Published Wednesday 10th February 2021
As with so many sectors, the financial services industry is in a state of flux; 2020 has been a challenging year. First, COVID-19 hit insurers with business interruption and travel insurance claims. Then, banks’ profits took a hit as they set aside billions for loan loss provisions. Given this and the protracted period of low interest rates, investors have taken a dim view of the industry’s prospects, lowering share prices of European banks and insurers.
Following the economic downturn of the last decade, financial services firms have not been idle, having been actively engaged in a new ecosystem of disruption while still grappling with the challenges presented by evolving regulations in a post-crisis environment. Banks continued to face the challenges of shrinking margins, increasing competition, and demanding consumers. With limited avenues for growth, financial services businesses across the globe have been attempting broad-based cost efficiency measures aimed at boosting profitability. Many financial institutions have been trying to improve cost-effectiveness by optimising the banking channels and reducing operating and IT expenses. Others were taking more traditional routes, resorting to headcount cuts and hiving off businesses to reduce costs.
In the latter part of 2020, financial services brands such as Credit Suisse, Deutsche Bank, and HSBC have relaunched their cost-cutting plans, which were on temporary hold during the pandemic. This renewed focus on cost cutting is reflected in data from the research organisation Forrester: In May 2020, 36% of French, German, and UK financial services and insurance executives saw cost reduction as a high or critical priority, up from 30% before COVID-19 struck, when growing revenue and improving customer experience still took priority. But leaders are keen not to let the crisis go to waste. Amid all the doom and gloom, European financial services executives also want to innovate. Together with cost reduction, improving the ability to innovate was seen as the top business priority over the next 12 months. This share has grown significantly since January 2020, when only 21% of French, German, and UK financial services and insurance executives saw innovation as a high or critical priority.
This is good news as there are plenty of opportunities, with two particular areas that can benefit from technology-driven innovation: fraud and claims management.
COVID-19 is a crisis for financial services businesses but an opportunity for fraudsters and hackers. In the UK, fraud rates rose by 33% across all financial products in April 2020. And 2021 will reveal the high number of fraudulent COVID-19 loans. The UK’s National Audit Office estimated that up to 60% of the COVID-19 Bounce Back Loan Scheme won’t be repaid due to credit and fraud risks. As the demand for business loans and pressure from governments keen to aid ailing businesses continue throughout 2021, financial firms will need to digitise customer onboarding, identity verification and credit scoring and decisioning. Emerging technology can help. Artificial intelligence has transformed transaction monitoring, risk scoring and model building, case management and investigation, and contextual reporting.
Fraud also impacts insurance businesses, raising claims costs together with other factors like extreme weather and higher repair costs. While car and home insurance claims have fallen during COVID-19 lockdowns, business interruption, travel and health insurance claims have not. For this reason, it is expected that containing claims leakage will be a top priority for non-life insurers in 2021. Again, technology can help. In 2021, insurers will be investing in smart analytics to identify leakage potential at first notice of loss.
Planning ahead in financial services is difficult in the current circumstances. But one thing is certain: alongside cost management, now is the time to use the digital acceleration and momentum that the pandemic has brought to reshape the future of your business.
About the Author: Richard Placito, leads and implements business process and cost management programmes for organisations across the UK and worldwide. Clients enjoy rapid, effective and engaging outcomes that deliver real value. Richard works across several market sectors and chairs the EMEA Financial Services Practice on behalf of ERA.