Are Banks and Investment Houses Facing Extinction?

Over the past few weeks, there have been a number of reports and indicators showing the world economy slowly heading towards a low inflation, low growth economy and perhaps recession.

Mark Pearson, Consultant

Companies appear to be keeping a watchful eye rather than taking affirmative action, but no doubt consumers will start to change habits much more quickly as needs are driven by these changes.

So what’s in play in the financial services sector?

• Low and negative interest rates set by central banks
• Low inflation
• Lacklustre consumer consumption across the globe
• Mortgage lending increasing modestly (not at the rate seen in the 2001-2008 period)
• Political uncertainly and rise of extremism (a move to both the left and right)
• Growth of mobile devices (ownership and use), internet and fintech
• Mistrust of the banking and investments sector
• Commoditisation of finance services
• Low returns on savings and investments
• Retail sales in investments down (for three of the last four quarters compared to 2014) and a move to invest in commodities especially gold

Not a pretty picture, but are central banks and governments able to reverse this? They have been working on this oil tanker for at least 48 months and to little effect.

The more affluent West has seemingly consumed all they want and this has led to a downturn in consumer demand. It would also seem this is true in China too, which leaves India and South East Asia to continue to generate consumer demand.

What does this mean for UK consumers and their use of financial services?

The UK consumer

Consumption is down in the UK; there is increasing disparity in income and there are deflationary pressures.

It is unlikely that customers will be encouraged to spend their savings and investments and although cheap lending might stimulate some spending, the bursting of the last lending bubble in 2008 still looms large in the memory.

Generally, life expectancy is increasing and health is improving (although this might be impacted by obesity) and consumers are looking local, with nationalism and protectionism on the rise as evidence.
We are moving into a sluggish period and will need to look at propositions that fit the needs of a new era, just as Japan has had to adapt over the last 25 years. For financial services in the UK this might be:

Investing

• Greater use of financial advisers, halting the trend of declining advice; this will be married with the increased use of robo advice at the same time for non-complex situations. Bringing these two propositions together will create a killer proposition.
• Parents taking a longer term view of savings and retirement planning for their children given their ever increasing life expectancy and low investment returns.
• A move to investments that impact our own lives for example local wind turbines, infrastructure projects close to our home, investment in industries that serve our interests and communities.
• A move to dividend investing rather than capital growth. As the economy adjusts to slower growth companies may be forced to hand back more of their unused reserves to shareholders in the form of dividends. Tools such as Dividend Max (www.dividendmax.co.uk) may prove popular to investors.

Retail banking

• A new pricing structure for credit cards and current accounts based upon transactions rather than interest paid, continuing the commoditisation of money.
• Growth of the peer to peer lending/investing market where consumers take pricing out of the hands of central bank and retail banks; these markets continue to grow strongly.
• Savings accounts which take a longer term view of the market with fixed terms for 10+ years and which sit alongside big events such as house purchase and retirement.
• Mortgages designed for life and inherited by children and, potentially, grandchildren.

Technology in financial services

• The disaggregation of service providers by banking and infrastructure providers; by that I mean the growth of new brands that can deliver payment services through tablets, cloud technology etc, i.e. fintech companies and infrastructure providers replacing traditional banks in terms of capital, liquidity, branches. This trajectory is already seen with PayPal, Apple Pay, and challenger banks such as Atom, Mondo and Starling.
• Social media channels throwing open the ability to support community forums which drive investment decisions brokered through the P2P platforms; witness the trend for rural pubs to be owned by the local residents.
• The connectivity between payments and rewards such as Yoyo wallet.
• The demise of plastic cards will hasten with the ongoing speed of development of mobile devices and bio-metrics to become the way we pay for goods and services.

Both traditional businesses and start-ups need to consider the long term picture and how it will change the needs of customers and how this will impact the design of financial services products.

In simple Darwinian terms those that ignore this face extinction just as others have such as Kodak, Polaroid, Nokia to name a few.

About the author: Mark is an independent consultant who has extensive experience of product management, proposition development, brand, marketing campaigns and insight gained in a range of blue chip financial services companies.