Our latest PwC thought leadership report, "Securing your tomorrow, today - The future of financial services" , has just been launched, where we discuss the 7 macro trends in the post-COVID-19 environment that matter to global financial services.
COVID-19 will change many aspects of financial services forever, accelerating trends already begun, creating new trajectories and slowing down or even stopping a number of changes previously underway in their tracks. Therefore, we are asking ourselves: Are we adapting quickly enough, given the environment? This question is equally relevant in a Channel Islands context as it is in the global arena.
In contrast to the global financial crisis (GFC), COVID-19 triggered initial impacts in the real economy and will increasingly manifest itself in a second stage throughout the financial sector. The lockdowns and social-distancing measures imposed by governments around the globe to flatten the infection curves have caused significant damage to many industries, all of which are served by financial institutions. We're feeling the impact of the global pandemic very clearly in the Channel Islands, with each Island adapting local lockdown rules, significantly reduced travel and visitors to the Island, and overall significantly decreased activity across all aspects of our wider economy.
Mike Byrne, Partner and Asset Management Leader, PwC Channel Islands
A new way to think about the future of your business
As you think about the future, it may be helpful to have a structured way to think about your organisation, operating platform and overall business. At PwC, as part of our Future of Industries project, we determined the four key categories and areas of focus to consider as you prepare for tomorrow.
Repair the damage
The damage from COVID-19 to the real economy—and, by extension, the financial system—is only beginning to manifest itself in various ways. This damage will require deliberative activities to repair financial institution balance sheets and reputations.
The following repair activities should be top priorities for financial institutions across the board:
- Prepare for restructurings, workouts and wind-downs
- Increase the proportion of fee-based revenue
- Accelerate 'trust-building' activities
- Create new business capacity
Rethink the organisation
Many of the questions about organisational structures and talent that existed before COVID-19—the efficacy of remote working and the productivity of agile teams—have been answered. These and related tools and approaches are now being deployed, and are succeeding, on a massive global scale.
Rethinking the organisation requires a focus on the following priorities:
- Adopt a modern management approach
- Embrace new ways of working and digital upskilling:
- Crowdsource talent and innovation
- Redesign the customer journey and strategy
Reconfigure the business and operating platform
Along with the repair and rethink activities, many financial services institutions will need to reconfigure the business and operating platform, in some cases making profound changes in order to succeed in the future. To be sure, the post-GFC changes were also profound, as the industry grappled with increased regulatory costs by selling businesses, reducing workforces, increasing offshoring and taking many other important actions. The COVID-19 crisis is only accelerating trends well underway in each sector and underscores how much work remains to be done.
There are myriad reconfigure activities, but for purposes of brevity, we will highlight the critical areas:
- Double down on cost reduction, digitisation and reshaping the change portfolio
- Increase cloud adoption and the use of emerging technologies
- Use M&A to bolster strategic position
- Partner with nonbank lenders and embrace change in market structures
- Optimize business/product mix and align incentives
Report the results
As various stakeholders demand more transparency and accountability from financial institutions, the focus will increasingly turn to complete and accurate reporting in a range of areas, including financial performance, ESG, regulatory compliance and the like. In addition, it will be critical not to miss perhaps the most important attribute of any successful financial institution in the future: being able to articulate its unique culture, story and value to society.ist
- ESG
- State aid
- Accounting standards
- Regulatory
- Shareholders
- Society
- Taxes
7 Macro trends that matter in the Channel Islands
And, in my view, I think we can clearly see how all are relevant to the financial services sector in the Channel Islands
Low interest rates will continue wreaking havoc on margins and business models - this will present continued challenges to the banking sector, which has endured low interest rates, with resultant lower demand for banking products, for the past ten plus years. Efficient and available banking services are key to an effective economy and so this important CI sector must continue to innovate and add value to its customers, if it is to remain relevant.
The COVID-19 recession and asset impairments will reduce risk-bearing capacity for regulated industries to support the real economy as it enters the recovery stage over the next year - we've seen in recent years Alternative Assets becoming mainstream and the Asset Management sector being key to funding future economic growth, and this trend is expected to continue.
Alternative providers of capital are set to become an even more important part of the global financial system - the challenges faced in the banking sector, and their ability to gather low-cost deposits to fund lending will take some time to change. However this also represents significant opportunities for other parts of financial services, including alternative finance providers such as Private Debt funds and Peer to Peer lending, and is also likely to attract additional investor capital into alternative funds which can provide a yield to investors through innovative financial structuring. A clear message from the report is the positive outlook for Alternative Asset Managers, the bedrock of the Channel Islands funds industry.
COVID-19 will not delay—and may accelerate—the implementation of current and planned regulatory measures in many countries and regions - regulatory focus will remain high, and efforts made in the Channel Islands to remain at the forefront of regulation are key. Examples of this include Jersey's proposed "anti-greenwashing" measures, which are key at a time when investor focus on ESG compliant products is expected to increase, supported further by the strong performance of ESG funds over 2020 as they did not contain exposure to underperforming oil and energy sectors.
Continued de-globalisation will further align the size of regulated financial institutions to the GDP of their home countries while continued offshoring will increase operational risk across the industry - the Channel Islands has a long established reputation as centres of excellence with effective oversight, governance and regulation. The CI appears well placed to deal with any changes on the horizon but will need to remain vigilant to shifting regulatory focus.
The client-driven shift to a platform- and ecosystem-based financial services industry will create a new wave of disruption and disintermediation. There are a number of CI firms that are currently lagging behind in terms of impactful digital transformation (being able to use Zoom for meetings is not exactly digital transformation!) and these firms risk becoming irrelevant if they don't accelerate their transformation efforts, which need to be embedded at the business strategy, operational and cultural levels.
Firms face unrelenting pressure to boost productivity through the digitisation of the business and the workforce - our recent PwC Channel Islands report "Upskilling the Channel Islands’ workforce for a digital world" revealed that around 30% of jobs in Jersey and Guernsey are at risk of automation between now and 2035. This equates to 27,000 current jobs being impacted by technology disruption. If governments, businesses and educators don’t take decisive action now, the jobs that are furloughed or lost in the downturn may never come back.
In conclusion, as you read our report, consider how the risks we identify will impact your business in the short-, medium- and long-term. Is the challenge of Covid-management distracting you from long-term transformation and innovation and building a plan for the future? There will be winners and losers when we emerge from the pandemic, which will you be?
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