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Challenges facing the financial services industry in 2022

The future of the financial services industry will demand new methods and approaches to meet rising demands on a greater scale.

Some of the biggest challenges that banking institutions face today includes:

  • Customer retention
  • Extensive compliance responsibilities
  • Difficulty in lowering costs

Solutions are needed to both manage risk and streamline compliance while delivering the insights and visibility to meet customer demands.

Payment Services Directive (PSD2)

EU regulation, namely the second Payment Services Directive (PSD2) represents a paradigm shift in the way banks and payment institutions deliver financial services. As new entrants are incentivised to apply their data usefully, consumers will benefit from more transparency in the payment ecosystem. In particular, banks who use payments data to improve customer support, and new financial services companies that offer this data via APIs and omnichannel engagement—can strengthen customer relationships.

Improving customer experience in financial services

Financial services companies realise a need to improve internal systems and processes, build and deliver a better customer experience, all while keeping a close eye on the bottom line.

In every industry, finding ways to innovate and improve performance is necessary for growth and success. Financial institutions are no different. In fact, financial services companies have been some of the best at using technology to streamline and simplify customer support—with contact centres now offering a first-rate customer experience with the kind of support that is easily accessible on any device, anytime, anywhere.

Information security and data protection in financial services

On the other hand, banks are coming under increased scrutiny from government regulators, with a myriad of new norms, guidelines and regulations to conform with. Coupled with this, they have been forced to operate in a low-interest-rate environment. 

Compliance costs have risen as a result of EU regulations, which have led to greater supervisory reporting requirements. One of the biggest risk factors that many financial services institutions face relates to information security and data protection. In some sectors, this threat grows in direct proportion with the amount of data collected, exchanged, processed and stored by organisations.

Covid-19 disruption to financial services due diligence

Additionally, limitations caused by COVID-19 lockdowns and social distancing have disrupted processes at banks, posing challenges in executing conventional know your customer (KYC) and customer due diligence (CDD) measures. Such difficulties make it challenging for financial institutions to carry out traditional customer identification and due diligence procedures.

Cost of compliance to financial services

The Global Regulatory Outlook published by Duff & Phelps, found that compliance is one of the biggest challenges that financial institutions face as “almost a third (32%) of respondents predict the total cost of compliance will be greater than 5% of their revenues. Only 12% expected to see compliance costs lower than 1% of revenues”. This suggests that regulatory compliance will remain a core cost of doing business across geographies.

In the European Union, MLD 4 has increased the AML (anti-money laundering) compliance cost burden among European financial institutions. As EU regulations governing AML compliance continue to evolve, there is a lot of pressure on compliance teams to meet new directives and regulations—exasperated by the significant fines and reputational damage that come with violations.

The cost agenda – a top priority for financial services

In a recent KPMG report, with views from 200+ executives from some of the world’s largest banks, the cost agenda has been propelled as one of their top priorities since COVID-19. As the complexity of new regulations increases, it is palpable that financial services firms will focus on ways to reduce costs and improve operational efficiencies.

At the same time, service levels, quality and responsiveness should be maintained, yet it can be challenging for organisations to balance all the moving parts.

The front, middle and back-office all share the responsibility to help reduce costs. If internal controls are lacking, and there is a requirement to become compliant, QA and regulatory specialists may suggest cutting HR budgets. This would create more significant issues—a negative synergy that can impact many areas of an organisation's activities.

It’s important to keep this in mind in relation to spending allocated to innovative IT projects or go-to-market activities. Sometimes these initiatives don't pay off as quickly as expected. Therefore, allocating spend towards process initiatives that can benefit all organisational functions can offer greater efficiencies and long-term value.

Benefits of third party outsourcing for financial services

One way that financial services companies can remain competitive is to focus on their strengths and rely on outside partners for expertise beyond their core strengths. Third-party outsourcing vendors with domain expertise and skilled resources can provide financial services organisations with more speed and agility to adopt new products—enter new markets—and comply with changing regulatory requirements.

Financial services ability to adapt quickly to market pressure

Increasing competition, new regulations, and the growing complexity of client needs have compelled many financial institutions to cultivate profitable new service lines, restructure business units, and focus on operational efficiencies. Failure to adapt could result in the decline of many of these institutions; therefore, being structured for agility, and prepared to respond quickly to market pressures is crucial.

Enables financial services to invest strategically

What is new about the current cost containment environment is that rather than just cutting costs, organisations are considering how to increase value through investments in strategic initiatives, as well as customer experience improvements, and back-office efficiencies. Investing strategically while cutting costs is vital.

Improving financial services operational processes

In a world that brings constant, transformative change, and where financial services processes have remained relatively static for years— perhaps nothing is more ripe for change—than the need to improve operational processes and link them with customer channels and touchpoints.

However, a workforce that is properly resourced for major change has never been easy to prepare for or deploy. A significant cost component is labour resources, which includes not just remuneration, but also the indirect costs associated with delayed onboarding and lost productivity.

It often takes an army of skilled and specially trained external teams to ensure a comprehensive approach to overhauling a system. To successfully implement organisational change, a partner who understands the competitive environment and who can help identify efficiency opportunities, plus your most valuable asset, people, will be critical to success.

Do your business processes and systems need an overhaul?

At Covalen, our expert teams will provide the support and skills you need to propel your organisation forwards in a competitive marketplace. Find out how outsourcing can benefit your organisation today.

Challenges facing the Financial Services industry. Challenges facing the Financial Services industry.
Challenges facing the Financial Services industry. Challenges facing the Financial Services industry.

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Challenges facing the Financial Services industry.



11th January 2022