Spotlight: 8 Financial Services Trends of 2013
As one year ends and another begins, there is no better time to look to the future. The near future, that is. Near in that 2013 is not only upon us, but because the tone has already been set by Congress’ recent swerve past the fiscal cliff.
We’ve collated these trends from across the financial services landscape. Some are grounded in underlying economics and investment practice while others are just emerging. But in all cases we believe you’ll be hearing a lot more about these within the next 12 months, and possibly be experiencing them in some form, too.
Here’s our first annual list of financial services predictions for the coming year. As in all things, we expect time and the market to be our judge.
THE EXPERIENCE ECONOMY
New technologies and business models continue to drive and reflect changes in customer demand and established FS firms are continually being pressed to up their game.
In the same way that retail and tech companies have optimized their customer experience FS firms are learning that product is no longer the key differentiator. Rather, it is the customer experience that is now the source of sustainable competitive advantage. And the main barrier to great experiences isn’t the tech; it’s the business case, the culture, and the capabilities to orchestrate the experience across all touch points.
We expect to work with a number of Chief Experience Officers in 2013.
Unlike securities trading and investment banking, retail, advisory and core banking businesses are in pretty good financial shape. One commonality of these businesses is their ability to efficiently cross-sell, and to expand usage and profitability from the account to the household.
We anticipate 2013 to be the year when smaller firms will focus on cross-selling while larger firms boost their core lending portfolios by barging into rivals backyards and buying business.
THE SEARCH FOR YIELD
Central bankers will continue to pump money into capital markets keeping interest rates low and prompting yield-hungry investors into riskier products. This will continue to raise demand for junk and frontier bonds, limited partnerships and even CDOs.
This search for yield is common across all types of investors, and is challenging product development, stretching liquidity and demanding ever-higher levels of risk assurance. It also begs the question whether there are any exotics left?
However, the best firms will continue to fixate on proven strategies and solid execution rather than chasing returns. Experience suggests slow and steady always wins the race.
The pace and effectiveness of business strategy and regulatory change continues to keep operating structures on the back foot. While many FS firms have talked about shifting operating and process models from co-ordination to standardization few have actually done it, given the complexity of legacy architectures.
We expect this to change over 2013 as more firms embrace “open source” thinking and operating structures to reap the benefits of cross line-of-business service models.
While FS firms are not stopping micro- or wholesale outsourcing, the objects of that activity are in flux. Concerns about increasing and hidden costs, data and security issues and a renewal of interest in American quality and craftsmanship are leading many firms to bring outsourced technology and business process functions back onto US shores.
This is not only a reflection of the underlying and challenging economics of the FS industry, but also of its political, cultural and emotional affiliations. We anticipate that near sourcing will accelerate rapidly in 2013, even when based on short-term business cases!
REGULATION! REGULATION! REGULATION!
The Consumer Financial Protection Bureau is the latest arrival onto the US regulatory landscape. The Bureau, which, was created to police financial firms and products is initially focusing on mortgages and payday loans.
The CFPB joins a long list of state, federal and international regulators that oversee an alphabet soup of rules, data requests and audits. We expect Compliance and Risk to continue to drive much of the business and operational change in 2013.
SECURITY AND PRIVACY
With the rise of cyber-breaches, data and information security and privacy have become increasingly important leading FS firms to redouble their efforts to protect the IT infrastructure.
We expect 2013 to be the year that information risk management shifts from the IT team to the boardroom. While Congress may expedite this, the sophistication of threat actors will necessitate it, as attacks move from data disruption to data destruction.
Fortunately, the tools, frameworks and benchmarks are available to manage these risks. The greater challenge will be cultural.
The long awaited arrival of active ETFs is now upon us. The SEC recently removed yet another regulatory hurdle and money managers are now readying plans to get product to market.
While there are currently only around 50 active ETFs we expect 2013 to bring many more. This will not only provide more choice to traditional ETF buyers, but should also prompt mutual fund owners to consider, potentially, lower cost and more flexible solutions.
Whether or not active ETFs will grow as fast as target date funds, the more interesting battle will be for consumer mindshare, as the lines between fund structures continue to blur.