M&A predicted to rise after post-COVID-19 crash, reveals new report

BY Fraser Tennant

Mergers and acquisitions (M&A) are predicted to rise over the next few years, as banks seek to reduce costs in the short term, refocus core business for the long term and transform operating models, according to new analysis by Kearney.

In ‘Life after COVID-19: building a new banking landscape through M&A’, Kearney predicts that, post-crisis,  banks will likely find M&A as the most efficient means to radically reshape their business portfolio – for both buyers and sellers – to achieve the required amount of cost reduction and transformation to stay afloat.

The analysis also reveals that the market is likely to see changes to operating models, with banks refocusing their core business offering. Some may seek to divest non-essential assets where they are not able to maintain competitive edge in the mid-term, while others might opt to source new capabilities, such as analytics and artificial intelligence  – further bolstering and scaling up their core business.

“Retail banks will be feeling the effects of this current crisis for the next two to three years, so never has there been a better opportunity for banks to reshape their cost base and revise their long-term outlook,” said Simon Kent, partner and global head of financial services at Kearney. “Analysis of previous market crashes indicate that change will be needed for most European retail banks, requiring bold decisions and quick action. After the 2008 crash, domestic M&A was a route to success, with 80 percent of banks outperforming their peers after such a transaction.”

In addition to a rise in M&A, Kearney also predict a rise in strategic partnerships, particularly across smaller banks and FinTechs, as they look to gain reach quickly and efficiently. Positive collaborations with these smaller enterprises, notes Kearney, will also allow larger legacy banks to leverage capabilities off others, either through back-end operations, technology platforms, or shared supplier networks.

“For a successful merger, banks will need to ensure strong due diligence and realistic expectations – setting out a good plan for integrating both entities,” said Mr Kent. “They will need to take extra care in communication to all stakeholders, such as clients, employees and investors ensuring cultures are aligned and employee motivation and retention remains strong.”

Mr Kent concluded: “While the COVID crisis in Europe has subsided, it is far from over, but the resulting surge in M&A activity will present a multitude of opportunities for the years ahead creating a better and strong market in the long run.”

Report: Life after COVID-19: building a new banking landscape through M&A

UK financial sector wants immigration reform

BY Richard Summerfield

With less than a year to go until the UK’s exit from the European Union becomes official, there is still a great deal of uncertainty surrounding the process. However, the financial services sector, given its importance to the UK’s economy, is making its feelings known. A new report from EY and TheCityUK, ‘The UK’s future immigration system and access to talent’, has suggested that the government must urgently review the country’s immigration system if it hopes to succeed post-Brexit.

Ensuring that the UK’s financial sector is able to access skilled overseas talent is vital to the UK maintaining its pre-eminence as the leading international financial centre, the report claims. The sector raises more than £70bn per year in taxes. However, the cost of bringing skilled European workers into the UK could increase by up to 300 percent if existing immigration rules are applied unchanged to European citizens, and if planned Tier 2 visa fee increases come into effect.

“As we approach Brexit, there is a real need to review and reform the UK’s immigration policy to ensure it supports businesses and skilled overseas talent looking to contribute to the UK economy. The current Tier 2 visa system is out of date – we need a much more flexible and dynamic system, which responds to today’s very real skills shortages, particularly around technology, which will worsen if not addressed,” said Margaret Burton, a partner at EY. “People are the foundation of any company. Without access to the right talent, the UK’s future position as a global business leader will be under threat.”

“Britain’s success is built on openness,” said Miles Celic, chief executive officer of TheCityUK. "Being able to attract and retain the most talented people with the right skills, from both the UK and overseas, is a top priority for business leaders across the industry. The UK’s ability to draw global talent has long been a competitive advantage. Losing this could undermine Britain’s position as the world’s leading financial centre. A basic immigration system that is fit for the UK’s needs, future focused and fair is essential. Simply applying the current immigration system for non-European citizens to European citizens after Brexit will not work. Doing so is likely to worsen existing skills shortages and make it much harder to attract the talent British firms need to compete on the world stage following Brexit.”

The report sets out nine key recommendations which could reform the UK’s immigration system and still allow firms to access global talent while reducing the skills shortages which are holding back UK economic and productivity growth.

However, the financial services space is not the only industry demanding the government take action. The healthcare and agriculture sectors have also demanded unimpeded access to international talent after Brexit. Such demands will place additional, considerable strain on the government which is already struggling to map out a Brexit which will please ‘Leave’ voters, many of whom want tougher immigration controls.

Report: The UK’s future immigration system and access to talent

FinTech market in Asia-Pacific to hit $72bn by 2020, new data suggests

BY Fraser Tennant

The FinTech market in the Asia-Pacific region is growing significantly and set to reach a value of $72bn by 2020, suggests new data from Frost & Sullivan.

According to the firm, the positive outlook for the FinTech industry in the region is being fuelled by a growth in digital payments, such as increasing adoption of cashless payments by small and medium sized enterprises (SMEs). Also, there is more widespread awareness of the viability of using P2P financing as well as new methods of crowdfunding using Blockchain, which Frost & Sullivan believes will lead to growth in the personal and business financing segment.

Furthermore, new innovations are expected to radically transform the way consumers shop, pay, perform banking transactions and purchase insurance. The wave of new FinTech technologies is also changing customer behaviour and interactions today.

Speaking at Frost & Sullivan’s annual review and outlook for the FinTech industry in Asia-Pacific, Spike Choo, consulting director in the firm's ICT Asia-Pacific practice, outlined the emerging trends in FinTech for 2018, making special mention of his expectation that more innovative FinTech services will be launched in the areas of financial investments and advisory services, as well as insurance due to advances in Big Data analytics, artificial intelligence (AI) and blockchain.

Much of the growth being seen in the region’s FinTech ecosystem is a result of the active support and initiatives provided by financial regulators such as the Monetary Authority of Singapore (MAS), Bank Negara Malaysia (BNM) and Bank Indonesia (BI), noted Mr Choo.

A major feature of Frost & Sullivan’s review and outlook was the future of cashless payments in Singapore. According to Quah Mei Lee, industry principal, ICT, Asia-Pacific, the mobile payments market in Singapore was estimated to be worth $1.4bn in 2017. Although the market is still small, Ms Mei Lee there are many supportive regional and local regulations and initiatives that will help Singapore move towards a cashless society. Ms Lee was also keen to stress that mobile payments of the future needs to be global first, inter-operable and secure, with global alignment being key to mobile payments going mainstream.

Rounding out the firm’s FinTech industry outlook was a focus on customer experience (CX) in the banking, financial services and insurance (BFSI) industry. According to Nishchal Khorana, Frost & Sullivan’s consulting director, ICT, Asia-Pacific, a successful CX strategy would be based on an integrated approach to people, processes and technology in the digital era.

Transformative, informative and innovative, it promises to be an exciting year ahead and beyond for FinTech in Asia-Pacific.

News: Asia-Pacific fintech market to reach US$72 billion by 2020, finds Frost & Sullivan

Financial inclusion set to unlock $200bn in revenue, claims new report

BY Fraser Tennant

Improving financial inclusion for micro, small and medium enterprises (MSMEs) in 60 emerging countries could generate incremental global annual revenue of $200bn, according to a new report by EY.

In ‘Innovation in financial inclusion: revenue growth through innovative inclusion’, EY states that the availability of affordable, accessible and relevant financial products will generate sizeable economic benefits – equivalent to 20 percent of emerging market (EM) banks’ 2016 revenues. Greater financial inclusion will also boost GDP by up to 14 percent in developing economies such as India, and 30 percent in frontier markets such as Kenya.

Furthermore, more than 40 percent of MSMEs in the least developed countries reported challenges in obtaining financing. This compares to 30 percent in middle-income countries and 15 percent in high-income regions. Traditionally, banks operating in EMs have not viewed financially excluded individuals and MSMEs as profitable target customer segments.

“There is a multitude of opportunity for banks to increase profits by being more financially inclusive,” said Jan Bellens, EY global banking & capital markets emerging markets leader. “Not only does financial inclusiveness have a positive impact on financial institutions’ bottom line, but it is also good for local economies and individuals as inclusiveness tends to smooth income trends, grow local businesses, protect against natural and man-made disasters and helps individuals to save for important life events.”

EY notes that banks’ financial inclusion growth opportunities will be the greatest in markets that embrace technology-led innovation and that have a clear and supportive policy framework for financial stability. Drivers of technology infrastructure include mobile adoption and e-payments, national digital identity systems, credit data infrastructure, open access to digital data and currency digitisation. Policy and systemic drivers include strong customer safeguards, responsible financial literacy programmes, bankruptcy regimes, regulatory incentives for banks, diverse financial ecosystems and interoperable financial systems.

The report also suggests that banks which focus on the following three actions will be most successful in the realm of financial inclusiveness: (i) customise offerings to raise relevance and deepen account adoption; (ii) innovate channels to reach more customers at lower cost; and (iii) creatively manage risk to address absence of credit histories.

According to the report, “institutions that act now to increase financial inclusion will be well-placed to dominate retail and MSME banking in EMs for years to come".

Report: Innovation in financial inclusion – Revenue growth through innovative inclusion

UK financial services optimism falls but stronger times lie in wait, claims new survey

BY Fraser Tennant

Optimism fell across the UK financial services sector in the three months to September 2017, despite a broad expansion of business volumes and expectations of stronger quarters to come, according to a survey published this week.

The quarterly survey of 94 financial services firms by the Confederation of British Industry (CBI) and PwC found that while banks and building societies were markedly less optimistic, finance houses, life insurers and investment managers were more optimistic than they had been in the previous three months.

Among a number of key findings, the survey found that: (i) 12 percent of firms said they were more optimistic about the overall business situation compared with three months ago, while 18 percent were less optimistic, giving a balance of minus 6 percent; (ii) 28 percent of firms said that business volumes were up, while 15 percent said they were down, giving a rounded balance of plus 13 percent (this compares with plus 44 percent in June); and (iii) to the quarter to December, growth in business volumes is expected to accelerate, with 34 percent of firms expecting volumes to rise next quarter, and 7 percent expecting them to fall, giving a balance of plus 27 percent.

“While demand in the sector is expected to hold up in the near-term, we cannot ignore the fact that optimism has dropped in almost every quarter for the past two years,” said Rain Newton-Smith, chief economist at the CBI. “With Brexit uncertainty affecting the wider economy, it is vital that substantive progress is made during the next round of Brexit negotiations, so that transitional arrangements can be agreed and businesses can make decisions now about investment and employment that will affect economic growth and jobs far into the future.”

In terms of the future of the financial services sector, survey respondents stated a need for action – including preserving access to talent and ensuring internationally focused regulation – on a number of fronts to ensure that the UK remains a leading financial centre.

Andrew Kail, head of financial services at PwC, concluded: “The financial services sector is at a crossroads. The way ahead is uncertain, particularly as Brexit negotiations are yet to be resolved. A coordinated action is now required by government, financial services firms and regulators to ensure the continued future success of the industry and its customers.”

News: British banks' pessimism in worst run since financial crisis