As 2017 showed, almost anything can happen in the financial services industry. But managing risk and opportunity is what this industry does well. In my role as PwC’s Financial Services Leader, I’m really upbeat about the industry. I see CEOs driving growth in innovative ways. And I see that their confidence comes from a clear understanding of risks and solid planning for whatever might lie ahead.
Our recently published “Top Issues for Financial Services in 2018” report covers 12 issues that we think will dominate industry discussions this year. From digital change to strategic opportunities to the role of government, the year will be full. Here are some of the issues we’re tracking.
First, we’re looking at how financial institutions are turning to technology and embracing disruption to reinvent themselves. It’s a challenge. Firms face competition from new players as well as clients who demand real-time control of their assets and risk profile. Meanwhile, they still depend on legacy systems that are often scattered across silos. We’re seeing leaders get ahead by focusing on what they do well and taking a more open approach to partnerships. Blockchain is a good illustration of the transformative power of technology. In trade finance, for example, blockchain could lead to processes that are better, faster, and cheaper.
Some firms and industries (insurance, in particular) are starting to uncover big payoffs from digital technology by using data and analytics. They’re mining a growing mountain of data to figure out what their customers really want. Others are finding that thinking machines can help them do more with less. From underwriting programs that rely on artificial intelligence to tax functions that use robotic process automation (RPA), firms are helping their staff make better decisions and shift toward higher-value work. There are issues to overcome—privacy, access to data, format inconsistencies, incomplete governance, lack of talent, and so on. But these new tools are a preview of the future of digital financial services.
Many firms are digging into scenario planning with new energy. They’ll need it, given potential asset-price bubbles, a fast-approaching Brexit deadline, and an uncertain outlook for interest rates. We’re encouraging executives to stay on their toes to manage risks and jump on opportunities, including those from mergers and acquisitions. These days, however, finding the right deal may be a challenge. The sector is awash in capital ready to be deployed, and we could see buyers circling a limited number of high-priced prospects. It may be tempting to rush forward, especially in the hot market for insurers and small banks. But you’ll want to make sure you have a clear rationale for any deal in this market.
Some “evergreen” strategic issues, like managing costs and addressing people strategy, are getting a fresh look and continued focus from boards. After years of low interest rates, most firms already have implemented the easy choices in trimming costs. Now, they’re thinking about better aligning parts of the business with their core mission—and about what they can divest. Similarly, we see many institutions doing soul-searching about culture. By making diversity a priority and preparing for their workforce for the future, companies have a chance to jump ahead of their competitors.
Changes in regulation are coming fast. Encouraged by the Trump administration, leaders of the agencies that oversee financial firms have streamlined some of the rules enacted after the 2008-2009 financial crisis. The upshot: We’re now seeing a much more favorable regulatory landscape. Many firms are using this moment to see how they can adopt new RegTech tools to manage risk and streamline compliance. More than 250 RegTech startups now help firms handle everything from loan origination to sharpening surveillance against fraud, money laundering, and insider trading.
Anyone not living under a rock knows that Congress last year overhauled US tax policy. Among several key changes, the new law cuts the corporate tax rate from 35% to 21%, removes the corporate alternative minimum income tax, and turns from a global to a territorial tax system. The retooling of the tax code is prompting some financial firms to rethink how they organize their tax departments.
Finally, it’s an unfortunate reality that many firms still need to shore up cybersecurity programs. The issue isn’t going away, and playing defense is harder than ever. In some ways, firms are even growing more vulnerable as they open up systems to clients and third parties. It doesn’t have to be a losing battle.
Last year, our industry faced its share of surprises, and 2018 probably won’t be any less action-packed. We’re here to help. I encourage you to take a look at our “Top issues” report and watch our webcast from early January. I also want to invite you to sign up to receive our thought leadership publications. I’m looking forward to discussing these issues, hearing your insights, and answering any questions that you might have.