2023: A rocky year ahead for financial services

This is a summary of a recent presentation I gave on a webinar for REaD Group, part of Sagacity. In it I talked about the challenges and opportunities facing financial services in 2023. Anyone interested can watch the webinar here (my section begins around 28 minutes in).

A less welcoming investment environment for retail investors

A decade of ultra-low interest rates have supported a rising stock market. This, coupled with an increase in disposable income due to lockdown, led to a rise in first-time retail investors in recent years.

This period also saw considerable investment in cryptocurrencies such as bitcoin (which doubled in price from January to November 2021).

Much of this investing was done through easy-to-use apps such as Robin Hood or Free Trade rather than traditional fund managers. Speaking to marketers at asset managers over the last year or so has revealed a cautious optimism that people have got into investing, coupled with a frustration that they are going for trading rather than opting for diversified funds.

The picture for retail investors is less rosy now. Anyone who invested in equities at or around the peak in late 2021 will have likely seen their holdings go down in value, with the prospect of more interest rate hikes on the way.

Meanwhile, savings accounts are paying decent rates for the first time in a decade. While asset managers would clearly expect to offer superior returns to a savings account, that guaranteed 4% or 5% offered by Lloyds or HSBC may look quite appealing to many savers.

In a world with clear winners and losers, asset managers need to offer a compelling message to convince retail investors to part with cash.

The cost of living – the need for authenticity

The challenges many are facing with their finances offers a chance for financial services companies to offer support, as they did during the Covid pandemic.

Nationwide is an exemplar here. As a mutual, Nationwide has been able to tap into its relationship with members and include them in its comms. It has set up dedicated helplines and in-branch events which build on its existing relationship with members. These activities are rooted in the company’s mission and purpose, which makes them feel genuinely authentic.

Customers won’t be impressed by companies that appear to be paying lip service without actually delivering anything.

What can firms actually do? Tap into the data that they have on customers to provide them with advice. Companies that have been set up from the beginning with a clear purpose may have an advantage, Zopa has been leading the fintech industry with its 2025 pledge, which aims to drive actions that build financial resilience.

Fintechs also have an advantage here due to their agility and comfort in using data, as Zopa’s Chief Customer Officer argued in a recent interview.

“Many [fintechs] are data-led and as such can identify, drive and track meaningful interventions,” said Clare Gambardella. “They also tend to be businesses that are grounded in driving fast-paced, tech-led innovation, which allows them to create solutions in an agile way.”

Q&A: Zopa CCO on how fintechs can tackle the cost of living crisis

Consumer duty – a paradigm shift?

High on every marketer’s agenda is the FCA’s new Consumer Duty, which will come into force on 31 July 2023. The regulation requires companies to deliver the right outcomes for retail customers, rather than sell products and tick boxes.

Essentially, it requires “firms to act in good faith, avoid causing foreseeable harm, and enable and support customers to pursue their financial objectives.”

This is particularly crucial to vulnerable customers – the “suitability” requirement means products need to right for that person.

First-party data will be crucial to underpinning this knowledge, while the rapidly rising discipline of behavioural science will provide a toolkit for these communications.

At the time of writing, Chancellor Jeremy Hunt has just announced a wide-ranging package of proposed reforms to make the UK’s financial sector more competitive.

Sustainability – a potential backlash?

While in 2022 it may have been eclipsed by inflation and Russia’s invasion of Ukraine, the transition to net zero will continue to be important. Financial services firms have a huge role to play here, and research shows that consumers still very much want to use brands that align with their values.

This will continue even amidst a mounting political backlash against net zero, particularly in the US.

BlackRock, the world’s largest asset manager, has attracted the ire of Republican state administrations in Texas and Florida for pursuing green objectives. The Republican governor of Florida,

Ron DeSantis, is increasingly being talked about as a potential 2024 presidential candidate, raising the prospect that this hostility towards sustainable investing will be brought to the national stage.

Meanwhile, in the UK, prime minister Rishi Sunak appears less enthusiastic about net zero than predecessor Boris Johnson while the new Reform party, which in some polls is hitting as high as 9%, talks about offering an “alternative to the main Westminster narrative about net zero”.

Continuing demographic challenges

Looking beyond 2023, life expectancy has increased hugely over recent decades. The challenge that this creates is that the old social contract of 20 years of education, 40 years of work, 10-20 years of retirement no longer functions.

A new model is needed, one that may involve people working longer and needing to put more of their income into a pension. The finance industry is going to need to play a role in educating people about saving for their futures, as well as how that is balanced with other goals.