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Q3 FIG Insights

This quarter, our industry experts take a look at how the theme of change is impacting Financial Institutions.

Welcome to the latest instalment of our FIG newsletter, which this time takes a closer look at change across the different Financial Institutions sectors. 

In the FinTech and Asset Management space, our sector heads discuss the changing nature of the FinTech industry, as well as the global impact of evolving sustainable investment strategies on the Asset Management sector.

One month on from Sibos, we also take a closer look at how embracing change is key for businesses to thrive in a hyper-connected world, and how technological changes are impacting financial institutions, as well as insurance companies within the Lloyds market. 

With further uncertainty regarding the future of the UK’s relationship with Europe, our team are here to support you with a range of services and solutions to meet your needs.

Philip Bowkley
Global Head of Financial Institutions Group.

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  • Banks, Broker Dealers & Alternative Finance

    Embracing change in a hyper-connected world

    Looking back over a busy Autumn banking conference season, the over-riding theme emerging from discussions with many clients and industry peers continues to be one of rapid change. 

    SIBOS 2019 was no exception to the theme of change - whether it’s the shifting focus of regulation, digital transformation or changing customer expectations. 

    This throws up many questions. How do we, as banks and financial institutions, remain relevant to our clients’ needs, stay abreast of regulatory changes, and how do we make sense of which technological investments we should be making, in order to keep up with changing opportunities.

    Legislation fuelling innovation
    Adapting to new legislation is critical to success. With GDPR reshaping the rules around customer data ownership and management, MiFID II pushing towards increased transparency of fees, and PSD2 making customer data more accessible, regulatory change is fuelling innovation and promoting competition. 

    The changes in FCA regulation in the P2P space from December 2019 have also been a hot topic at recent conferences.

    Looking further ahead, while there are many regulations and standards occupying our collective efforts, the adoption of ISO20022 in 2022 is of particular interest. A common messaging standard that should allow greater connectivity between banks as well as more efficient communication, it’s gathering pace in many countries and markets. 

    Traditional banks should be thinking about what they need to do to not only comply with these regulations and standards, but to drive operational efficiency and achieve strategic advantage. 

    Partnering for digital transformation
    While challenger banks and FinTechs continue to lead the field in digital transformation, the incumbent transactional banks retain the advantage in terms of years of experience, customer numbers and, crucially, data. 

    Modernising existing infrastructure, effective data management and embracing artificial intelligence are just some of the essential components needed to keep up with the rapid pace of digital transformation. 

    But banks don’t necessarily need to develop these technologies themselves. It’s clear that the older, established financial institutions can play an important role in supporting the new wave of challenger and digital banks. A connected approach and stronger partnership between traditional players and specialist FinTechs should strengthen the future of the financial sector, ultimately by improving the client experience. 

    This is why we’re so committed to building partnerships with the FinTech community, including our involvement with the FinTech Power 50.

    Evolving customer expectations
    Customers’ needs are, of course, changing very rapidly too. They are more likely to be looking for personalised, seamlessly interconnected, value-added services. Customers are also seeking a different type of interaction with their banks as they look to move away from a purely transactional relationship towards a more strategic partnership. 

    To meet and exceed customers’ expectations, banks need to capitalise on KYC and their data resources to understand and anticipate what their customers want, and adapt their services accordingly. They may also need to shift their focus from having lots of transactional clients to fewer clients with whom they build strong relationships on a global scale. These requirements are driving the need for a very different type of banking discussion.

    Keeping up with the pace of change
    These key trends demonstrate how quickly the banking world is changing. Coupled with the current low interest rate environment, both established banks and FinTechs can’t afford to underestimate the increased focus on digitisation and the need to exceed customer expectations. 

    For Barclays, this means reviewing our strengths and establishing where we can add most value, particularly in terms of Sterling, Euro clearing and our trade proposition. For example, this year we’ve expanded our trade proposition to include large structured transactions ranging from specific client-risk participation to helping bank subsidiaries with financial guarantees in meeting with local regulatory requirements.   

    Our aim is to develop a stronger operational model with a world-class service promise and global reach for all our clients, while also building deeper partnerships with some key partners.

    Sabry Salman
    Global Head of Banks Coverage & Head of UK FI

    Lauren D’Arcy
    Head of Overseas Banks, Broker Dealers and Affiliates

  • FinTech

    FinTechs and diversity: more disruption required

    To continue to attract the talent it needs, the FinTech sector may need to force the pace of change when it comes to diversity and equality in the workplace.

    The FinTech industry has always cultivated a disruptive, cutting edge image. FinTechs are radically changing the way people manage and control their money, and are allowing people and businesses to access financial services products in ways they’ve never dreamed of. 

    FinTechs are generally seen as fun, inclusive places to work and they often promote progressive attitudes towards a healthy work-life balance1. Working in a FinTech is a popular choice: 40% of the companies on LinkedIn’s ‘2019 Top Startups list of where UK professionals want to work’ are FinTechs2.

    However, while FinTechs are often perceived as ahead of the times, the statistics suggest this is not necessarily always the case when it comes to diversity. 

    EY’s UK Fintech Census 2019 PDF revealed a 70.5% male to 29.5% female gender ratio among employees3, and, while 25% of FinTechs have at least one female founder, the 2019 UK FinTech State of the Nation reported that 83% of all FinTech executives are male. A gender bias appears to exist in terms of funding too: for every £1 of venture capital investment in the UK, all-male founder teams get 89p, mixed-gender teams get 10p, and all-female founder teams get less than 1p4

    But it’s not just about gender. The European Women Payments Network (EWPN) and Banking Circle recently surveyed over 300 individuals working across banking and finance, including FinTechs. Their research found PDF that in terms of pay and career opportunities almost 30% of respondents have, at some point, felt discriminated against because of their age, 15% due to their ethnicity, and 11% due to their level of education.

    Diversity makes good business sense
    There has been no shortage of research in recent years showing that workforce diversity has a positive effect on return on investment and the bottom line. The evidence suggests that ethnically diverse organisations are 35% more likely to outperform their less diverse competitors while gender diverse companies are 15% more likely to outperform other businesses. And for every 10% increase in racial and ethnic diversity on the senior executive team, earnings rise by 0.8%. 

    Building teams from a range of backgrounds brings different experiences, skills, values, attitudes and opinions to the table. This creates greater opportunities for learning and innovation within the workplace. A diverse talent set could also result in more diverse and inclusive services and products, which in turn may resonate with a broader customer base. 

    Meanwhile, the war for talent is intensifying, and FinTechs are feeling the pressure. For the past few years, surveys have shown that attracting and recruiting the right people is one of the industry’s biggest challenges3. Furthermore, with 42% of UK FinTech employees coming from overseas, it’s important for companies to think of innovative ways to attract and retain talent across borders.

    How can FinTechs disrupt the diversity disparity?
    By its very nature, the sector is open to innovation and change, and FinTech leaders and entrepreneurs have already started to address the diversity issue. But there’s still work to be done. 

    The industry needs to continue to develop new ways to attract, recruit, retain and progress the careers of diverse talent. This might include launching programmes specifically targeting minority groups, and certainly requires role models to inspire and attract people to the sector. A lot of this is down to individuals recognising the value they can add by talking about their own experiences in a candid way, be it as a mentor or a coach. 

    For example, this year SIBOS launched its STAR scholarship programme, for which I was delighted and humbled to be selected as a mentor. I’m honoured to be part of the programme, which aims to support the diversification of the financial industry, by developing and empowering the next generation of female leaders, and sharing my own experiences. This type of scholarship scheme is incredibly valuable both for creating networking opportunities and to highlight the diverse talent across the industry – and allows the next generation to benefit from the experience of previous ones, something we as a firm are proud to support.

    There is also huge potential for FinTechs to work hand-in-hand with government bodies, education and skills providers, and voluntary and community groups, to inspire a range of people to consider a career in FinTech, and help increase the number and diversity of people gaining the skills they need to enter the job market. 

    The wider global financial services and technology industries have a role to play too, and firms, entrepreneurs and venture capitalists need to ensure that they’re doing what they can to address the diversity gap. Research conducted in the 2019 Tech Track report showed that 10 out of the top 50 companies are run or founded by women, compared with 11 last year, and 10 in 20175. At Barclays, for example, in partnership with Anthemis, a FinTech investment firm, we’ve launched the Female Innovators Lab in the US through which we hope to address the gender funding disparity within the banking industry. 

    With their innovative and inclusive cultures, FinTechs are well placed to disrupt existing talent and recruitment models in order to attract and retain a more diverse talent set. Long may this continue.

    Sources
    1 UK FinTech – State of the Nation, April 2019
    2 LinkedIn Top Startups 2019: The 25 hottest UK companies to work for now, September 2019
    3 EY’s UK FinTech Census 2019 
    4 Female Start-up Founders Missing Out On Billions In Funding, British Business Bank, February 2019
    5 https://www.barclayscorporate.com/insights/industry-expertise/tech-track-100/

    Jenni Himberg-Wild
    Head of FinTech and PSPs Coverage

  • Insurance

    Lloyd’s of London back in the race

    In response to rapidly evolving technology and changing market forces, Lloyd’s of London, one of the world’s most historic institutions is undertaking its biggest shake-up in decades.

    As one of the pillars of the UK’s financial establishment, Lloyd’s of London has long been a beacon of excellence, working to high standards while delivering strong financial performance.

    In order to maintain its reputation as a world-class insurance market and avoid losing ground to competitors, particularly in Bermuda and the US, CEO John Neal is taking bold steps to tackle vital issues around embracing new technologies and enhancing profitability.

    In September, the business launched a series of transformational initiatives called Blueprint One in a bid to make Lloyd’s “the most advanced marketplace in the world”, and meet changing customer expectations.

    Lloyd’s today
    Lloyd’s' commitment to the biggest structural, cultural and technical reforms it’s seen for a long time is good news for the UK market and welcomed by the industry.

    In terms of the financial performance, a number of factors have been in play. Insurance rates across the sector have also been compressed, resulting in higher volumes of under-priced business being written over the last five years, alongside rising costs associated with an intensifying regulatory burden and general operations.

    Profitability has also taken a hit due to the large numbers of catastrophic claims in 2017 and 2018. In its half-year reporting in September, Lloyd’s’ underwriting profits were just £100m compared to £500m in the same period last year. 

    The market’s technology is undeniably antiquated and it is over-reliant on paper-based systems. To reduce costs, it needs to embrace new digital technology that will enable it to write insurance more cost-effectively.

    Blueprint for the future
    Lloyd’s has stated that its transition to a data-lead organisation could take up to three years, with the integrated solutions outlined in Blueprint One being phased from 2020.

    A new complex-risks platform will be designed to make doing business easier by enabling the most difficult to cover risks to be placed and bought digitally, using standardised data and allow brokers and underwriters to negotiate digitally.

    A new electronic Lloyd’s Risk Exchange will allow less complex risk to be placed in minutes at a fraction of today’s costs, while a capital platform designed to make it easier for investors to navigate the market and help managing agents raise third-party funds, will simplify processes for providing funds at Lloyd’s. Additionally, a next-generation claims service will improve the customer experience and speed up claims payments.

    To make it easier for innovators to bring new products and business to the market, an off-site syndicate-in-a-box system is to be introduced from January 2020, and there will be a new services ‘hub’ to help market participants develop new business and deliver high quality service to clients.

    The corporation itself will take a bigger role going forward, driving and delivering the future development of Lloyd’s marketplace. This includes setting and overseeing a broader range of standards than those already imposed on market participants, and having greater oversight of technology and data.

    Lloyd’s says its members are already showing greater discipline in the policies they are underwriting. Volumes are down by 6.5%, and there’s been a 3.9% average increase in written premiums since the modernisation programme was launched.

    Strong links
    At Barclays we have a strong investment banking relationship with the market, as well as providing many syndicates with operational banking support.

    We’re working closely with participants within the Lloyd’s Market, to help them bring exciting solutions to the market. One such example is our long-standing client, Vitesse PSP. Vitesse have a payments solution that optimises claims payments within the market, as well as the management and control of loss funds. We’ve worked with them to grow this product so that it continues to allow for payment optimisation whilst enabling Vitesse insurance clients to generate returns on loss fund balances previously tied up with third parties. As this solution rolls out through the Lloyd’s Market, processes will be enhanced, costs reduced, and investment returns maximised – a great result for Vitesse, their clients, and the market.

    We’re firmly committed to the Lloyd’s market and welcome its bold steps to make the transition it is looking to achieve and look forward to seeing the improvements they promise to deliver.

    James Morris
    Head of UK Insurance

  • Asset Management

    The rise and rise of sustainable investment

    We look at the global impact of evolving sustainable investment strategies on the fund management sector.  

    In response to ever-growing international concerns about climate change and the environment, more than a third of all assets under management (AUM) now go through some form of sustainability test or screening prior to investment.

    In its latest review, the Global Sustainable Investment Alliance (GSIA) reports that in 2018, $30.7trn of sustainable investment was made across Europe, the US, Japan, Australia and New Zealand – a 35% increase on 20161

    Sustainable investment now represents 35% of all global AUM, worth some $88.5trn in 20182 with Europe being the world’s largest sustainable investment market at over $14trn.

    Driving forces behind growth of ESG
    Most asset managers already incorporate some form of Environmental, Social and Governance (ESG) criteria into their investment decisions. To date, the ESG market has grown largely organically, driven by a combination of investor demand and organisations wanting to act responsibly, rather than as a result of regulation. 

    This includes both the negative screening approach to sustainable investment by excluding investment in certain companies, sectors or practices (amounting to nearly $20trn of AUM), as well as through investment managers specifically integrating ESG factors into their financial analysis (around $17.5trn of AUM).

    There is every indication that this trend is likely to continue and play an increasingly critical role in the provision of capital in the global market. Sustainable investment is fast becoming business as usual for all asset managers and is likely to represent over half of global AUM over the next couple of years at current rates.

    International effort
    This evolution is, of course, occurring against a backdrop of international co-operation to combat global warming, most notably represented by the UN-driven Paris Agreement that 184 countries have now signed up to.

    The signatory states, which together are responsible for 89% of the world’s greenhouse gas emissions, have pledged to keeping temperature rise to less than 2°C this century and to strive to limit the increase to 1.5°C if possible.

    Earlier this year, the EU set out its plans for new sustainability disclosure rules to ensure that fund managers are not ‘greenwashing’ products and are marketing them appropriately in line with its 2018 Action Plan on Financing Sustainable Growth.

    The regulations, published in March 2019, cover investment funds, insurance-based investment products, private and occupational pensions, individual portfolio management, insurance advice and investment advice.

    Many across the sector will already be familiar with the rules requiring firms to outline their procedures for integrating environmental and social risks into their investments and advisory processes, and how those risks may impact the profitability of investments.

    Furthermore, asset managers will need to explain how any stated environmentally friendly strategy is being implemented and outline how their products and portfolios support sustainability and impact the climate.

    Supporting the green agenda
    Climate change is one of the biggest threats to people and the environment today.

    Banks have a key role to play in the pursuit of sustainable finance through the way they mobilise capital, advise clients and develop products. We’ve developed a suite of green solutions – including green deposits – to ensure that sustainability can be at the heart of your financial decisions. 

    To find out more about how Barclays can help manage sustainable investments to support your business, contact your Relationship Director. 

    1 http://www.gsi-alliance.org/trends-report-2018/ 
    2 McKinsey & Company: North American asset management in 2018: The New Great Game 

     

    Andy Ponsford
    Head of Funds and Non-Bank Financial Institutions for Europe

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Q2 FIG Insights

This quarter, our industry experts take a closer look at trends across Europe and how technology changes are impacting Financial Institutions. 

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