Navigating the Evolving Financial Services Landscape in 2024

The year 2023 proved to be a period of surprises and shifts in the financial world. Key events included multiple bank failures in the United States, exemplified by the collapse of Silicon Valley Bank and the emergency rescue of Credit Suisse by UBS. This tumult in the banking sector was a notable deviation from the norm and sent ripples across global financial markets.

Concurrently, central banks globally, including the U.S. Federal Reserve, embarked on a rigorous cycle of interest rate hikes to combat inflation. The Fed alone raised rates by over 500 basis points from near-zero levels, a move mirrored by other central banks. This aggressive monetary policy was a response to the persistent inflation that had taken hold globally, but the strategy's success in taming inflation led to some skepticism about potential policy errors.

Additionally, 2023 was marked by the significant growth and influence of Generative AI in various sectors, including finance. This technology's rapid advancement and integration into mainstream applications were unforeseen at the beginning of the year.

Overall, the financial landscape of 2023 was shaped by a combination of strategic central bank interventions, technological advancements, and the global economy's adjustment to post-pandemic norms. These factors collectively contributed to an environment of resilience, innovation, and adaptation in the face of challenges and uncertainties. With 2023 behind, what does the year ahead – 2024 – hold?

For retail banking, the relentless push towards digital transformation will intensify further. Banks must digitize and integrate key processes and help customers navigate with less friction, and deeper personalization. The need for digital-first, customer-centric models can no longer be ignored. Seamless digital onboarding and frictionless cross-channel experiences will be crucial for customer acquisition and retention.

• Embracing Digital Transformation: The retail banking sector is undergoing rapid digital transformation. This has been accelerated by the COVID-19 pandemic, leading to a majority of transactions going digital. Banks are increasingly focusing on digitizing key processes like account opening and customer onboarding. This transformation is not just about technology, but also about helping customers navigate financial stress and maintain well-being in uncertain times. The transformation involves shifts like digital banking, customer-centered advice, and hyper-personalization.
• Navigating the Global Economic Landscape: The banking industry in 2024 will face challenges from a slowing global economy and a divergent economic landscape. Factors such as higher interest rates, reduced money supply, more assertive regulations, climate change, and geopolitical tensions are reshaping the foundational architecture of the banking and capital markets industry. Banks will need to adapt their strategies to manage these challenges effectively while pursuing new sources of value in a capital-scarce environment.
• Operating Like Tech Companies: In order to succeed in the evolving market, banks will need to operate more like tech companies. This involves developing advanced data capabilities, a cutting-edge tech stack, and an agile operating model. Banks will need to leverage data for personalization and stronger customer engagement, use a cutting-edge technology stack to reduce costs and speed up innovation, and adopt an agile operating model to respond to fast-changing markets.

The insurance sector must brace for climate change-led tail risks and longevity improvements from advanced new drugs.

The P&C insurance sector is likely to put a greater emphasis on products and services related to climate change and natural disasters. As extreme weather events become more frequent and severe due to climate change, insurers may need to adjust their risk models to account for these increased risks. This could lead to more innovative insurance products that offer protection against a broader range of climate-related damages, as well as services that help customers mitigate these risks.

The increasing use of GLP-1 drugs, initially approved for treating Type 2 diabetes and later for weight loss, is expected to have significant implications for the life insurance sector. Analysts suggest that a healthier population resulting from widespread use of these drugs could lead to lower life insurance premiums, as more individuals qualify for better underwriting classes. Additionally, this improved health may delay mortality, allowing life insurers to earn more investment income on reserves for longer periods.

Wealth managers face an influx of tech-savvy millennial clients and the largest intergenerational wealth transfer in history. They must transform operating models to enable hybrid digital-human advisory services. Customization, personalization, and democratization will be vital to capture share-of-wallet from this segment. Integrating banking and investment relationships will also be key as clients seek consolidated platforms.

As significant wealth transfers occur from older generations to younger ones, wealth management firms might focus on providing services that cater to the needs of both generations, balancing traditional investment wisdom with newer, tech-focused strategies.

Based on the current trends and future projections in the wealth management industry, here are key predictions for financial advisors and broker-dealers:

• Integration of Digital and Human Interactions: Wealth management firms are increasingly combining human and digital interactions to offer more personalized experiences and a broader range of investment options. This trend is driven by the need to meet evolving client expectations for efficiency and personalization in wealth management services.
• Competitive Dynamics and Market Convergence: The wealth management market in the Americas is witnessing intensified competition and market convergence. Private banks, brokers, dealers, RIAs, fintechs, full-service wirehouses, insurers, and asset managers are differentiating their offerings and expanding reach. Wealthtechs are adding a new layer of competition and are being acquired by larger wealth management players to gain valuable data technology assets.
• Emerging Demographic Shift: More than USD$68 trillion is expected to move between generations over the next 25 years. Wealth managers are likely to focus on holistic, planning-centric advice to better meet financial goals, use smart data for growth and personalized experiences, and improve digital capabilities for a more seamless client and advisor experience.

Commercial Banks face the struggling credit market for commercial real estate (CRE). Tightening credit conditions and liquidity have been key challenges for the market. Due to soaring interest rates, private lenders have become the primary source of funding, but they are becoming increasingly cautious. This shift exacerbates the liquidity crunch in an industry already strained by a wave of debt coming due. Banks have been renegotiating CRE debt terms to prevent defaults, leading to the necessity for additional equity from borrowers.

The market scenario has altered notably, with the sharpest increase in interest rates in years, compounded by stricter lending criteria following regional bank collapses in March and a decline in office space usage in the post-pandemic era. This environment has led to lower rental incomes, as they fail to keep pace with rising debt service costs. Consequently, even private lenders are finding the numbers hard to justify.

The looming maturity of nearly $2 trillion in CRE debt over the next two years is expected to heighten the demand for private financing. The current economic landscape suggests that certain sectors might take over three years to enter a recovery phase, with private lenders potentially needing to downsize their portfolios, which are costly to maintain.

?For Capital Markets, technology investment remains vital despite margin pressures. Implementing AI and data analytics is now indispensable to unlock efficiency gains and stay competitive. Firms also need to align operating models to navigate disruptive forces like economic weakness, higher rates, climate change risks and geopolitics.

• Technological Investment Amidst Economic Challenges: Capital Markets firms are likely to increase their investment in technology and associated controls, even in the face of weak performance and margin pressures. This investment is crucial to meet growing client expectations for personalization and timeliness in interactions.
• Theme-Driven Portfolio Construction: There is a growing trend towards theme-driven portfolio construction as a vector for product development. Traditional investment strategy classifications like growth vs. value, large-cap vs. small-cap, and by industry sector will continue, but there will also be a move towards more thematic and tailored investment approaches.
• Impact of the Global Economy and Disruptive Forces: The global economic slowdown, divergent economic landscapes, and multiple disruptive forces like higher interest rates, reduced money supply, assertive regulations, climate change, and geopolitical tensions are reshaping the foundational architecture of the banking and capital markets industry. Investment banking and sales and trading businesses will need to adapt to new competitive dynamics, such as the growth of private capital.

Finally, the regulatory agenda while risk and compliance budgets may face scrutiny, skimping is not prudent. Proactive collaboration with regulators and technology integration will enable better oversight without compromising experience.

In 2024, the regulatory landscape for financial services is expected to focus on several key areas:

• Increased Regulation of Off-Channel Communications: There will be a heightened regulatory focus on off-channel communications across a broader range of financial services firms. This includes scrutiny of collaborative platforms like Microsoft Teams and Slack, expanding beyond traditional email and social messaging. Firms will need to implement sophisticated tools to supervise not just written messages but also emojis and gifs.
• Enhanced Mobility Management Strategies: Firms are anticipated to adopt tailored governance policies to manage mobile compliance effectively. This includes leveraging advancements in technology and compliance tools, as well as prioritizing ongoing mobile compliance training programs. Senior executives will play a crucial role in emphasizing the importance of adhering to mobile communications guidelines.
• Generative AI in Regulatory Spotlight: The rapid adoption of generative AI technologies, like ChatGPT, will continue to draw regulatory attention. The SEC and other regulators are likely to issue more concrete guidance around potential conflicts of interest and data privacy concerns associated with AI. Firms will need to focus on areas like data privacy, transparency to mitigate algorithmic bias, and effective management of model risk.

Conclusion, as we approach 2024, leaders in the Financial Services sector must take proactive steps to address these emergent trends. This involves not only technological investment but also a strategic shift towards sustainability, personalization, regulatory agility, and understanding client behavior. By embracing these trends, leaders can ensure their institutions remain competitive, resilient, and aligned with the evolving demands of the market and society. The future of financial services is bright, but it is reserved for those who are prepared to innovate and adapt. Hello 2024.