Financial Services
April 27, 2023

10 Trends Defining Growth for Financial Services Businesses in 2023

Financial Services Trends

Changes in technology, consumer tastes, and government policies have all contributed to a dramatic evolution in the financial services industry during the past few years. Several key developments are likely to shake up the industry in the next year.

 



Contents

1) The Digital Revolution:

How are financial institutions responding to the digital revolution?

 

2) Creating Opportunities with Data-driven Insights:

How are financial institutions benefiting from data-driven insights?

 

3) Open Banking:

How are financial institutions responding to open banking?

 

4) Compliance with Industry Regulations

How are financial institutions contributing to social responsibility?

 

5) Social Responsibility:

How are financial institutions contributing to social responsibility?

 

6) Improving Security:

How are financial institutions improving security?

 

7) Using AI to Increase Productivity and Drive Innovation:

How are financial institutions benefiting from AI?

 

8) Operational Efficiency Levers:

What operational efficiency levers are financial institutions using?

 

9) Optimising the Customer Experience:

How are financial institutions improving customer experience?

 

10) Drive Towards Customer Loyalty and Retention:

How are financial institutions improving customer experience?

 




9 Key Trends That Will Transform the Financial Services Industry in 2023


With the rise of fintech and digital-only providers, customers' access to financial services is constantly evolving, and businesses in the industry have to keep up the pace.

Financial services businesses are under increasing pressure to innovate and continue to provide a convenient and competitive service to their customers while maintaining their existing customer base.

To sum it up, the financial services sector is evolving rapidly, and it's important to understand the implications of these changes for businesses and their customers.

 

1. The Digital Revolution  

Digital transformation is one of the primary drivers of rapid change in the financial services sector. The development of digital technology has had a dramatic effect on the provision of financial services, opening the door to new entrants while forcing more established businesses to change or be left behind.

Fintech businesses use technology to provide innovative banking and financial services to customers, challenging the status quo in the industry.

The fintech industry has exploded in recent years, with dozens of new startups providing anything from investment management software to new ways of making digital payments.

Due to their low overhead costs, digital-only providers can provide customers with lower fees and more enticing interest rates. They can also offer a variety of remote-accessible services, such as robo-advisory services, mobile banking apps, and online banking.

Customers using these platforms can manage their finances quickly and easily thanks to the convenient and optimised user experience they can provide.

How are financial institutions responding to the digital revolution?  

As a result of its rapid growth, financial services companies are investing heavily in technology to modernise their products and services and maintain relevance. This has seen several financial institutions provide entirely digital banking services, including loan and mortgage applications, account opening, and more.

Additionally, financial institutions are working with fintech startups to offer their clients cutting-edge products and services. This entails looking into how blockchain technology and cryptocurrencies can be used to increase the security, effectiveness, and transparency of their business practises.

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2. Creating Opportunities with Data-driven Insights

The use of data-driven insights is becoming increasingly prevalent in the financial services industry. With the right technology, businesses in the financial sector can now access valuable data on customer habits, financial transactions, and other relevant key indicators. 

This information can improve risk management and regulatory compliance, as well as enable a better understanding of customer preferences and requirements.

Personalising financial products and services is another area that can greatly benefit from data-driven insights.

Research has revealed that 78% more customers would remain loyal if their bank offered personalised service. This emphasises the need to tailor your services to each individual customer to provide more relevant experiences.

How are financial institutions benefiting from data-driven insights?

Data analytics is helping financial institutions detect and control risk. Monitoring financial transactions for fraudulent dealings, spotting unusual patterns, and anticipating risks are all part of this process. 

Optimising processes through the analysis of data is also a viable benefit. Some examples include using customer traffic analysis to better place branches, using cash demand forecasting to better place ATMs, and automating administrative tasks to cut down on inefficiencies.

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3. Open Banking

Another major development that is sweeping through the financial services sector is open banking. With open banking, banks make their data and APIs available to third-party developers to improve their products and services.

Statista predicts an almost 50% annual growth rate in open banking users from 2020 to 2024, with Europe's market being the largest. In 2021 alone, 47% of financial institutions launched open banking APIs, and another 25% did so last year.

With the positive influence that accessible data has on both customers and financial businesses, it's not hard to see why this trend is likely to continue.

Wide acceptance of open banking is in part due to regulatory changes, including the EU's PSD2 directive, which demands that banks make their APIs available to third-party developers. As a result, there are more opportunities in the financial services industry for fintech and entrepreneurs to exploit by using bank data to build innovative products and services.

 

How are financial institutions responding to open banking?

Financial institutions are responding to open banking in several ways. Many embrace it as a channel for expanding their services, while some are wary of its risks and challenges.

Overall, open banking is optimising cloud accounting processes.

Over 72% of businesses rated connecting to bank accounts as a vital part of their cloud accounting service. Another 58% have the same view concerning real-time transactions, all made possible with open banking connections. 

The same study also revealed that, by using these services, 77% of businesses can now accurately monitor their financial position. This demonstrates the game-changing potential of open banking and how businesses stand to benefit from using it.

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4. Compliance with Increasing Industry Regulations

The demand for banks and other financial institutions to be compliant and manage risks throughout relevant touchpoints has increased due to stricter regulatory and reporting obligations.

And in 2023, 79% of banks expect an increase in financial regulations.


This points toward financial service businesses improving their existing processes to meet compliance standards as regulations concerning ESG, consumer protection, and security emerge. It could mean creating audit trails for disclosure delivery and using robust data analytics resources to manage risks and obligations.

Several financial companies have been subject to hefty fines in recent years for failing to meet various regulatory benchmarks.

In 2021, financial businesses that fell short of compliance standards and due diligence were penalised a total of $2.7 billion.

Additionally, there has been an increase in the amount of private data sent between systems and locations used by financial services companies. This is a direct result of their workforces becoming more dispersed and digitally linked.

The growing number of digital channels, along with customers' desires to employ their preferred methods of contact, is making it more difficult to enforce regulations. But security and compliance should not require businesses to sacrifice usability.

Another significant recent regulation is The FCA's Consumer Duty regulations, which aims to improve the treatment of customers across the financial services industry. The regulations require firms to act in the best interests of their customers, prioritise their needs, and deliver better outcomes.

Financial services providers will need to ensure their products and services are designed with customer interests in mind, and will also need to provide clear and transparent information to customers to help them make informed decisions. The regulations are expected to have a significant impact on the industry and will require firms to make changes to their operations and processes to comply.

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5. Social Responsibility

Financial institutions have recently started to place a greater emphasis on sustainability. As more people become aware of environmental and social problems, they seek out financial services businesses that support their strong ethical stance.


According to a recent survey, over 86% of UK customers want companies to join intervention efforts against the mental health crisis.

Another survey found that
34% of consumers are concerned about poverty and inequality, 31% are worried about racism, and 42% of customers want firms to do something about the climate emergency.

 

Yet another study claims that over one-third of millennials are interested in investment products that take ESG factors into account (with 19% for Gen Z and 16% for Gen X). 


How are financial institutions contributing to social responsibility?

Two examples of green finance products that have benefited from the growth of the sustainability movement are sustainable investment funds and green bonds. Investors can get a significant return on investment while simultaneously helping the environment and society with these products. 

Another effective method of encouraging ethical behaviour is rewarding customers who meet certain environmental goals. Companies in the financial services industry are increasingly implementing green initiatives as part of customer loyalty programmes. 

Some financial institutions and credit card companies, for instance, have introduced loyalty programmes that offer incentives for customers who make environmentally friendly purchases and account transactions. These incentives may include cashback offers, higher interest rates, or rewards points that can be exchanged for green products or services.

Businesses are also partnering with non-profit organisations to solve issues that matter to their target demographic. By doing so, they are creating awareness for social issues and helping customers make greener choices about their spending and investment behaviours.

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6. Improving Security

Recent years have seen an upsurge in cybercrime and fraud as a result of the rise of remote work and digital transactions. Financial organisations suffer disproportionate losses from cyberattacks.

According to Flashpoint, the financial services sector was among the most-breached industries in 2022. Over 254 million records were compromised, with financial and insurance institutions across the globe suffering over 566 data breaches.

Banks stand to lose a lot of customers and capital if their data security is breached. Research shows that:

60% of users will stop using banking applications if they experience digital disruption. This is because of the high value of the customers' financial and personal information. 


To add to that, 42% of organisations report being unable to expand into new channels due to digital fraud.

Concerned regulatory agencies have since offered new recommendations and regulations meant to encourage businesses to implement industry-standard procedures for cyber security and incident reporting.

Security must be a top investment priority for financial services companies for the foreseeable future. You should not only engage with partners that share your commitment to data privacy and security but also optimise your internal processes. 


How are financial institutions improving security?

Financial services businesses are implementing stronger authentication protocols, such as multi-factor authentication, to ensure that only authorised users can access their systems and data.

Proactive vulnerability management is another strong approach to financial cybersecurity. It involves running regular security audits to eliminate vulnerabilities and enhance security. These audits can be done in-house or by a third-party security expert.


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7. Using AI to increase productivity and drive innovation 


This is one of the most important technological developments in the financial services sector.

According to IDC's 2026 forecasts, boosting their foresight with AI and ML (machine learning) will increase productivity by 25% for over 85% of businesses.

AI has the potential to dramatically enhance the efficiency and innovation of the financial services industry. It can offer channel recommendations, which involve identifying which method will work best for each individual consumer. By doing so, you can eliminate service inefficiencies and improve the customer experience.


How are financial institutions benefiting from AI?

Besides business processes, AI’s far-reaching impact extends to financial services businesses looking to boost customer loyalty with reward programmes. They can leverage AI-powered predictive modelling to analyse customer data, including spending patterns, purchase history, and demographic information. 

This analysis reveals the preferences and behaviours of customers and guides the creation of personalised incentives that are more likely to resonate with them. Customers earn relevant rewards for their loyalty and increase their engagement with the financial provider’s offerings.

 

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8. Operational efficiency levers


Several businesses in the financial services and insurance industries have turned their attention to cost transformation in anticipation of a potential economic crisis. Cost transformation involves identifying areas where costs can be reduced or optimised to improve business performance, profitability, and competitiveness.

What operational efficiency levers are financial institutions using?

There are several cost transformation levers that are measurable using business outcomes. These levers include IT modernisation, product rationalisation, and a hybrid workforce.


  • IT modernisation is a cost transformation lever that you can deploy to improve efficiency and reduce costs. This may entail modernising outdated systems or switching to more advanced, cloud-based platforms that provide better functionality, scalability, and affordability.

    You can lower the costs of maintaining outdated technology and increase overall productivity by modernising your IT infrastructure.

  • Product rationalisation is another tool for cost transformation that businesses can use to streamline their offerings and cut costs. This entails reviewing the products and services your company provides and determining which do not contribute to your profitability or strategic objectives.

    You can cut back on expenses related to product development, marketing, and support by eliminating or combining these offerings.

  • Hybrid workforce: Creating a more adaptable and economical workforce entails combining full-time employees with independent contractors, outsourced resources, or freelancers.

    You can lower the costs of maintaining a sizeable full-time workforce and increase your workforce's agility and responsiveness by utilising a hybrid workforce. 

 

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9. Optimising the customer experience

Younger demographics have more influence on financial services, and they expect engaging and rewarding digital experiences. Customers have grown to expect a certain level of accessibility and ease of use from the digital experiences they engage with on a daily basis.

 

70% of customers said they would leave their present bank for another that provides a superior digital experience.

You can meet their demands by focusing on developing digital self-service and mobile-friendly solutions that offer customers access to financial services whenever and wherever they need them.

How are financial institutions improving customer experience?

A financial services loyalty programme can deliver hyper-personalised experiences and added value to your customers. Almost 90% of companies provide some sort of loyalty programme to reward repeat consumers

For years, industry giants like Barclays (Blue Rewards) and CitiBank (ThankYou Rewards) have used loyalty programmes to drive sustained growth for their businesses.

With loyalty programme elements like gamification, which can increase brand engagement by 47%, it’s not hard to see why businesses are investing in this effective approach to incentive marketing.

 

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10. Drive towards customer loyalty and retention

 

Customer loyalty and retention have become more important to financial services businesses in recent years. The consumer-facing elements of financial products and services generate significant revenue and provide a competitive advantage.

According to one study, over 80% of senior decision makers in the financial sector say they prioritise customer loyalty

The realisation that customer engagement is crucial to financial institutions' success is a major factor in the current trend toward customer loyalty and retention. Businesses in the financial services industry are increasing customer retention by fostering an atmosphere of trust and loyalty among their customers through personalised interactions.

The use of data and analytics to gain a deeper understanding of consumer behaviour and preferences is also a key factor driving this change.

A staggering 97% of organisations leverage predictive analytics in their customer loyalty strategies. 65% also believe that predictive analytics improve personalisation efforts.

You can meet your customers' expectations by using data and analytics tools to identify their needs and preferences and tailoring your service delivery accordingly.

The push for customer loyalty and retention is a good sign for the financial services sector as a whole. It will place more emphasis on giving customers extra value and help create mutually beneficial relationships.

How are financial providers driving customer loyalty and retention?

Financial service providers are adopting creative techniques to engage, reward, and retain their customers. Several innovative strategies have emerged over the years, and Zions Bank’s “Pays for A’s” is a great example. The customer loyalty programme is designed for students and gives them the chance to earn cash rewards for every “A” grade they get.

Middle, junior high, and high school students get $1 for every “A” on their report card added to their Young Savers Account. The students also stand a chance to go on and win scholarship savings accounts. Even students who don’t have a bank account still get a reward (.50 cents) for each “A.”

By rewarding students for academic success, the bank is directly encouraging them to do even better. It is also building goodwill with the students, increasing the likelihood that they will remain customers in the future. Besides building lasting relationships with a young demographic, the loyalty programme also encourages their parents to become loyal customers.

The Future is Here

The world of finance is constantly evolving. The aforementioned trends will further expedite this change, significantly reshaping the market in the coming year. Financial institutions can't afford to lag behind, even for a second, or they risk losing customers as the world rapidly evolves around them.

Customer loyalty is more valuable than ever in today's marketplaces, where consumers can choose from a variety of financial service providers and solutions. By learning about your clients' habits, likes, and dislikes and providing them with a loyalty programme that is tailored to their needs and requirements, you can secure their loyalty and thrive no matter what the future brings.

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