In 2021, financial service providers encountered significant uncertainty and volatility. Organisations in banking, capital markets, and insurance have had to weather the storm caused by the sustained impact of a global pandemic reaching its two-year mark, uncertainty regarding its near-term and long-term impact, divergent and inconsistent policy responses, changing customer behaviours and preferences, competitive pressures from new entrants, and unfavourable macroeconomic conditions. Nevertheless, businesses across the industry demonstrated resilience and agility and made progress in improving digital capabilities and ecosystems.[toc]
So, what should we anticipate in 2022?
In our first meeting of 2022, the BJSS Financial Services Community of Practice explored this topic. To identify and discuss the key emphasis topics for 2022, the group contributed thoughts and observations gleaned from our work and interactions with companies across the industry. We voted on these, and the top six trends are listed below. And despite the fact that making forecasts in these times might be a fool’s errand, we went out on a limb and made some in each area.
1. Modernization of the Past
Modernization of old infrastructure and applications will be a significant theme in banking, insurance, and capital markets in 2022, according to our contacts with clients. Companies are likely to conclude that now is the moment to confront digital transformation’s complexity, expense, and barriers.
In recent years, the banking industry has seen vast digital transformations. Modernisation has occurred, but much has been neglected as the consumer and competitive environment have been prioritised. Numerous modernization initiatives are currently ongoing, and the focus has shifted to shaping the organisation for the long term. This involves reducing costs, becoming more nimble, enhancing resilience, real-time risk management, and removing obstacles to the introduction of digital platforms. Reducing physical infrastructure footprints and migrating to the cloud will be a big motivator, and we anticipate that many banks will expedite this process and plan the migration of their whole estates to the cloud.
In the insurance industry, the emergence of advanced data and analytics platforms has allowed companies to modernise by automating previously manual operations such as data preparation, document processing, and reporting. This not only generates substantial cost savings, but also drastically increases accuracy in areas such as bidding and underwriting, claims assessment, and customer service. Insurers are also seeking to rationalise duplicate systems in an effort to minimise complexity and costs.
Modernization initiatives will accelerate in 2022 as banks and insurers seek to decrease complexity, automate processes, and realise measurable cost savings.
In 2022, we anticipate a new level of personalization, notably in retail banking and insurance.
Numerous businesses have laid the framework for establishing strategic data platforms, enabling them to improve access to and utilisation of current datasets while also capitalising on the expanding availability of external third-party data. This has allowed for a rise in the application of predictive analytics to create business insights. For many, though, there is still work to be done here. As the foundations are established, the focus will shift to the incorporation of data insights into business processes. Personalization of products and customer services is one of the primary application cases.
This will become a competitive need as digital channels evolve to provide comprehensive product and service coverage. Differentiation will be achieved through the intricacies of client engagement and the extent to which financial service providers can understand individual customers and personalise products and services to their specific needs and preferences.
Personalization will also be a fascinating aspect of embedded finance, in which financial services are integrated into broader client experiences, such as consumer retail. Grasp and personalising the financial service within a broader understanding of the client’s journey and context will be essential to delivering the optimal customer experience and capturing their business.
Prediction for 2022: The data and analytics foundations that have been developed over the past several years will be exploited to provide deeper customer insights and more personalised products and services.
3. The progression of open finance and ecosystems
Open finance will continue to be driven by continued open data rules and the need to innovate and build new business models and distribution channels. 2022 will be the year that innovative use cases provide substantial business value.
Following the launch of Open Banking in the United Kingdom in 2017, the concept has subsequently spread to around 30 additional countries. As part of the European commission’s digital finance agenda, spanning banking and other areas of finance such as open insurance, open finance legislation is ongoing, with predicted advancements in payments and more by 2022.
Open banking adoption is not as advanced in the United States, and there has not been the same regulatory emphasis as in the United Kingdom and Europe. However, 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 developing policy rules in this area.
We see this as a crucial area where financial service providers will seek to build new distribution and revenue channels as the number of use cases increases. For instance, banks might generate revenue through premium API subscriptions that provide enhanced data and services. Integrating a marketplace facilitates the creation of new distribution channels and client acquisition. Embedded finance journeys can enable banks to integrate with non-banking partners to offer banking services within their customers’ trips.
From a technological standpoint, we consider the establishment of open architecture to be in line with the modernization endeavour. The IT competencies of API planning, data management, and security are required to capitalise on this expanding trend.
Our prediction for 2022 is that business model innovation and the profits generated by banks as a result of open ecosystem integration will increase, and that open finance projects will expand in scope.
4. Sustainable finance
With the momentum gained during COP26, the establishment of the International Sustainability Standards Board (ISSB) by the IFRS in November 2021, and the centrality of sustainable finance in the published work programmes of regulators, this will be a major global theme for 2022 as we seek to direct capital flows to support the transition to a sustainable economy. Many companies are already using sustainable business and investing methods as their primary marketing messages.
We anticipate an improvement in the quality and consistency of reporting, as well as the quantity of available data, as disclosure requirements expand and more companies become subject to the regulations. In Europe, for instance, the Corporate Sustainability Reporting Directive (CSRD) and the Sustainable Finance Disclosures Regulation (SDFR) will impose additional regulations on corporations and financial service providers, respectively.
The United States has a distinct set of regulations, with the SEC mandating some ESG disclosures if they are deemed important to an investment decision. In general, it is acknowledged that the degree of information required to be reported in the United States is lower than in many other established markets. However, the SEC is actively considering expanding this requirement and issued a call for information last year.
The Taskforce For Climate-Related Financial Disclosure’s 2021 status report, for example, found that only 50 percent of companies were making at least three TFCD-aligned recommended disclosures. Hopefully, 2022 will also be the year when more companies comply with the disclosure rules and jurisdictions work together to align on approaches and taxonomies.
As reporting and scrutiny increase, we see several intriguing opportunities for businesses seeking to enhance their sustainability scores, including the role that technology may play. As the quantity and quality of data expand, we also see opportunities for novel services to better inform consumers about the effects of their actions and decisions on the companies they employ.
Our prediction for the year 2022 is that companies would prioritise becoming visible leaders in sustainability and producing innovative goods and services that empower customers to make educated decisions.
5. Distributed Finance (Defi)
Decentralized finance is the concept of conducting financial transactions such as trading, lending, and investing without the control of a central intermediary, such as a bank or broker, utilising secure distributed ledgers. The potential of democratising finance through a more open, transparent, and equitable financial system has made it a subject of increasing interest in recent years. According to The Block, the total value locked (TVL), the sum of assets stored in DeFi protocols, increased from approximately $1 billion in mid-2020 to more than $100 billion at the end of last year.
Much is occurring in the DeFi space. We have witnessed the launch of cryptocurrencies by central banks, the continued digitisation of assets (anyone for NFTs? ), the establishment of crypto trading desks by traditional banks, the continued experimentation with blockchain / DLT technology to revolutionise traditional finance processes, and increased regulatory scrutiny.
In 2022, we anticipate DeFi to continue to expand as more projects enter the field, more assets become tokenized, and creative technological solutions continue to evolve. Regulators such as the FCA have already prioritised AML/KYC in a DeFi world, and as quantities expand (particularly in stablecoins such as Tether and USCD), regulatory scrutiny will intensify. We anticipate that 2022 will be the year in which regulators move toward a regulatory framework that functions within a paradigm with no centralised agents.
Additionally, technological innovation will continue in areas such as blockchain scalability so that the system can accommodate expanding quantities. We also anticipate the evolution of interoperability solutions, both between blockchains to reduce fragmentation and between DeFi and traditional financial infrastructure to bridge the gap between the two.
Prediction for 2022: DeFi is here to stay, regulatory scrutiny will intensify, and a balanced strategy will develop that delivers the appropriate level of openness and supervision without impeding sector innovation.
6. Capital markets trading moving to the cloud
In 2022, we also anticipate a further acceleration of cloud use within financial markets and a migration of trading systems to the public cloud.
Capital markets are already utilising the cloud to leverage the availability of data and the scalability of computing in areas such as risk calculations on the sell-side and quantitative analytics on the buy-side. Several new cloud-based exchanges have also been developed. In spite of this, the adoption of cloud technology for trading operations has been relatively modest due to concerns around performance, security, and data residency. Nonetheless, we observed in a BJSS webinar that it is not simply a technological barrier but also a disruption of conventional business paradigms.
However, this is presently changing. The pandemic highlighted the need for scalability and resilience in trading systems, as a number of them failed in the face of heightened market volatility and activity spikes. One approach is to move trading workloads to the elastic scalability of the cloud.
In their pursuit of the trading and matching engine market, cloud service companies with large wallets have made advances in latency-improving technologies. This has enabled capital market companies to approach the latency characteristics of trading systems that are extensively built and optimised for physical hardware.
CME and Nasdaq’s public declarations that they will move their matching engines to Google and AWS, respectively, are another proof that the cloud is now mature.
Four years ago, we anticipated that trade will transition to the cloud within five years; this forecast continues to hold true. In 2022, we anticipate a significant number of exchanges and buy- and sell-side trading organisations to shift critical front-office and trading technologies to the public cloud.
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