After the unpredictability of 2022, it’s now more important than ever that the banking and finance industry takes a best-fit approach for 2023 and beyond. Doing so will require an approach where data is at the heart.

Why 2022 was a year of turbulence

2022 finally saw an emergence from the pandemic peak and hope that the worst is now over. Although strategies and the speed at which countries have exited the pandemic have varied, most are now operating a business-as-usual approach to life that is focused on recovery.

And yet the shoots of post-pandemic hope had no sooner emerged when one of the biggest impacts of the year hit. The war in Ukraine, which has been ongoing since February 2022, led to further issues in the supply chain during the year, primarily shortages of raw materials, and later often to overstocking.

Consumers may have been seeing shortages of sunflower oil in the shops, but industries were also seeing similar shortages with commodities such as aluminium and copper. Since supply chain shocks have a commensurate effect on the financial services that underpin the markets, this had a huge impact.

The Ukraine war also led to an energy crisis in Europe and the UK – a crux point for a huge variety of industries, not only financial services. The ensuing surge in inflation prompted the largest rise in global interest rates in a decade, as central banks looked to bring inflationary pressures under control.

This led to interest rate highs not seen since before the 2007-08 financial crisis and while more seasoned financial services professionals will remember the previous peak, those newer to the industry may have never worked in such an economic environment.

A year of transition lies ahead in 2023

The events of 2022 are worth recapping as they place financial services in an unusual position as we start 2023. Overcoming the challenging of the past year will require a transitional approach, where the finance industry reflects before deciding on future strategy.

To do this, it’s naturally important to understand what we are likely to see happen during 2023. Most commentators believe that Europe is in recession and will stay so, but initial economic reports suggest that the USA may avoid this fate. Recent reports that the UK economy grew 0.1% in November 2022 have prompted some positivity, but this slight figure is not enough to contradict most projections.  

Consideration must also be given to the global backdrop. The economic powerhouse that is China grew slower than expected last year thanks to its policy of continued Covid lockdowns. However, after reopening its borders this January, it’s likely its economy will see a resurgence in the second half of the of 2023.

For banks across the globe, positive interest rates will help drive profitability, but this will be balanced out by a commensurate rise in non-performing loans. There are also significant opportunities around payments – a growing, innovative sector that is attracting high returns.

Against this backdrop, cost will continue to be a key challenge. Many financial organisations will be struggling to deliver a 40 percent cost-income ratio, which is the level Kearney recommends for financial institutions and services. Without greater control of costs, financial services will leave themselves vulnerable to future ‘unprecedented’ events as the year unfolds.

Care must be taken when cost-cutting, however. Up to half of the cost for financial services comes through third-parties and so, when looking to make savings, it is easy to sacrifice quality in the name of cost.

Sustainability and ESG in the value chain are more important than ever, and there should be a renewed and continual focus on ensuring the entire supply chain still meets sustainability thresholds, even as businesses try and trim the fat.

But there is a wider opportunity from the ESG agenda too, offering huge scope for investment as a sector where there is much capital to be deployed.

Organisations will need to establish exactly where growth fits into this picture of tough macroeconomic headwinds and increasing regulatory, governmental and consumer focus on ESG, and understand how to deliver it.

Three key approaches

We believe that for financial services, there are three approaches that can be taken in these circumstances, each of which has its own benefits and drawbacks.

The first is to adopt a universal scale model, the traditional mass market approach which has often been taken by the industry incumbents. This involves providing a wide variety of comprehensive financial services, including those tailored to retail, commercial and investment services to clients, often at a lower operational and funding cost thanks to scale.

Secondly, there’s the niche business model in which there is a focus on a specific purpose and subset of the population. By carving a space in this niche, banks can offer more specialist products and advice, and become competitive through a more personalised approach which puts the customer first.

Finally, there is the platform model, an approach to which is centred on subscription banking and is growing in popularity. While banks are subscription-based by nature, so far only a few have tried to apply the corresponding go-to-market packaging and pricing strategies. There is an opportunity here to both drive revenue and build loyalty, and to offer a wider range of solutions than has been traditionally put forward.

The vital role of data

In any of these approaches, data is key to maximising success. It’s the new liquid gold which banks must use to redefine themselves and create new value if they are to move forward with confidence in 2023 and beyond.

Whether financial services are looking to recover from 2022 or set the growth trajectory for 2023, leveraging data will provide the best option for both resilience and profitability.