re talking about the impact on the financial services industry with Monica O’Reilly, National Industry leader for financial services with Deloitte & Touche LLP , and Jim Eckenrode, managing director of the Deloitte Center for Financial Services.

I started by asking about the broad view—what has the industry learned about itself this year? 

Monica: That move to remote work was something that occurred more seamless[ly] than individuals expected. Most of the institutions felt that they were able to ride out that first wave around remote working and continuing to keep operations going in a way that was surprising, frankly, to quite a few folks and quite a few organizations. 

Immediately after that, there started to be some problems that perhaps manifested and maybe those were more around gaps that occurred because something could not be done remotely. An operation that had intended to become more virtual in five to six years wasn’t really able to do that overnight. We started to see some delays in processing and some delays in activities. 

Jim: I would agree with that. [in] the survey that we did of 800 executives around the world,1 which was one of the important inputs to this outlook, three-quarters of the respondents said that the pandemic actually showed how unprepared their business was to handle, at least initially, what was going on. But to Monica’s point, everything we’ve heard has been that they did a masterful job in doing that absent formal plans. After all, a previous survey that we did shows that while crisis-management business-continuity recovery plans were good, I don’t think anybody could have anticipated the speed and scope of the pandemic and the shift to work from home. 

In fact, what we’ve heard from a lot of people is this work-from-home environment may be something that is worth pursuing in the long term. We’ll have to see how that works. We are starting to see some hybrid work arrangements appear, which present their own challenges. But while I don’t think anybody could have anticipated what happened to the industry back in March, I do agree, and the survey responses suggest, that everybody pivoted very rapidly to keep business going. 

Tanya: So in general, the agreement is that they did a good job initially and even moving forward. But you mentioned something, Jim, alluded that there were some challenges, we’ll say. What sort of potential shortcomings did this shift reveal for the industry? 

Jim: Some of our business operations and processes didn’t naturally translate well to a working-from-home environment. For example, in the capital-markets and investment-management space, [there were] challenges around simply opening new accounts that required wet-ink signatures. And along with that, printing documents at home that really was not something that was allowed. 

Other challenges related to operational controls and monitoring of people’s activities had to shift. Some perspectives around how people are managed, how their performance is managed and how they’re measured needed some accommodation to a work-from-home environment involving family care and other things that also needed to be taken care of in the short term.

"The industry has an opportunity to really lead the charge, to reshape a human-centered sort of capitalism, and really help us think through, what does the next evolution of financial services look like? I’m very hopeful from what we’re seeing, that this is going to be the beginning of a different age driving a meaningful social and environmental change." —Monica O’Reilly, National Industry leader for financial services, Deloitte & Touche LLP

Monica: One of the things that was highlighted, particularly in the move to remote work, was that parts of the organization were extremely tapped out when it came to capacity and others not so much. There was this level of reassessing productivity that institutions started to look at. We saw it manifest in potentially using some of workers who maybe were more frontline, maybe even in the branches, to help in other areas of the institution to get throughput done. [With] the shift to remote work, there was an ability to do it, but not the necessary capacity to do it. 

Tanya: What sort of tactical plans do companies have to come up with for the coming year? 

Jim: The good news here is that respondents overwhelmingly have confidence in their organizations’ plans to support ongoing operational and financial resiliency. Over 80% of them either agreed or strongly agreed that their companies were on the right path there. In terms of tactical plans for the coming year, a number of different dimensions were cited: Continued focus on cost, potentially to include continued rationalization of compensation and headcount. A real focus on implementing technology, particularly to enhance efficiency. More broadly speaking, a real focus on investing in cybersecurity and privacy, cloud and data analytics. And interestingly enough, also accelerating innovation initiatives. There’s a sense here that we’re repositioning some of our cost savings toward the future and toward anticipating where we think we might be successful in the coming years. 

Monica: The one thing that could be underscored over and over and over again as a result of what occurred is digital transformation acceleration. More has been realized in the last seven to 10 months than the prior five years. That’s something we’re going to see much more careful planning around at all institutions, regardless of which sector they’re in. 

Tanya: So we’re going to see this increased focus on digital spend. But we’re seeing a divergence in which technologies are being spent on, say, in the United States versus in other parts of the world. I want to get into that—the differences in the way that companies have reacted here in the United States versus in the rest of the world. 

Jim: When you look across the regional responses, everybody agrees that cybersecurity and privacy are a high priority, along with cloud. There is some divergence, though, in [other] areas. For example, there is much less of an emphasis on analytics and spend on digital channels in Europe than in the United States and in Asia. And Asian respondents also were much more bullish on increasing spending for blockchain and robotic process automation as opposed to their counterparts in the United States and Europe. 

Tanya: What other differences did you see regionally? 

Monica: The other thing to highlight, Jim, would be what we were seeing around the move towards maybe more social responsibility. 

Jim: That’s right. 

Monica: Prior to the pandemic, we saw the beginnings, particularly outside of the United States, around the conversation on sustainability and what that meant within the financial services industry. It originally [arose] more around sustainable finance, but [is] morphing now into, what are organizations doing to help from a sustainability perspective in their own activities? There’s an expectation around disclosures. There’s an expectation around how sustainability is being built into risk models, etc. We’re starting to see much more of that topic across the globe. 

The other aspect that we see that [possibly] had its genesis outside of the United States was around the regulatory environment. What did it mean to keep pace with regulation through the use of digital? [Was there] more opportunity for automation when it came to keeping pace with what the compliance was for organizations around certain legislated requirements? 

And then lastly, because we’ve gone to this virtual digital environment and there’s an expectation of maybe being always on, there’s now a conversation that’s starting to arise around well-being. How are you also now caring for your workforce, not just thinking about the productivity of that same workforce? 

Jim: Monica, there’s a lot in there that’s really important. What we saw in our survey was in response to, broadly speaking, corporate social responsibility initiatives, whether that’s sustainability, diversity, equity and inclusion, caring for the people and communities that they operate in. … Over half across the board said that their institutions were increasing their focus there—more so in Europe and Asia Pacific than in the United States, but still, over half responding positively in that way. 

In terms of taking care of well-being, certainly one of the focus areas that came out of the survey was some plans and some thinking around, how can we return people safely to work for those who are comfortable doing so over the course of the next year or so? A number of different initiatives were identified along those lines as well. So, caring for the employees, creating that sort of environment where they feel comfortable to return to work, and supporting the culture of the organization going forward is something that clearly came through as a focus area in our survey. 

Tanya: We had a really interesting conversation on the podcast recently about wellness and incorporating chief technology officers and other people on the tech side of the shop into what is often a human resources sort of function. There are some interesting things going on in that sector right now. 

Monica: There is. And we’re only starting to see the tip of what’s to come. I guess the good news is there’s a recognition that the benefits of a digital capability and being able to work remotely wherever and whenever also has a darker downside when it comes to, how are you also thinking about the stress and impact to your employees? We are starting to see organizations lean into that and think about what were some of the things they could put in place. What does that look like? Are there new apps that they could provide to their workforce for being mindful of how they spend their time? We’re just starting to see how that’s going to get inculcated into the industry and also within organizations. There’ll be lots of learnings coming in the next few months around what’s working and how to continue to accelerate that. 

Tanya: Resiliency is really important no matter what sector of the industry you’re in. And so is agility, the ability to react quickly like we talked about and maybe not wait for the perfect solution. But there are some issues that are very sector-specific. I want to take us there one by one. In banking and capital markets, what are the biggest lessons that they’ve learned with the pandemic? 

Jim: One of the key messages is something that we actually talked about last year, which is the notion that we need to think about changing how we change. In other words, a greater focus on agility and efficiency, of course, but also flattening hierarchies, speeding up decision-making, empowering staff, creating flexible work environments. Bankers and financial institutions in general are not widely known for those sorts of attributes. It’s a business that is very focused on risk-management and risk-control. But certainly in dealing with the pandemic, a couple of things were revealed: One is when we have to, we can think differently. We can be agile. We can make quick decisions. We can empower employees. And we can accelerate things that have been slowly building. 

The other one, to Monica’s point, is the focus on the greater good. We’re seeing that, especially in the banking industry, as providers of capital, as guardians of financial assets, banks do have a role to play in influencing, if not driving, societal change. And certainly they can do that through reallocation of capital, enhanced risk frameworks, greater transparency, a number of different things that are going to be really interesting to watch over the next year or two particularly. 

Monica: And Jim, I want to illuminate that last point, because it’s not only a matter of doing good for society, but also, there is an untapped market for products and services that have been discussed by banking institutions for a number of years, but that [the industry] has not been able to think about how to address. We’re starting to see society having higher expectations of how financial institutions can help address systemic racism or income inequality, to think through the products and services and ,maybe, what we would term financial inclusion, driving that with an expectation that not only is that good for society, but it’s also good for the capital market. 

Tanya: What would be an example of one of those products or services you think that banks have been talking about for a long time, but this is really going to push them to look at it more seriously and actually institute? 

Monica: It’s manifesting in what we’ve experienced over the last few months when you think about PPP (paycheck protection plan) and credit to small businesses. What I think institutions are realizing as they look at their credit models, is those credit models were built during a time when perhaps there were inputs that created bias—unintended bias but nevertheless bias—around how that individual or that business was afforded credit. Now what we’re seeing is a realization that those models, those algorithms have to be re-looked at to ensure that bias isn’t there, and that the risk scoring can be much more real-time and effective in helping to address access to credit and access to capital that certain communities just weren’t able to get access to. 

Jim: In addition to that, the whole area of financial advice is one that could be explored further, with all sorts of new data sets that Monica just referenced, alternative data and analytic tools that can explore those data in greater detail to help underwrite loans for people who have thin or no credit history. Particularly banks have perhaps a better perspective of their customers’ financial position than anyone else, looking at transaction and other data. So, providing some level of targeted advice through digital channels that help people to learn how to manage their budgets more effectively, to save, to build capital for investment, I think, is an untapped opportunity as well. 

Tanya: I love how we’re pushing this forward, and banks and capital markets obviously playing a bigger role in that. Let’s move to the insurance industry. One of the things that the insurance industry in particular is looking heavily at is cybersecurity and business interruption. There’s a lot of risk out there. What is the insurance industry grappling with right now? 

Monica: At the outset of the pandemic, insurance operations were really disrupted. That move to remote work and engaging with customers virtually began to expose the gaps that existed, and particularly [the need for] a ratcheting up around protection of information and those cybersecurity concerns. We are seeing, within the insurance industry in particular, a clear understanding of the need to address cybersecurity through increasing identity and access capabilities and ensuring that that digital experience is protected. 

Jim: I would agree. Some of the things that we talked about in banking are applicable to insurance as well, whether it’s automation of underwriting and claims processing, using alternative data, advanced analytics, basically virtualizing operations as much as possible. Digital transformation really has accelerated in insurance because of what we have experienced over the last six months. And while there are new risks, that also means new opportunities to underwrite those risks. One of the themes that we talk about in this year’s outlooks for insurance, particularly, is reimagining the product development capability so that carriers can accommodate more fluid concepts of work, property, and lifestyles and imagine new forms of coverage that really reflect how people engage and live today. 

A good example of that is traveler’s insurance: You’re insured for a period of time while you’re engaged in a specific activity. That can be applied in a variety of different contexts: Thinking about new ways of applying concepts to different kinds of risks that may be time-bound. Using IOT data, for example, as we do in telematics for auto insurance and homeowners insurance and other forms of insurance, to better monitor the condition of the property that’s being insured, to potentially reduce the premium cost of covering those assets. Those are all opportunities, I think, that are either being explored right now or have the potential to be explored going forward. 

Tanya: Got it. Well, when I inform my insurer that I’m going to start working remotely from my sailboat, that’ll blow their mind. 

Jim: There you go. 

Tanya: For the record, I don’t have a sailboat and I’m terrified of water. OK, moving on. That leads naturally into the conversation about real estate. And the real estate sector has faced its own challenges during COVID and moving forward as well. Let’s tackle that. What’s the biggest issue right now? 

Monica: In real estate there was clearly an exposure of shortcomings in digital capabilities. And as a result, we’re now seeing companies adopting a more structured approach when it comes to digital transformation, combined with what Jim said previously around bolstering their cybersecurity, data privacy, and leveraging analytics to make better decisions. You’re starting to see this thread that is running across all of the sectors related to using data and analytics to make better decisions, but also that you can create a better customer experience by utilizing that data. We’re starting to see that happen in the real estate market. 

Jim: Absolutely. The other challenge, very honestly, is the impact of the current economic environment. Turning to our survey for a minute, anywhere from 25 to 35% of our respondents expected rental collection declines of more than 20% in the next year. That impacts decisions around what real estate portfolios might look like. Obviously, different kinds of properties are going to be affected in different ways. 

In terms of the digital transformation aspect in real estate, perhaps that sector has come to it a little bit later than some of the others, but it is catching up very fast. We did find that about one half of respondents who said that their company is using digital technologies like interactive mobile apps, for example, for their tenants, also plan to increase investment on digital channels over the next year. So, while we’ve got some indication that things are moving forward, there’s still some room to grow there. And certainly we see that happening. 

Monica: We can all probably agree that real estate was impacted, significantly commercial real estate. Organizations first thought that this was a temporary move to remote work and [are] now realizing that that remote work can continue. [They’re] reevaluating what their real estate footprint looks like now and in the future, which will have all sorts of implications for businesses. Where do you co-locate individual employees? Is there an opportunity to do that in different parts of the country that you haven’t done before? Where are people going to live? We’re certainly seeing a move out of urban environments. Is that going to last? Are we going to start to see smaller corporate offices in certain parts or satellite offices in certain parts of the country that didn’t exist before? They’re fundamentally going through this transformation right now, [so] there’s even more transformation to come. As we look at the sort of return to work and the future of work and where work is done, real estate is going to be at the center of that. 

Tanya: That’s something I’ve been thinking a lot about lately, as more and more people are working remotely.

Monica: It’s going to be different. I still think there are going to be central places like New York City and Los Angeles and San Francisco, places that are going to have a concentration of commercial real estate. Now, the use of that commercial real estate may be mixed. That’s what we’ve yet to see. So is it the death of the behemoth office building? I don’t know yet. I think it’s going to be reconfigured completely. Organizations are going to have an opportunity to look at that differently around, how do you do more with the space or something different with the space? It’s yet to be revealed. 

Jim: There are all sorts of examples that we’ve seen over the last couple years that suggest a great deal of creativity and flexibility in how real estate is being used: Retail establishments being transformed into hybrid retail and local distribution centers so that you get that last mile of delivery of products closer to the customer. Large-footprint retail establishments, big box stores, being repositioned into storage facilities. Shared offices [are] yet another example. I don’t think this story has been written yet about how people are going to live, work, and play in the future. It could be argued that people are going to be craving to go back to the office, and in certain locations there’s an important factor of critical mass, of people all doing the same thing, that creates the kind of energy to drive the economy forward. That’s going to be [an] important factor to consider as we move forward as well. 

Tanya: We’ve got one more sector that I want to get to before we wrap things up, and that’s investment management. What are the biggest considerations there moving forward? 

Jim: You could argue that if real estate may have been the most impacted of the four sectors, investment management may have been the least. We saw a lot of market disruption back in March. Many investment advisers were not expecting the level of volatility in the markets that was seen. But that’s leveled off quite a bit in more recent months. We talked back then about the need for investment management firms to be able to move at the speed of the markets, using data and analytics more effectively, developing what’s called now-casting capability to anticipate the kind of market disruptions that we saw back then using alternative data analytics. All of that, again the same story, are certainly contributing factors to that. 

The other challenge that continues with investment management is narrowing margins. If you look at the kinds of asset classes that our survey respondents indicated they anticipated greater demand for, it’s in passive investments, passively managed investments or active ETFs (exchange traded funds). The margins on those products are relatively thin. How do we continue to transform the organization, manage cost, manage those margins to really be able to move to this at the speed of the markets and more digitally engage with our investors and our clients? 

Monica: The expectation of the individual around the sophistication and, some might argue, the elegance of the customer interaction is key for the brand of an investment management firm, and it’s going to even be more underscored going forward. We’re [also] certainly seeing an appetite to have conversations around what’s core domain capability versus what potentially could institutions think about as partnerships or off-loading to other firms to do on their behalf. As Jim said, the margins are narrowing and the customer expectations are heightening, [so] investment management firms are looking at, where will cost savings come from? 

Tanya: Of all the things that we’ve talked about today across the sectors, across the regions of the world, what is the biggest thing, in your opinion, to keep an eye on right now? 

Monica:Wow. 

Jim: Can I throw up a flare and see what you think? 

Monica: Yeah. 

Jim: The industry, broadly speaking, is in a different place than it was during the global financial crisis of ‘08 and ‘09. The reason I say that is because there’s an opportunity for the industry to contribute to the recovery and play an essential role in supporting society that we weren’t really talking about 12 years ago. We talked about this earlier, the notion of corporate social responsibility. We’re seeing it in terms of commitments of funds and statements from leaders in the industry about these aspects of climate change, and diversity and inclusion, and a whole range of other factors like that. And we see it from regulators, too. The CFTC (Commodity Futures Trade Commission) recently published a report looking at the implications of climate change on the financial services industry. We’re really seeing a significant momentum shift because of the nature of what we’re going through right now. 

Monica: I echo those perspectives. The industry has an opportunity to really lead the charge, to reshape a human-centered sort of capitalism, and really help us think through, what does the next evolution of financial services look like? I’m very hopeful from what we’re seeing, that this is going to be the beginning of a different age driving a meaningful social and environmental change. 

Tanya: So that sounds like a beautiful way to end a podcast, however, I have one more quick question for you. 

Tanya: What is the one thing that we have not talked about that might surprise financial institutions in 2021?

Jim: I’m not entirely sure it would be surprising to institutions that there is an increasing level of interest in and evidence of participation in the financial services industry by parties outside of the industry. You look at large technology firms, you look at retailers, you look at fintech, you look at a variety of different players, automotive companies that are looking to provide financial products and services. You’re looking at the creation of open banking around the world and the ways in which consumers can choose to protect and share their data with all sorts of different institutions to find, arguably, a better deal. What we see potentially is an increasing level of movement toward vertical disaggregation of industry products, silos, sectors; a more diverse array of participants in the financial services industry. Even the regulators are cautiously looking at this and approaching it by offering new types of charters for banking, for payments activities, and increasing their focus on all aspects of digital financial services, central bank, digital currencies, cloud, and AI payments. But if I were to tie it up in a neat bow, I would say that the industry is converging with others and there are interesting new models that may emerge and new platforms that may emerge over the next coming years as a result of all this. 

Tanya: Jim, Monica, thank you so much for the conversation today. You gave us a lot to think about as we move into 2021. 

Monica and Jim: Thank you. It was great. 

Tanya: Monica O’Reilly is the National Industry leader for financial services with Deloitte & Touche LLP, and Jim Eckenrode is the managing director of the Deloitte Center for Financial Services. The 2021 financial services industry outlooks will be live in mid-December. You can sign up for the updates at www.deloitte.com/insights/FSIoutlooks.

As I said at the top of the podcast, we’ve been talking a lot about COVID-19 and reimagining business on the podcast. You’ll find conversations about employee wellness, digital technology, transportation, holiday shopping, and more at the Deloitte Insights website. 

We’re on Twitter at @DeloitteInsight and I’m on Twitter at @tanyaott1. Thanks for listening! I’m Tanya Ott. Have a wonderful rest of your day. 

This podcast is provided by Deloitte and is intended to provide general information only. This podcast is not intended to constitute advice or services of any kind. For additional information about Deloitte, go to Deloitte.com/about.

  1. Deloitte Center for Financial Services Global Outlook Survey 2021.View in Article

Cover image by: Neil Webb

The Deloitte Center for Financial Services

The Deloitte Center for Financial Services, which supports the organization's US Financial Services practice, provides insight and research to assist senior-level decision makers within banks, capital markets firms, investment managers, insurance carriers, and real estate organizations. The Center
is staffed by a group of professionals with a wide array of in-depth industry experiences as well as
cutting-edge research and analytical skills. Through our research, roundtables, and other forms of
engagement, we seek to be a trusted source for relevant, timely, and reliable insights.

Monica O'Reilly

Monica O'Reilly

Vice Chair, US Financial Services Industry Leader

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