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By Simon Hull, Head of Financial Services at BJSS
2021 was a year where financial service providers experienced considerable uncertainty and volatility. Organisations across banking, capital markets, and insurance have had to weather the storm fuelled by the sustained impact of a global pandemic reaching its two-year mark, uncertainty regarding its near-term and long-term impact, diverging and inconsistent policy responses, changing customer behaviours and preferences, competitive pressures from new entrants and unfavourable macroeconomic conditions. But firms across the industry showed resilience and agility and took strides forward in advancing digital capabilities and ecosystems.
So, what can we expect in 2022?
The BJSS Financial Services Community of Practice discussed this topic in our first meeting of 2022. The group brought insights and observations from our work and interactions with firms across the industry to identify and debate the key focus areas for 2022. We voted on these, and the six trends below came out on top. And although it can be a fool's errand in times like these, we even went out on a limb with some predictions in each area.
1. Legacy Modernisation
This is a reasonably general theme, but from our interactions with clients, we think the modernisation of legacy infrastructure and applications will be a big theme across banking, insurance and capital markets in 2022. Firms are likely to decide that now is the time to address complexity, cost and impediments to digital change.
We've seen large swathes of digital change in banking over the last few years. Modernisation has happened, but a lot has been deferred, with the focus being placed on the customer and competitive environment. Many modernisation programmes are now underway, with the mindset shifting towards shaping the organisation for the long term. This means streamlining costs, becoming more agile, improving resilience, managing risk in real-time and removing the barriers to deployment of digital platforms. Reducing physical infrastructure footprints and moving to the cloud will be a significant driver and we expect many banks to accelerate this and plan the migration of entire estates to the cloud.
In insurance, we've witnessed the rise of advanced data and analytics platforms that have enabled firms to modernise by automating previous manual tasks like data preparation, document processing and reporting. Not only does this generate significant efficiency savings, but it also improves accuracy dramatically in areas such as quoting and underwriting, claims assessment and customer service. Rationalisation of duplicate systems is also a theme here, and something insurers are looking to progress to reduce complexity and cost.
Our 2022 prediction: Modernisation programmes will accelerate in 2022 as banks and insurers look to reduce complexity, automate and achieve tangible cost reductions.
We think personalisation will move to another level in 2022, particularly in retail banking and insurance.
Many firms have put in the groundwork to establish strategic data platforms, enabling them to better access and leverage existing datasets whilst also benefiting from the growing availability of external third-party data. This has enabled an increase in the usage of predictive analytics to generate business insights. However, there is still work to be done here for many. As the foundations are put in place, attention will turn to integrating data insights into business processes. One of the key use cases is the personalisation of products and customer services.
This will become a competitive imperative as digital channels progress to offer full product and service coverage. Differentiation will be achieved in the nuances of customer interaction and how well financial service providers can understand customers individually and tailor products and services to their specific needs and preferences.
Personalisation will also be an exciting area within embedded finance where financial services are infused within wider customer journeys, for example within consumer retail. Understanding and personalising the financial service within a broader understanding of the customer journey and context will be vital to providing the right experience to capture customer business.
Our 2022 prediction: The data and analytics foundations that have been established over the last few years will be leveraged to drive increased customer insights and personalised products and services.
3. continued evolution of open finance and ecosystems
Continued open data regulations, along with the need to innovate and develop new business models and distribution channels, will continue to drive open finance. 2022 will be the year we see real business value-driven from new use cases.
Following the initiation of Open Banking in the UK in 2017, the concept has since taken off worldwide, with around 30 other jurisdictions following the UK's lead. Open finance regulation is continuing, with progress into payments and more expected in 2022 as part of the European commission's digital finance strategy, covering banking and other areas of finance such as open insurance.
Open banking adoption is not as far ahead in the US and there hasn’t been the same regulatory focus as in the UK and Europe, but the customer experience and revenue drivers to develop open banking based services still exist, and the Consumer Financial Protection Bureau (CFPB) will take the lead in crafting policy rules in this area.
Use cases are growing, and we see this as a critical area where financial service providers will look to develop new distribution and revenue streams. For example, banks can generate revenue through premium API subscriptions that offer richer data and improved services. Marketplace integration enables new distribution channels and customer acquisition. Additionally, embedded finance journeys allow banks to integrate with non-banking partners to provide banking services into their customer journeys.
From a technology point of view, we see the creation of open architecture as being aligned to the modernisation journey. API strategy, data management, and security are essential technology competencies required to take advantage of this growing trend.
Our 2022 prediction: Business model innovation and the revenues that banks generate from open ecosystem integration will increase, and we will see the progression of more extensive open finance initiatives.
4. sustainable finance
With the momentum gained during COP26, the set-up of the International Sustainability Standards Board (ISSB) by the IFRS in November 2021, and sustainable finance being central to the published work programmes for regulators, this will be a significant global theme for 2022 as we aim to direct capital flows to support the transition to a sustainable economy. Sustainable business and investment practices are already being used as key marketing messages for many firms.
We expect to see an improvement in the quality and consistency of reporting, along with the volume of data available, as disclosure requirements expand, and more entities fall within the mandates. For example, in Europe the Corporate Sustainability Reporting Directive (CSRD) and the Sustainable Finance Disclosures Regulation (SDFR) will bring more rules for corporate entities and financial service providers, respectively.
The US has a different set of rules, with the SEC requiring certain ESG disclosures if they are considered material to making an investment decision. It is generally accepted that the level of information required to be disclosed is lower than that of many other developed markets, but the SEC is actively looking at extending this and put out a request for information last year.
2022 will also hopefully be the year that we see more uptake of the disclosure rules (a 2021 status report by the Taskforce For Climate-Related Financial Disclosure, for example, found only 50% of companies were making at least 3 TFCD-aligned recommended disclosures), and further collaboration across jurisdictions to align on approaches and taxonomies.
As reporting and scrutiny increase, we see many interesting areas for firms looking to improve their sustainability ratings and how technology can play a role here. As the volume and quality of data increases, we also see opportunities for innovative services to better inform people about the overall impact of their actions and choices regarding the companies they use.
Our 2022 prediction: Firms will prioritise becoming visible leaders in sustainability and developing innovative products and services to enable customers to make informed choices.
5. Decentralised Finance (Defi)
Decentralised finance is the concept of conducting financial activities such as trading, lending and investing using secure distributed ledgers that do not require the control of a central intermediary, such as a bank or a broker. It has been a growing area of interest in recent years because of the promise to democratise finance through a more open, transparent, and fair financial system. According to The Block, the total value locked (TVL), the sum of assets deposited in DeFi protocols, has risen from around $1bn in mid-2020 to over $100bn by the end of last year.
A lot is going on in the DeFi space. We have seen central banks launching cryptocurrencies, the digitisation of assets continuing to grow (NFTs anyone?), traditional banks setting up crypto trading desks, continued experimentation with blockchain / DLT technology to revolutionise traditional finance processes and more scrutiny from regulators.
In 2022, we see DeFi continuing to grow as more and more projects in the space come into existence, more assets become tokenised and innovative technology solutions continue to evolve. Regulators like the FCA have already placed a focus on AML/KYC in a DeFi world, and as volumes grow (particularly in Stablecoins like Tether and USCD), scrutiny will only increase. We can see 2022 being the year when regulators progress towards a regulatory framework that works within a model with no centralised agents.
We will also continue to see technology innovation in areas such as blockchain scalability so the technology can cope with growing volumes. We also expect interoperability solutions to evolve, both across blockchains to reduce fragmentation and also to bridge the divide between DeFi and traditional financial infrastructure.
Our 2022 prediction: DeFi is here to stay, regulatory scrutiny will increase, and a balanced approach will emerge that provides the right level of transparency and supervision without stifling innovation in the sector.
6. capital markets trading moving to the cloud
2022 is also the year we expect to see further acceleration in cloud adoption within capital markets and a move to migrate trading systems to the public cloud.
The cloud is already in use within capital markets to take advantage of the availability of data and the ability to scale compute in areas such as risk calculations on the sell-side and quantitative analytics on the buy-side. We've also seen several new exchanges built for the cloud. Still, in general, the take-up of cloud technology for trading operations has been low due to concerns in areas such as performance, security and data residency. However, in a BJSS webinar, we’ve noted that it’s not only a technology barrier but also a disruption of current business models.
This is now changing, however. The pandemic highlighted the need for scalability and resiliency in trading platforms as a number suffered under increased market volatility and spikes in activity. Moving trading workloads to the elastic scalability of the cloud is one solution to this.
Cloud providers have deep pockets and are now going after the trading and matching engine space, and in doing so have made progress in developments to provide improved latency. This has allowed capital market firms to get closer to the latency characteristics of trading systems that are highly engineered and optimised for physical hardware.
And if any more evidence is needed that the cloud is now ready, look no further than the public announcements from CME and Nasdaq that they will be moving their matching engines to Google and AWS, respectively.
Our 2022 prediction: Four years ago, we predicted that trading would move to the cloud within five years, this prediction continues to hold. We see many other exchanges along with trading businesses on the buy and sell-side looking to migrate key front-office and trading technology onto the public cloud in 2022.
2022 promises to be another year of significant change across the industry.
There will be no let-up in digital transformation, but firms will also look to modernise to reduce complexity and increase their agility to remain competitive.
Customers will benefit from a new wave of competition around the personalisation of products and services, along with the convenience of financial services contextually embedded into their non-financial experiences. They will also become armed with enhanced data so they can make better decisions with sustainability in mind.
Decentralised finance will continue to grow under the watchful eye of regulators, and capital market firms will finally start to move trading technology onto the cloud.
The confluence of these forces and the hoped-for emergence from the pandemic will dramatically impact markets, businesses and consumers. Exactly how is difficult to predict, but waiting on the sidelines to find out isn’t an option.
If you'd like to learn more about the themes mentioned in this article and what BJSS is doing with clients across the industry, please get in touch!