2021 Global outlook for banking and financial markets

Late last year, 44 members of the IBM Industry Academy and Academy of Technology in 11 countries reflected on trends that will drive investments and actions in the banking and financial market industries in the new year. They produced a collective point of view based on IBM global experience, and their pulse on what is truly going on in the industry.

The IBM Institute for Business Value (IBV) extrapolated the main themes from these experts that will dominate the agenda of financial services leaders. They agreed that successful financial institutions will be characterized by forward-looking leaders focused on responding to eight trends:

• Muted financial performance
• Accelerated digital adaptation
• New cloud-based business architectures
• Escalating competition
• Operational resilience challenges
• Increasing open and free data
• Security and fraud risks
• New ways of working.

Let’s explore each of these trends in more detail.

Muted financial performance drives structural cost reduction and industry consolidation, and the search for new revenue streams.

The industry price-to-book is well below the average of other industries, and European banks appear to be the most disadvantaged. Existing actions and operating models are unlikely to deliver ROE demanded by investors.

This can only be addressed by deploying new business models driving revenue growth and radical cost reduction initiatives, and further improving capital efficiency and risk management. Industry consolidation through mergers and acquisitions will intensify, driven by opportunities around weak market valuations, the need for scale efficiency, and the need to safeguard distressed institutions.

Accelerated digital adaptation as customers and employees embrace digital interactions driven by government-mandated social distancing and closures of physical locations.

During the pandemic outbreak, clients quickly migrated to direct channels. Just as clients had to adapt, financial institutions also had to quickly enable a remote workforce and digital interactions with partners and vendors.

Increased digital experiences make clients’ demand more compelling for transparent, real-time, tailored services, which are seamlessly integrated into their lives and businesses. As a result, banks are further enabling virtual proximity and enacting instant payments.

New cloud-based business architectures fast-track application programming interface (API)-driven banking functionalities.

Existing architectures cannot deliver the cost and agility required to compete in a disrupted landscape. Industry leaders are migrating to new operating models based on an open hybrid multicloud architecture.

To achieve expected returns, financial institutions might target a range of 40-50% of workloads on a specific public cloud, around 20% on a traditional public cloud, and the remaining 30-40% on-premises based on a modern, mainframe infrastructure. Banks are intensifying their cloud migration of business-critical workloads. They are coupling application modernization with the sourcing of banking functionality from joint ventures or external providers in new consumption models.

Escalating competition inside and outside the financial services industry blurs the line between banking and non-banking to enable client-centric ecosystems.

Bigtech companies are moving “outside-in,” expanding their businesses with inside financial services. They are connecting to financial clients by enabling and leveraging ecosystems around people’s lives and their businesses.

Leading financial institutions are also developing new value propositions that address this new model for the consumption of financial services. They are innovating “inside-out” to connect with clients and engage them on non-banking platforms through end-to-end analytics.

Operational resilience challenges are driven by increased regulatory scrutiny, as well as new compliance and business requirements.

Amid post-pandemic uncertainty, compliance officers and risk managers are learning the importance of being proactive and anticipating any impact on their businesses, while new guidance is enforced for clients to access stimulus packages. A barrage of new regulation is coming in 2021 to address operational resilience.

Increasing open and free data creates opportunities for cloud-native competition.

The industry has access to vast amounts of rich data about its clients—data that is becoming cheaper and increasingly open. Well-balanced data strategies underpin sustainable success in the digital platform economy.

Success will require the modernization of data environments, leveraging new analytical and artificial intelligence (AI) tools, while enacting a transparent balancing act between the ownership and the sharing of data across entire ecosystems.

Security and fraud risks continue to expand as financial institutions enable operating models deployed in response to the pandemic.

Combined with expanding channels, increasing interconnectivity, digital platforms, and pervasive access is driving increased security risks, threats, and fraud. Holistic strategies and combining data across functions allow banks to predict and respond proactively across the risk management spectrum, knowing that the risk for fraud and security breaches evolves with sophisticated adversaries.

New ways of working emerge as financial institutions are shifting from the traditional front-office/back-office segmentation.

Teams of employees, subcontractors, and automated systems are working together in new collaboration models on well-defined tasks across areas of expertise. This has been accelerated by remote working. A redefinition of the workforce, combined with intense competition for digital talent, will transform how resources are recruited and managed.

Keys to transformation

Facing these eight trends, industry leaders are encouraged to master a set of common enablers to transform their business and address all priorities in 2021.

• Open hybrid multicloud architecture. Migration of business-critical workloads to open hybrid multicloud enables business flexibility and resolves operational risks experienced when workloads are concentrated among a small number of data storage providers.
• Data and AI. Enterprise data strategies underpin the digital transformation in the platform economy, enabling a transparent balancing act between ownership and sharing of data and insights across entire ecosystems.
• Security and compliance. Holistic approaches combining data across risk management systems and security functions allow businesses to predict and respond proactively to cyber risk (such as data breaches, operational resilience, and identity theft).
• Ecosystems. Easier-to-use, self-served digital options and embedded hyper-personalization offers higher value for clients in an accelerated digital world.
• Talent. New enterprise working models that mobilize expertise globally will help the industry meet accelerated client demand for digital services.

For more insights about Banking and Financial Markets, you can download the latest IBV paper, “Banking on open hybrid multicloud.”