From a talent shortage to the blending of technology and finances, emerging financial services trends in 2022 can have lasting impacts to the industry.
“The financial services industry is one of the more mature industries, but one that constantly advances to provide products and solutions to support growth and generate returns,” said Ziad Kubursi, head of financial, executive and transactional liability at The Hartford. “Despite the economic challenges with inflation and geo political instability, the financial services industry is expected to grow 3% annually over the next five years as interest rates normalize.”
What Are the Current Trends in Financial Services?
According to Kubursi, there are three key trends in the financial services industry:
- FinTech
- Environmental, Social and Governance (ESG)
- Talent
“The rise in FinTech, a worsening talent shortage and the heightened interest in ESG means there are obstacles that the financial services industry has to overcome this year,” Kubursi explained.
FinTech and the Financial Services Industry
FinTech combines financial services with information technology. FinTech companies are building out various technologies, platforms and apps to provide customer solutions. It’s an industry that’s projected to reach $190 billion by 2026, growing at a compound annual growth rate of 13.7%.1
Kubursi noted that it’s a disruptor to the financial services industry and has resulted in changes motivating the legacy banking and other finance services industry to enhance their offerings to remain competitive.
An example of this, he explained, is Venmo. After the online payment platform launched and grew in popularity, some banking institutions partnered and released Zelle.2
“The financial services industry will need to start investing heavily in technology to compete with the FinTech companies and offerings,” Kubursi said. “They’ll need to come up with different ways to get to customers and provide solutions.”
SPACs
So, how did the FinTech industry become a disruptor to financial institutions? Kubursi pointed to the rise in SPACs, or special purpose acquisition companies.
Increased SPAC activity has provided a simplified path to capital markets giving start ups and emerging FINTECH companies the resources to develop and launch their products and services more rapidly.3
Historically, companies would go public through an initial public offering (IPO) to attract investors in exchange for equity. It’s a process that takes time because disclosures about the business and operations are reviewed and scrutinized by the SEC.4
With a SPAC, investors first pool their money and then go public as a shell company. It’ll then look to merge or acquire a business, utilizing funds in the SPAC and supplemented by PIPE funding,, or Private Investment in Public Equity. The rise in popularity with SPACs is largely due to the speed in which a company can go public through this De-SPAC transaction.5
“In the FinTech environment, their impact as a disruptor is exacerbated by the increase in SPACs. There were over 600 SPAC IPO’s last year,” Kubursi explained. “These are entities looking for target businesses to take public. Once you do that, you’re giving these new companies the ability to access capital and the opportunity to grow and further develop.”
How Do Blockchains Affect the Financial Services Industry?
A growing technological change affecting the financial services industry is blockchains. Blockchains digitally collect transactions and put them in chronological order, and they can’t be changed.6 Proponents of blockchain tout its benefits with:7
- Transparency since it gives people the ability to trace transactions more easily
- Fraud prevention because the information can’t be changed
- Lowering costs related to typical financial services
Kubursi said he believes interest in blockchains from banks and other financial institutions will grow in 2022.
“It allows for faster transactions that are accurate and safer. At the same time, it takes away the backend administrative services,” he explained. “From an industry level, though, blockchains haven’t been broadly implemented yet.”
Some banks are already recognizing the benefits with blockchain. Bank of America grew the number of its blockchain patents by 86% in 2021.8
A Growing Interest in ESG in Financial Services
Environmental, Social, and Governance (ESG) is growing in many industries and many businesses are being more transparent about their corporate sustainability efforts. Financial institutions aren’t immune to this rising interest in ESG.
From an economic perspective, the world is moving towards a “consumer-led economy,” giving customers more power than before to deliver on human needs and wants.9 It’s not uncommon for customers and investors to choose which banks or companies to do business with based on their environmental positions and sustainability efforts.
In fact, ESG investing set records in 2021 and investors were able to push for company and policy changes.10 It’s estimated that ESG assets will reach $41 trillion by the end of 2022 and $50 trillion by 2025.11
Institutions and the financial services industry will likely have to make changes to adapt to an economy more focused on ESG priorities, Kubursi noted. But he emphasized that it won’t be an easy transition and it could put financial institutions at ESG-related risks.
“ESG is very important, and it’s emerged as a strategic priority for many financial institutions,” Kubursi explained. “We’re seeing the financial services industry getting a lot of pressure to move away from fossil fuel lending, and loan portfolios are shifting slightly.”
Facing the Financial Services Industry Talent Shortage
As with many other industries, the COVID-19 pandemic exacerbated the talent shortage in financial services.
It’s another area where FinTech is disrupting the finance industry. To grow, financial institutions are trying to hire workers with technical skills but they’re having to compete with technology companies and startups.12
Kubursi pointed out that the financial services industry also involves demanding work, which may not be attractive to a younger, new generation of workers or even current employees.
“Financial institutions raised their starting salaries for investment bankers, but they’re having a hard time retaining talent. Workers don’t want to work 14-hour days, they want flexibility,” he explained. “To overcome the talent war, financial institutions need to modernize to attract and retain their workforce.”
Remote Work: A New Normal
The COVID-19 pandemic ushered in a new era of work where remote and hybrid workforces are the norm. Embracing this flexibility, Kubursi said, can help financial institutions improve morale and lets them cast a broader net to find talent.
Un remote workforce in a regulated industry with employees handling sensitive information can “add a layer of complexity” to data protection, according to Heather Savino, financial services industry lead at The Hartford. It’s why she recommends that financial institutions assess their risk level and discuss with their agent whether their coverage needs are being adequately met.”
“Financial institutions need to recognize that remote work and the mobility of today’s talent introduces additional threats that they need to safeguard against,” Savino explained. “There’s more use of cloud services in the financial services industry, so it’s essential to look at the protection of data, especially personally identifiable information. And these companies also need to have a plan to address and protect against cyber attacks”
Kubursi added that he believed cyber liability insurance needs will increase as remote work becomes the norm, as well as errors and omissions (E&O) insurance.
“There’ll be a blend of technology E&O and cyber coverage as financial institutions rely more on technology to provide services to customers and clients, like robo advisors and automating transactions through a platform,” Kubursi explained.
What Is the Future of the Financial Services Industry?
Professionals at The Hartford said they believe the financial services industry will continue to grow in the future but emphasized that it needed to address the key trends in 2022.
Despite global events, Kubursi noted that as the interest rates normalize, it’ll help the industry. And as financial institutions work to find and retain talent, as well as focus on ESG priorities and initiatives, the finance industry will continue to mature.
“As the industry works through the current talent shortage, the convergence of technology, like blockchains and apps, will force the financial services industry to adapt in order to grow,” Kubursi explained.
1 Global News Wire, “Insights on the Fintech Global Market to 2026 – Growing Adoption of Non-Bank Option to Manage Money Is Driving Growth”
2 Retail Dive, “JP Morgan, Bank of America Join Forces to Take Down Venmo”
3, 4, 5 NPR, “The Spectacular Rise of SPACs: The Backwards IPO That’s Taking Over Wall Street”
6, 7 U.S. News & World Report, “How Blockchain Can Transform the Financial Services Industry”
8 Cision PR Newswire, “Bank of America Sets Record-Breaking Year for Patents in 2021”
9 Deloitte, “How Financial Services Can Use ESG Initiatives To Help Build a Brighter Future for All”
10 Reuters, “How 2021 Became the Year of ESG Investing”
11 Bloomberg, “ESG by the Numbers: Sustainable Investing Set Records in 2021”
12 Forbes, “Forrester Expects Banks To Invest Aggressively, But Run Into Skills Shortages”
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