2022 financial services industry outlook has been saved
Cover image by:
Limited functionality available
Jim Eckenrode: Whether you’re talking about stablecoins, central-bank digital currencies, NFTs, it really calls into question the future of money and investing. How are these things going to develop? Will they coexist in the marketplace at some point in time? And what roles will they play in the commercial marketplace?
Monica O’Reilly: Certainly ethnic and diverse small businesses were more heavily impacted by the pandemic than any other demographic—and so the financial services institutions have an opportunity now to lean into that, to help bring back those small businesses, and to add to the diversity of the community.
Tanya Ott: The financial services industries are undergoing pretty dramatic changes. We’ll talk about it today on the Press Room.
I’m Tanya Ott. Thanks for joining us. In the financial services industries these days, it’s either disrupt or be disrupted. Of course we’ve had a big disruption over the last year thanks to COVID-19. But the upside is that it’s really primed industry leaders to think about how to transform to meet the new opportunities that are emerging to embed financial services in new lines of business. So how are you supposed to navigate the space?
My guests today are here to help.
Monica O’Reilly: Hello, I’m Monica O’Reilly. I am the US financial services industry leader. And with that role, I have the responsibility for ensuring our strategies across banking and insurance, investment management, and real estate.
Jim Eckenrode: This is Jim Eckenrode. I lead the Center for Financial Services here at Deloitte, where we produce thought leadership on a range of different topics—technology, customer and client dynamics, regulatory issues, et cetera, in support of our clients in the financial services industry.
Tanya: Their team surveyed financial services executives across four sectors and four continents to get a birds-eye view of the challenges and opportunities the industry is facing in the coming year. The 2022 financial services industries outlook will be published on Nov. 18 on Deloitte Insights, and you can sign up to be notified when it’s released. We asked them to give us a preview of their issues they’ll be covering—including the state of mind among executives.
Monica: I would say this state of the financial services industry right now is one of buoyed optimism. One that is fueled by a reawakening of what is possible across each of the sectors and the opportunities that arise through transformation, return to work, and the potential to move toward a growth agenda.
Jim: I would agree with that, Monica, and in fact, in the outlook survey that we conducted of 1,600 executives around the world, that optimism is definitely coming through. We’re seeing it in a variety of different performance dynamics, whether it’s banking industry performance associated with reserve releases and improving loan growth, better investment manager performance, rising premiums and insurance, property price indexes in real estate. You can see it across all of our sectors and certainly our respondents see that as well.
Tanya: A lot of people are talking about how this is a real inflection point for the financial services industry. What are the big forces at play right now?
Monica: You’re right, it is an inflection point. The big forces at play, which shouldn’t be surprising to anyone, are the rapid digitization of everything, the postpandemic era—what’s in store, and the search for talent. They all sort of culminate in three specific areas that we’re observing across the industry: The symbiotic relationship between talent and technology. The looming and continued view of risk and regulation being something that has certainly manifested across topics such as ESG and cyber risk. And the last chapter is more focused on purpose and trust. What we mean by that is the financial services industry is really grappling with its place in society. How can this industry, above all other industries, lean into the opportunity that exists to help elevate activity to help the underserved, to lean into climate risk and sustainability, and generally drive a much higher purpose for the industry overall?
Tanya: So let’s dig into those three main buckets that you talked about. The first one was talent and technology. We’re in the midst of what we’re calling the great resignation. Lots of people are leaving their positions. There’s also a war for talent going on right now, specifically tech talent.
Monica: That’s for sure. We are witnessing this war for talent and it’s heightened in a number of areas. It’s heightened in the need for technology talent, those that have process and technology backgrounds, be it in investment management or in banking capital markets or insurance or real estate. In fact, in every sector we’re seeing the opportunity for this relationship between focusing on transformation and technology and the need to have talent that can actually help with marrying that technology to a much more seamless process to help really improve the experience of the customer overall.
Jim: There are firms that are starting to separate themselves from the pack, either because they have been much more successful at implementing more modern digital technologies, building stronger cultures, or locating and hiring and retaining the kinds of people that they are going to need to affect the kinds of transformation the industry is going through right now. We talk a lot about super jobs, which is sort of a combination of human empathy and understanding with enhanced artificial intelligence, redefining work, redefining the kinds of jobs that will exist, and the kinds of people [for whom] we’ll need to do those jobs.
Monica: It’s interesting. The other aspect of this is really coupled to returning to work, and what does that mean in sort of hybrid models that every industry, frankly, financial services being one, is trying to identify because there’s such differences between those that may prefer the office versus those that that are remote. That’s a generational thing, too, with potentially baby boomers maybe preferring office and millennials preferring remote, and the Generation Z, who have little prepandemic experience, are trying to identify what mode they prefer. Technology plays a part in that too, because we’re on the tip of seeing what will technology do to enhance how work is done and the flexibility that will exist for where work is done.
Jim: Yeah, it’s interesting that the respondents to our survey are really divided on the go-forward strategy for return to work or return to the office. About a third feel that eventually everybody will return to the office. Another third feel that virtual work will happen most, if not all, of the time. And then the remaining third feel it’ll be a hybrid. So each firm in each geography is going to make their own decisions about how they do that going forward. It’s going to be an interesting mix.
Tanya: So, Jim, that is an interesting push-pull there. And I’m wondering, as employees, for the first time in a long time kind of have the upper hand in negotiations because of this war for talent, is it going to be perhaps less the firm’s decision and more the decision of the staff?
Jim: That’s right. And part of these dynamics that we’re touching on here in terms of the establishment of culture, establishment of a sense of purpose and trust, is not just relevant for customers and clients of financial institutions or board members or stockholders, it’s also employees. They’re already increasingly looking at the expressed purpose of the firm that they work for, and that’s going to be a really important competitive dynamic going forward.
Tanya: Monica, technology and humanity really have to go hand in hand in this equation.
Monica: It is clear that the expectations from consumers who engage with organizations is to ensure that there is a seamless, frictionless interaction and that often happens through the use of technology. However, there is as high an expectation that this move is also coupled with a human experience—meaning it can’t be impersonal—it has to be personalized. And the fact that that human dynamic, someone who can make decisions based on maybe a more emotional quotient is very relevant in how you bring together technology and what humans can bring in serving clients or customers across the board.
Tanya: We’ve all had experience with technology that maybe it responds in a more human way than other technologies. I’ll give you an example. My husband and I are refinancing our house right now. I’ve been leading all of the conversations with the company that we’re working with, and yet he’s getting all of the automated "It was great to talk to you” messages and I’m like, you did not talk to him. You talked to me. Same thing happens with chatbots. Some of them are much more human feeling to a customer like me than others are.
Monica: Again, we are in the development of a number of the technology capabilities, and I don’t think we’ve yet really seen what the end state is going to look like. It’s clear that there’s an opportunity not to get into technology just for the sake of technology. We know based on the survey that over half of our businesses are saying that they’re struggling with implementing new digital technology, either lack of leadership or connection to strategy, or no clear ROI, or issues with legacy systems. That is encapsulated in the survey results that we’ve seen. However, what’s clear is that strategy and your technology has to be tied together. What are you trying to accomplish as an organization in your interaction with the consumers, so that you are making it personalized, but you’re also making sure that you're not losing connection to them; to make sure that you’re driving a more holistic, overall arching strategy between your products, your services, and the technology you’re implementing.
Jim: The [digital] trap is the notion that we need to implement technology for technology’s sake, rather than anchor to a business strategy or a business opportunity. And that’s further amplified by the emergence of new competitors and the blurring of industry lines between financial services and other industries. We’ve talked about fintech and PropTech and InvesTech and InsureTech for a long time, but we’re starting to see other opportunities emerge in health care, in education, and in transportation. So the embedding of financial services into other business lines and the emergence of new business combinations themselves are being driven by technology. That doesn’t mean technology for technology’s sake, but at the same time, the rapid advancement in capabilities is offering new competitive opportunities to the industry itself.
Tanya: At the same time, the industry is facing more regulations expected across the board.
Jim: That’s right. It’s very interesting to observe what’s happened around the world over the last year to year and a half with regard to regulatory attention to not only the core issues of financial and operational resiliency, which are always going to be there, but increased expectations around the proper use of artificial intelligence, the way that third party relationships are managed, particularly on the technology side, SupTech [supervisory technology] and RegTech [regulatory technology] in the ways that financial institutions share regulatory data with regulators themselves, and also obviously cyber risk and financial crimes as well.
Monica: I would also highlight the emerging focus from a regulatory perspective on climate sustainability, or ESG as we call it, across the globe. Here in the United States, we’re starting to see an emergence of this focused around how are organizations going to achieve net-zero emissions? What are they doing? Below the disclosures that are out there in the 10-K [a mandatory, comprehensive financial performance report filed annually in the United States by publicly traded companies], what are they actually doing within the organization? We see the regulators turning toward that. That’s going to be another hallmark of this next five to 10 years of what are we doing as an industry to promote sustainability, and lean into the environment and understand the supply chain implications within the environment? Also, look at social impact and how are the institutions ensuring that they’re bringing more of the underserved, underbanked, that area of the economy into the opportunity to be included in the financial markets? And then lastly, as Jim mentioned, this overarching governance around how do we really trust the financial systems and how are they protected—and ensuring this overview of managing risk is paramount.
Jim: Another really important dynamic that’s emerged in the last year is around digital assets, the exploration of those kinds of opportunities across a range of different platforms. Whether you’re talking about stablecoins, central bank digital currencies, NFTs, it really calls into question the future of money and investing. How are these things going to develop? Will they coexist in the marketplace at some point in time? What roles will they play in the commercial marketplace? We even see firms in the investment-management space creating some products by bundling these currencies into different funds, so there are emerging investment opportunities as well. But I would say that digital assets is definitely gaining momentum from a regulatory perspective, as well as a business perspective.
Tanya: You two have been at this for quite a while, and financial services has always been a robust area to be in, but have you seen a time like this when there is so much in flux, so much being developed, and so many fundamental things being questioned?
Monica: It’s hard to compare it to any other era, but I’m sure in previous eras there was this focus on the next frontier. I feel like that’s where we’re at right now within this industry, and frankly, the general economy. There’s so much changing. There’s an immense amount of convergence across industry sectors. Jim talked earlier about the convergence of health and wealth. We’re also seeing the convergence of the opportunity to take a real estate company making purposeful decisions around how to reconfigure space within a community so that there’s better access to health care, better job opportunities. It’s really incredible to see the opportunity in front of us for the industry, focusing on not only how to drive more growth and acquire customers, but to do so in a way that’s actually going to drive a higher purpose for society. There’s this symbiotic relationship that exists here too around how does the financial services industry really lead the opportunity to elevate society by leaning into how work gets done and where work gets done and the possibilities of bringing this technology, as well as the focus on customer benefit, to bear.
Jim: I would agree. I can’t think of a time, at least in the 40 years that I’ve been in the industry, that I’ve seen such change happening across so many different surfaces or facets of the industry, whether it’s social or technology or customer or regulatory or anything else. And it offers an opportunity for industry leaders to really take a more strategic look at those opportunities. For example, with regard to ESG, a lot of focus has gone into assembling the sorts of metrics that are required to be able to quantify the impact of ESG initiatives. Most of our survey respondents report that they’ve made some great progress in doing so. And that’s certainly important, but we would also argue that it’s a strategic issue as well. We’re looking at the kinds of problems that not only the industry is facing, but society and the economy are facing, and what those opportunities are to help address that allows us to think more horizontally about addressing ESG issues. So many of the opportunities that we have, whether it’s climate risk or financial inclusion or the future of work, touch aspects of E, S, and G. Thinking about solving problems and creating solutions for opportunity in the future with a focus on ESG, but horizontally and not vertically, is really important as well.
Monica: The financial services industry is really at a pivotal point in its evolution. We see, based on the survey that we’ve done, these outlooks that we’ve produced, that there is an opportunity for the industry to really embrace this perspective of not just being there for a business imperative, but also the opportunity to lead the way to a more just, equitable, and sustainable future for everyone.
Tanya: As you said, just, equitable, and sustainable, and one of the things that we didn’t tackle yet is DEI.
Monica: All stakeholders in the industry need to take action here. We see this as about more than just an internal activity, but more focused around four parts of the organization. It’s your talent and sales strategy across products and services within the community and throughout third-party relationship choices. It has to be multidimensional. When we look at the opportunity to bring a diverse group together to take advantage of not only the financial services and products that are available, but to also underwrite and sustain small businesses that were heavily impacted—and certainly ethnic and diverse small businesses were more heavily impacted by the pandemic than any other demographic1—financial services institutions have an opportunity now to lean into that, to help bring back those small businesses, and to add to the diversity of the community. So we look at it as both an internal and external opportunity for financial services organizations to be involved in.
Jim: It’s important also to note, Tanya, that there is opportunity to do well by doing good. Just to give you one example, the carbon trading market is estimated in some studies to be as high as US$22 trillion by 2050.2 That’s a huge market that can be developed to satisfy not only objectives around addressing climate change, but frankly, commercial objectives as well. It doesn’t have to be one or the other.
There’s a common theme in all of this, Tanya, about taking action to be bold and aggressive right now where the opportunity exists, as we’re transitioning in so many different ways. Banks have the opportunity to lead in a number of different fronts. I mentioned carbon trading, financial inclusion, investment management, looking at strengthening their firm culture. And figuring out how to use, for example, alternative data and artificial intelligence to improve investor results is a huge priority for them.
In terms of insurance, which has always been thought of kind of the financial first responders in helping communities and businesses recover from disruptive events, building on that to establish a greater sense of trust and allowing for contributions to the common good. And then in real estate, transitioning from a focus on location and physical footprint to a more digitally enabled real-estate-as-a-service offering to help a variety of different businesses capture the opportunities as commercial spaces and residential spaces are repurposed and reused.
Monica: The summary overall is there’s opportunity now across the industry for every sector to act and to act with both the opportunity to embed a higher purpose in what they’re focused on, be that developing trust and relationships with their clients that demonstrate how they are approaching E,S, and G, and making sure that it is underpinned by processes and technologies that elevate it and illuminate it. Right now we’re seeing an opportunity across each of the sectors to really lean into that. We will find a gap widening between organizations that are going to build for the future versus those that may be left behind.
Tanya: Last year, Deloitte launched the “higher bottom line” campaign, which speaks to some of things we’ve been talking about …
Monica: The reason that we came to the tag of a higher bottom line was the observation that the industry is at a pivotal point in being able to marry both profit and purpose for the betterment of society. What we mean by that is if you see the opportunities for institutions to not only think about the communities they serve, but the products and services they bring to those communities, in every sector, in banking, in real estate insurance, and investment management.
Jim: We see the financial services industry, if done right, can act as a catalyst toward creating new business models, new business combinations, new products and services to address the societal and economic issues of our time. Just like the industry did at the start of the industrial age, as an example, providing capital liquidity, transaction management, insurance, and even property development as a key catalyst for driving a lot of these changes. There’s a lot that the industry does that exists at the center of all other industries we feel, and that extends to addressing the opportunities that we talk about at the higher bottom line.
Monica: Our hypothesis is that institutions who do lean into a view of creating a more beneficial product and service for the betterment of society will not only attain profitable growth but sustainable growth for now and into the future.
Tanya: Monica, Jim, thank you so much—great conversation today and looking forward to learning a whole lot more.
Monica and Jim: Thanks, Tanya.
Tanya: You can get more insights from the 2022 FSI outlook report which are being released on November 18. Register on Deloitte Insights at deloitte.com/us/FSIoutlooks to be notified as soon as the outlook is released.
We’re on Twitter at @DeloitteInsight and you’ll find me at @tanyaott1. I’m Tanya Ott. We’ve got more great conversations coming up in the next few weeks, so be sure to subscribe to the podcast so you won’t miss out.
This podcast is produced by Deloitte. The views and opinions expressed by podcast speakers and guests are solely their own and do not reflect the opinions of Deloitte. This podcast provides general information only and is not intended to constitute advice or services of any kind. For additional information about Deloitte, go to Deloitte.com/about.
Cover image by: