Over the past decade, retail financial services organizations have been reliant on profits generated from increasing consumer lending, whether through loans, mortgages, or card spending. The financial crisis resulting from the sub-prime and housing-market collapse has put an end to this, causing substantial changes in the industry. As a result, retail banks need to attract more depositors in order to stabilize their books, and lenders need to have a much deeper understanding of their customers and risk profiles before they lend. This must all be achieved in an environment that is increasingly competitive and cost-conscious, as banks chase marginal gains in constrained markets. In turbulent economic times, we believe that banks must deliver fundamental performance improvements to ensure that they not only weather the global recession, but also emerge as stronger, healthier organizations that are better able to meet customer needs, appropriately manage risks, and remain profitable.
The UK is a leading global financial services centre and the single most internationally focused financial marketplace in the world. It has an unrivalled concentration of capital and capabilities, as well as a regulatory system that is effective, fair and principled which means that more overseas financial institutions and investors choose to do business in, and with, the UK than any other country.
On this page you can find facts and figures outlining the international nature of the UK financial market, the scope of products covered and some facts and figures that will give you a sense of the scale.
Overseas owned firms represent nearly half of the UK’s largest financial services groups. Of these, it is the western continents of North America and Europe that maintain by far the largest share with around 52% and 26% respectively. Emerging markets are playing an increasingly important role in the UK sector as they internationalise.
The US is the largest investor along with Switzerland, Germany and Japan. There are 251 branches and subsidiaries of foreign banks in the UK, which is more than in any other country.
The UK Financial Services Authority (FSA) has authorised 1116 foreign owned firms, and one third of the £4.8 trillion assets managed across the UK are managed on behalf of overseas clients.
Many banks need to address key industry-wide challenges through:
Redefinition of the banking value chain to identify opportunities and to respond to challenges from the emergence of specialist players and captive-finance providers – especially in product manufacturing and distribution
Better understanding of customer needs and risks, to enable banks to improve their product and service offerings at appropriate price points, allowing them to capture and lock customers in and improve profitability. To do this, banks will need systems that have deep insight into customer needs and risks, to allow them to personalize the product and price
Faster response to government and regulatory changes. The coming years will see substantial new regulatory measures designed to prevent a recurrence of the conditions that led to the current economic crisis – banks will need to respond to these at all levels, across people, processes, and technology
Step-change improvements to halt the decline in efficiency that many banks have suffered over the last few years. By adopting techniques from other industries, such as lean manufacturing, banks can significantly improve performance
Adoption of segment-aligned operating models to provide differentiated levels of service to each customer segment, depending on its needs and value to the bank, minimizing cross-subsidization and profit leakage
Expanding into the emerging markets, where retail banking and credit cards were previously the preserve of the wealthy, is becoming increasingly important
Private banking/wealth management
While the credit crunch may have reduced the volume of high net worth individuals, the growth of the affluent sector and their increasingly complex demands are forcing wealth providers to be increasingly agile. There is strong competition across the industry, with the wealth management arms of investment and retail banks competing with the more traditional private banks. Globalization of wealth is continuing – Asia-Pacific, Eastern Europe, and Southern African markets are growing rapidly. Furthermore, customers are becoming increasingly demanding, requiring their banks to better manage their wealth in times of economic uncertainty.
In the coming years, UKEC believes that private banks and wealth managers will look to:
Deliver new products and services effectively, to set themselves up to better compete in a rapidly changing environment. To do this, banks will need to deliver fast-paced changes to products in current environment e.g., sharp decline in interest in hedge funds
Clearly define the boundary between premier and private banking in order to serve customers effectively – and, as the economic downturn turns into a growth cycle, helping integrated banks effectively to turn premier customers into private banking customers
Offer personal services, tailored to customers’ precise needs, as financially-savvy customers are increasingly making their own investment decisions and disintermediating the wealth management service.
Capital markets/investment banking
Global corporate banking and capital markets have seen substantial change in the last few years. There is new competition from online brokerages and, most recently, there has been a drop in transactions for debt and equity markets, mergers and acquisitions, and initial public offerings. As banks seek to position themselves for economic rebound, a well documented wave of employee layoffs and other cost reductions were undertaken.
We believe that players in the investment-banking and capital markets sector will need to continue responding to a range of trends, including:
Regulatory reform will substantially change the way banks think about their credit, market, and portfolio risks.
Changing the risk organization to deliver these effectively will need more than just a re-shuffle of people. Banks will need to rethink their risk processes, the interfaces between risk management and the wider business, and the capabilities of their risk organization to ensure that regulatory changes can be delivered effectively
Industry convergence and market structure shifts, which have positioned participants around customer results; the redefinition of the business; overcapacity and consolidation on a global, regional, and local scale; and several de novo value chain plays. Banks must position themselves to take advantage of market changes, by assessing their own positioning and opportunities for consolidation, and then restructure the organization, extracting as much value as possible
Increased demand for customer-focused organizations that offer tailored value propositions and high-quality customer service across all channels. Institutions must improve their service to customers, without imposing additional strain on the business model through redundant systems and costs
Pressure to extract value from the operations/technology processing environments, recognizing technology as a driver of industrialization, which has an impact on innovation and scale and unbundles manufacturing and distribution
Evolving organizational models, which are separating manufacturing and distribution and redefining the value chain
Shifts in capital flows to emerging markets and new asset classes.
While retail banking has seen an influx of new players and new channels, commercial banks have faced significantly different pressures over the past few years. Businesses today are demanding more customized products at a lower price point and with greater levels of service. The challenges of today’s economy have reduced the flow of capital in the market and require a more in-depth view of risk. We believe that commercial banks will need to fundamentally restructure in the coming years to enable them to deliver a profitable business as the market improves.
UKEC believes that commercial banks face some key industry issues, including:
Transitioning from a product-focused to customer-focused organization to enable customers to be served comprehensively at the relationship level. Barriers caused by traditional product silos severely limit banks’ ability to own the customer relationship and maximize wallet share. Most banks are striving for a customer-focused strategy, but the challenge is in implementing the processes and systems that can support the change
Improving operational efficiency allows banks to reduce costs and improve profitability – but the risks behind this are significant. Banks need to deliver efficiency improvements without damaging customer service. Banks can continue to learn from other industries by adopting, for example, lean techniques from manufacturing
As market conditions and financial regulations tighten, commercial banks need to substantially step up the way in which they deliver risk management across their organizations. Developing a holistic understanding of risks will become vitally important, and thus risk operating models need to be re-designed to be more effective operationally and provide a more transparent view of risk at board level.
The insurance market has changed significantly in the past few years, whether in property and casualty, life and pensions, or reinsurance. In property and casualty and life and pensions, insurance companies are facing several long-term challenges, including major changes to demographics and customer needs and the changing nature of distribution as a result of competitive and regulatory pressures and the advance of technology. In addition, economic conditions are forcing insurance companies to better manage their risks, protecting against increasing fraud levels in direct customer space, ensuring adequate premiums and protection levels for reinsurers, and better protection of assets in the face of the increasing pressures on insurance liabilities.
As a result, insurers are addressing the following issues:
Customer needs and demographics are changing: insurers need to think about how they respond to customers’ demands for better products and services in new demographics – and how this will impact delivery channels, servicing, and technology
The traditional insurance channels are changing: insurance brokers are no longer as critical in the market as they once were. New channels, such as the bancassurance model, web 2.0 and mobile technologies are changing the way customers access insurance. Insurers need to leverage these channels in the most effective ways to gain market share
In the face of increasing customer and distributor demands, insurers are rethinking how they can better serve the market and position themselves closer to their customers. Enhancing the operating model can deliver these changes effectively – but insurers will need to think about the appropriate models to apply, and how technology and operations will be impacted
Legacy books are becoming increasingly costly to operate effectively. There are options available to insurers to better manage these legacy policies – but which is best? The market for book consolidation is not as rich as it once was and outsourcing may not be the best approach from a customer service perspective. Insurers need to make tough decisions to drive down costs and maintain profitability
Insurers are re-thinking their approach to risk management. Restructuring risk-management functions and processes can substantially improve their effectiveness in the face of increasing claims and financial losses.
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