Financial Services Industry: 2022 Sector Overview, Outlook, & Trends

2020 was a year like no other. The global COVID-19 pandemic caused chaos on a massive scale, affecting nearly every business in the financial services industry.

As a result, many within various sectors are wondering what 2022 holds. Although nobody has a crystal ball, we can make some predictions based on past data and current trends.

To that end, read on for a high-level flyover of the different sectors within the financial services industry. We’ll uncover the highlights of current challenges and relevant trends you need to pay attention to this year.

What is the financial services industry?

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DEFINITION

Financial Services Industry

The financial services industry is a broad sector that addresses financial needs for individuals and corporations. The industry includes large conglomerates as well as smaller companies.

We can group financial services companies into the following sectors:

The financial services industry includes both traditional institutions with long histories, as well as new fintech startups that are trying to disrupt the market.

Due to the rapid proliferation of powerful technology (smartphones, mobile apps, risk decisioning analytics, etc.) over the past 15 years, the industry is undergoing massive change.

Legacy institutions that have resisted change for decades must now figure out ways to meet evolving customer expectations. Otherwise, they risk being overtaken by more agile competitors.

Financial services industry overview & examples

At a high level, the financial services industry can be broken down into the following categories: personal/consumer and corporate.

Some companies, such as banks, cover both categories. Others, like the AI-driven personal finance budgeting app Cleo, target one specific category.

Let’s look at some examples of the financial services industry sectors

Banks

Banks offer a variety of financial products to individuals and companies, ranging from small business checking accounts to personal loans. The most common products include:

However, many non-traditional banks have emerged to capture some of the market share. For example, online banks like SoFi offer reduced overdraft fees, higher APY accounts, and user-friendly apps.

Credit unions

When comparing credit unions vs banks, there are several things to consider. Most importantly, credit unions are not-for-profit co-ops, which means they’re owned by the members themselves. As a result, they can often offer better interest rates across the board than traditional banks.

However, because credit unions tend to be smaller than banks, they often don’t have the same level of technology, geographic coverage, or number of locations.

Additionally, credit unions have membership requirements, such as being part of the military, working at a specific company, or living in a specific geographic area.

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Financial advisors

Financial advisor is a broad term that can be used to describe a host of services. At a high level, a financial advisor is someone who assesses your current financial situation, seeks to understand your financial goals, and then helps you create a plan to achieve those goals.

Beyond that, a financial advisor can help you:

• Make investment decisions and then execute them
• Minimize tax burdens
• Help you manage overall wealth levels
• Plan for retirement
• And more…

However, advances in artificial intelligence have given rise to robo-advisors. The robo-advisors use complex algorithms to fully or partially manage the investments of individuals. Examples include Acorns, Betterment, and Wealthfront. By relying heavily on algorithms, the cost for investors is dramatically reduced.

Investment services

Investment services manage their clients’ investment portfolios and craft an investing strategy that aligns with their goals. Then, they divide their portfolios into different investments like stocks, bonds, precious metals, etc.

Many investment services also function as financial planners, with investment management as one part of a holistic offering.

Over the last several years, there has been a surge in low-cost or no-cost investment apps. Software like Stash, Webull, and Ally Invest allow customers to easily make investments.

Insurance companies

Insurers have long been a staple of the financial services industry. They help people and companies to protect what matters most and to be prepared for downturns of fortune. There are different types of insurance companies.

Some offer health, home, auto, or life insurance. Others are more niche and insure specific industries, items, or situations, such as homeowners with prior large claims, temporary event insurance, or even body-part insurance.

Commercial insurance companies cover areas such as:

• General liability
• Worker’s compensation
• Commercial auto
• Commercial property insurance
• Cyber insurance

Companies like Lemonade are disrupting the insurance industry. Lemonade leverages technology to drive down premium prices while also, as a Public Benefit Corporation and a Certified B-Corporation, supporting valuable social causes with unclaimed money.

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Tax and accounting firms

Tax and accounting firms help both individuals and corporations make sense of complex tax codes, stay in compliance, and reduce the tax burden they face every year. Within the sector, you have everything from traditional firms staffed with CPAs like Deloitte with more than $21 billion, to software giants like Intuit ($7.7 billion).

Newer financial services industry companies like Collective and Wingspan have also emerged in response to the burgeoning gig economy. These types of companies help freelancers and small businesses stay on top of invoicing and other accounting tasks.

Private equity and venture capital

A private equity firm, often referred to as a financial sponsor, is an investment management company that provides financial backing to startups or operating companies that are not publicly traded. They use a range of investment strategies, including leveraged buyouts and venture capital, as well as growth capital. Well-known private equity firms include The Blackstone Group, The Carlyle Group, and Kohlberg Kravis Roberts & Co.

A venture capital firm, on the other hand, invests in startups and small, growth-oriented businesses. VC investments typically are sourced from wealthy investors, investment banks, and other financial institutions. Well-known examples of venture capital firms include Sequoia, Andreessen Horowitz, Founders Fund, GV, and Arch Venture Partners.

Interestingly, despite the global impact of COVID-19 in 2020, venture capital investing in North America reached an all-time high, at just over $150 billion.

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Financial services industry Challenges

What challenges will the financial services industry and capital markets face in 2022 and beyond? the financial sector will need to deal with several key challenges in addition to COVID-19 reverberations.

COVID-19 repercussions

Perhaps the most obvious challenge is repercussions from the global COVID-19 pandemic. While it’s still not clear all the ways the industry will be affected, just about every financial services sector has felt the impact in one way or another.

Banks and credit unions have to deal with both individuals and businesses defaulting on loans due to lost income. Financial advisors and investment services must grapple with how best to manage client portfolios during these highly unusual times. And insurance companies must account for increased health-related claims.

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Deloitte

The Deloitte Center for Financial Services estimates that the US banking industry may have to provision for a total of US$318 billion in net loan losses from 2020 to 2022.

While losses can be expected in every loan category, they may be most acute within credit cards, commercial real estate, and small business loans.

Fintech innovation

As previously noted, many startups leverage advanced technology to drive down costs and better serve businesses and consumers. This poses a potential threat to traditional financial institutions which often rely heavily on legacy systems.

Today’s customers don’t value brand loyalty so much as they do personalization, ease of use, and speed. If traditional institutions want to maintain market share, they’ll need to implement technology that meets those needs.

Cybercrime

Cybercrime is not a new threat to the financial services industry, but it is a growing one. As the International Monetary Fund notes:

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IMF

Furthermore, financial services companies continue to be the most targeted industry. Cybersecurity has clearly become a threat to financial stability.

Due to COVID-19, cyber attacks against the financial services industry increasing by 238% between February and April of 2020.

As data privacy becomes an increasingly sensitive issue, financial institutions will need to work even harder on risk management to prevent breaches and protect customer data. This goes beyond financial information. You must also protect any first, second, or third-party data you collect and manage.

Financial services industry trends & analysis

In addition to several prominent challenges, there are a number financial services industry trends to watch.

As you can see from those statistics, consumer behavior is changing, so financial services firms need to keep up or they’ll be left behind. Citizens Financial Group’s Banking Experience Survey revealed that 50% of consumers and 76% of businesses said the COVID-19 pandemic “changed the way they interact with their financial institution.” Furthermore, approximately 66% of those consumers and 73% of the businesses expected the changes to be permanent.

Digital transformation

The financial sector has always relied on paper documents. For example, customers filled out slips to withdraw money from their bank accounts and received monthly statements in the mail. Investment firms sent out quarterly reports detailing the performance of customer portfolios. Insurance companies required customers to fill out detailed claim reports. Tax returns were on hardcopy paper.

Digital transformation is radically changing how businesses operate. As a result, investors can now look at the performance of their portfolios in real-time on their smartphones and purchase stock with the tap of a button. Home buyers can apply for a mortgage and be pre-approved in minutes rather than days. Internal business processes can be automated using tools like DocuSign.

Digitization is the new norm, so companies can’t remain profitable by maintaining the status quo. Instead, they’ll need to invest in a digital transformation strategy. In fact, there are numerous examples of digital transformation that include banking.

Explosion of fintech

The explosion in the number of fintech companies has dramatically benefited consumers and forced traditional financial institutions to reevaluate how they operate.

Companies like Venmo, Zelle, and Square have reinvented how people pay for things. Kabbage, OnDeck, and Fundbox leverage AI to streamline the business lending process while also increasing profits. Other digital banks let customers manage their money, exchange cryptocurrency, and send money to friends.

As new fintech companies continue to emerge, traditional financial institutions will have to figure out ways to offer similar benefits to their customer base.

Democratization of investing

Apps like Robinhood, Webull, and Acorns have dramatically lowered the bar when it comes to investing. With minimal or no fees, individuals can purchase full or partial shares of their favorite companies. With STASH, for example, they can set up automatic stock purchases every time they visit their favorite stores. Or, they can allow a robo-investor to automatically invest in companies and mutual funds based on their risk tolerance.

This combined with mass communication tools like Reddit and Discord have created significant challenges for traditional investment firms (see: the Gamestop “short squeeze”).

In order to thrive, financial advisors and investment firms will need to find ways to differentiate themselves and prove their worth.

Utilizing big data

Financial institutions generate enormous amounts of data, but that information is useless without a powerful engine to organize it. Fintech software makes it possible for companies to mine actionable insights from big data sets helping them to:

For example, big data analysis can help companies:

• Better understand customer behavior
• Gain real-time insights into financial market stocks
• Identify and prevent fraud
• Analyze loan and investment risk
• Identify profitable customer segments
• And much more

As more companies mine their data, expect them to use it to provide better customer service while also generating more profits.

More open banking apps

Open banking is an API model that let’s financial institutions securely share customer data with other companies. For example, the budgeting app Mint allows you to connect your bank and then it will automatically pull in your transactions.

In the last few years, there has been a proliferation of apps that rely on open banking to serve customers in unique ways. Cleo is a conversational “chat” app that relies on artificial intelligence to help you manage your budget. Truebill scans your transactions to help you monitor subscriptions and bills, while also allowing you to automatically save a certain amount each month.

Expect to see even more open banking apps emerge in the coming year.

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2022 Financial services industry outlook

For many financial institutions, 2020 was a reckoning of sorts. Agile companies that were already abreast of current trends and seeking to adapt appropriately were able to pivot much more easily than more rigid, outdated companies.

For example, banks with robust apps and strong digital presences were able to still effectively serve customers when lockdowns forced them to close branches.

Due to the unique challenges of the last year, companies are beginning to understand that they need to adapt and change with the times. That means more than implementing new technologies. It also includes changing how your company operates and markets to consumers.

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