Analyzing the Banking Industry Trends and Their Impacts

In this final learning unit, we’ll be looking at what the market size and outlook is in Banking and Capital Markets from their purchasing point of view.

We’ll look more closely at the challenges these organizations face to better understand their decision making processes. We’ll also look at how these firms deal with competition, both new and old.

Despite all this competition and the challenges banking and capital markets firms face, there’s still significant opportunity for them with the right strategy.

Lastly, you’ll find out how you can gain access to more information to both learn about this fascinating industry and how SAP serves it.

Banking and Capital Markets is generally a growth industry. The latest SAP CMI data shows strong growth over the next five years with investments in Cloud solutions increasing year on year as firms execute their digital transformation strategies. Investments in on-premise software will decrease, however, maintenance of existing on premised solutions will fall at a slower rate as firms maintain a hybrid architecture of legacy revenue generating capabilities and Cloud based corporate services and analytical SaaS offerings.

Regionally, North America is by far the largest market for Banking and Capital Markets, however growth wise we see emerging markets showing the largest moves.

When we look at the market size by solution area for Banking and Capital Markets, we can see just how reliant they are on data to power their business. These organizations have always had to deal with vast amounts of information, and this will only continue revenue generating capabilities and Cloud based corporate services and analytical SaaS offerings.

Competitive pressures facing banking and capital markets firms are numerous and dynamic, driven by various internal and external factors. Below is an outline of some of the key competitive pressures:

• The regulatory environment has always been there for banks and capital markets firms, however, post-2008 new stringent regulations and compliance requirements have been imposed by government agencies and international bodies such as Basel III, Dodd-Frank Act, MiFID II, etc. have significantly increased compliance costs and the need for extensive risk management which impact profitability and market presence.

• Changing customer demands are moving faster than before as clients increasingly expect personalized and seamless experiences across various channels, necessitating investment in user-friendly interfaces and customer service. This is in part fueled by mobile banking as users have a growing reliance on smartphones and mobile apps for financial transactions, putting pressure on firms to develop robust mobile banking solutions.

• Times of economic stress often create market consolidation. Mergers and Acquisitions: Larger institutions with greater resources may seek to acquire smaller competitors, leading to consolidation within the industry.

• Of particular relevance at the moment, following on from the low interest rate environment post-2008 are fluctuating interest rates. Changes in interest rates impact borrowing costs, lending practices, and profitability. Whilst the current increases in interest rates often improve profitability for banks and capital markets firms it also introduces uncertainty into the market and affects bigger revenue generating activities such as mergers and acquisitions and advisory services.

• Also of particular relevance at the moment are geopolitical and trade factors, including trade conflicts. Political tensions and trade disputes between countries can impact cross-border transactions and investment flows.

Navigating these competitive pressures requires adaptability, innovation, and a customer-centric approach. Firms that can effectively respond to these challenges are more likely to thrive in the dynamic banking and capital markets landscape.

These different factors ultimately combine to influence Global Economic Conditions and create economic volatility. Economic downturns can result in increased credit risk, reduced lending activity, and market instability. In addition, currency fluctuations can affect banks and capital markets firms with international exposure to risks related to exchange rate volatility.

Whilst these may seem like significant challenges, and they are, banks and capital markets firms are at least familiar with them and used to incorporating them in their routine business activities.

Competition is something that every industry has to deal with in one shape of form, but for banks and capital markets firms, competition is constant and recently quite different from how it used to be thanks to digital disruption. The traditional competition for Banks and Capital Markets firms was other Financial Institutions. Traditional banks compete with each other for deposit and loan business, as well as offering various financial services to individuals and businesses. The same thing applies in other areas of banking and capital markets. With competition amongst all areas of financial services being fierce with organizations looking to take their business strengths to new geographies, as well as leverage their scale to acquire additional businesses or overwhelm smaller competitors in the market

More recently, advanced technology has allowed new competition in the form of FinTech Startups. FinTech companies leverage technology to provide innovative financial services, often challenging traditional banking and investment methods. However, as they grow and realize the burden of meeting the increased regulatory scrutiny, FinTechs are also Partnering with traditional financial services providers in a coopetition type model.

In addition to FinTechs, technology also enables new non-industry entrants from outside the Financial Services Industry to pose a significant threat, partly because they already have a significant and loyal customer base, for example social media companies. These organizations can sometimes disrupt the industry by coming in with a different perspective based on their core-business background.

Ultimately, this all means that Banks and Capital Markets firms must have clear value and strength in their sector, as well as always looking to the future and adapting to new trends. All this despite the core customer requirements not being too dissimilar to those in Pompei almost 2,000 years ago!

While digital disruption does create challenges for financial institutions, it also creates significant opportunities for institutions to transform their own businesses by leveraging these advances in technology. For example, financial institutions are investing in analytics and machine learning to improve risk fraud, marketing and customer analytics, and utilizing robotic process automation to automate business processes and reduce costs.

Organizations are now investing in hybrid architectures covering their traditional on-premise landscape, and often multiple cloud service providers, as they seek to benefit from technology advancements, and Software-as-a-Service as part of their digital transformation.

Offering Robo advisory services to retain and attract clients, and exploring blockchain applications to support interindustry functions such as trade finance and securities trade settlement.

In addition to analytics and cloud services, the increase in computing resources has led to a wave of artificial intelligence capabilities to support reconciliation, customer engagement, finance and risk processes, as well as trading and investment decisions. The recent introduction of generative AI is potentially one of the most transformative technologies ever to have been invented and firms are scrambling to see how they can leverage this to create competitive differentiation.

These new technologies however don’t come without risk. Much is yet to be understood about the legal and ethical stance of AI and its use in regulated industries like banking and capital markets. But accepting risk is a fundamental part of a financial institution's business, and they happen to be quite good at understanding it! In recent years, financial institutions and regulators have increased their focus on improving risk management. Governance practices are investing in data management, predictive analytics and machine learning to enhance risk and fraud analytics, expanding stress test modelling to better understand the impact of adverse economic and market conditions, and implementing enterprise risk management.

Financial institutions cannot avoid risk entirely, and the most successful institutions are those that identify the appropriate levels of risk to assume and put the appropriate measures in place to manage that risk.

As firms leverage this pivotal moment of digital transformation, the opportunities open to them are immense. From improved customer engagement, to invisible financial services, from basic ESG reporting, to financing instrumental change to support societal and environmental transformation for the better - Banks and Capital Markets firms will continue to be instrumental in how individuals, businesses, public sector, and even other financial institutions operate.

If you want to understand how SAP meets the needs of Banks and Capital Markets firms then take a look at the Industry 102 learning unit to gain insights into the SAP and Partner relevance to this industry.

Planet Financial Services

Banking Content Discovery

Banking Story Telling App

Further information can also be found at Planet Financial Services, or though the Banking Content Discovery and Banking Story Telling Apps.

Lesson Summary

• Market Outlook for Banking and Capital Markets in a graphical format: Banking and Capital Markets is generally a growth industry. The latest SAP CMI data shows strong growth over the next five years with investments in Cloud solutions increasing your on year as firms execute their digital transformation strategies.
• Traditional Challenges for Banking and Capital Markets Firms: Competitive pressures facing banking and capital markets firms are numerous and dynamic, driven by various internal and external factors. This topic provides an outline of some of the key competitive pressures, including the regulatory environment, changing customer demands, economic stress and fluctuating interest rates
• Modern Challenges for Banking and Capital Markets Firms: In addition to the more traditional challenges that banking and capital markets firms have had to deal with, the recent advancements in technology have created newer challenges for firms, for example the FinTech disruption, the rise of decentralized finance (DeFi) and cryptocurrencies, cybersecurity, talent and Human Resources and, lastly, the rapid maturity of Environmental, Social, and Governance (ESG) concerns.
• The Competitive Landscape for Banks and Capital Markets Firms: For banks and capital markets, competition is constant and more recently, advanced technology has allowed new forms of competition in the form of FinTech Startups, technology also enables new non-industry entrants from outside the Financial Services Industry to pose a significant threat and these organizations can sometimes disrupt the industry by coming in with a different perspective based on their core-business background.
• Opportunities for Banks and Capital Markets Firms: While digital disruption does create challenges for financial institutions, it also creates significant opportunities for institutions to transform their own businesses by leveraging these advances in technology. For example, financial institutions are investing in analytics and machine learning to improve risk fraud, marketing and customer analytics, utilizing robotic process automation to automate business processes and reduce costs.