The financial services industry may not be the largest in the United States, but a strong case can be made for it being the most diverse. From insurance to consumer banking, mortgage origination, data analysis, and much more, the finance industry has a specialty for just about everybody. Indeed, there are over 7.6 million professionals who are employed in the financial services sector and over a half-million private establishments, according to figures compiled by Zippia. Combined, financial services within the United States on average generate more than $4.8 trillion in annual revenue, making it responsible for more than 7% of the country’s gross domestic product.
But with Western Europe representing the largest share of the world’s financial services market (40%), the domestic financial services industry has room for growth. The sector’s ability to make headway may be influenced by financial institutions, banks, lenders, brokerages, and other industry players capitalizing on opportunities to expand their customer base and turn their weaknesses into strengths — both in 2023 and beyond.
The following are some of the trends that are poised to shape the future of the finance sector:
Trend No. 1: Banks look to cash in on Generation Z with digital technologies
Ever since millennials first outnumbered baby boomers in 2020, businesses have focused on appealing to the younger demographic, particularly financial institutions seeking to expand their account holder base. 2023 is poised to be another generational turning point. That is because according to Insider Intelligence, it will mark the first time that Generation Z adults — loosely defined as those who were born between the late 1990s and the early 2010s — outnumber those who remain in their adolescence.
Unlike millennials, many of whom were growing up as analog phased out and the digital revolution took hold, Generation Z is digitally native. They familiarized themselves with digital technologies, tools, and solutions at a very early age. As such, their bank-related activities and relationships with money have been far different than those of millennials, Generation X, or baby boomers of the same age. This is particularly evident with respect to cash. Consumers by and large have reduced their cash use: 41% of Americans do not use paper currency during an average week, up from 24% in 2015, according to the Pew Research Center. This has been the norm for Generation Z practically from birth. In fact, the same Pew poll revealed that only 45% of adults under age 50 always keep cash on them, compared with 71% who are 50 or older. Instead, much of Generation Z leverages their smartphones for their purchasing needs by using mobile pay. They also use mobile apps to perform much of their banking, such as cashing checks or checking the balance on their savings and checking accounts.
To appeal to Gen Z as they enter the workforce, financial institutions, like retail banks and credit unions, are investing in the mobile solutions that Gen Z use for their banking needs. They are accomplishing this by creating them, improving their functionality, or promoting them on social media networks, such as Instagram, Snapchat, and Tiktok. They are also harnessing the power and reach of social media to help Gen Z sharpen their financial literacy skills. According to a study done by Credit Karma, a majority of Gen Zers (52%) use TikTok to obtain financial information, compared with 26% of millennials who use the network for the same reasons. Consumer finance expert Deborah Boyland told The Financial Brand that TikTok is a gold mine for banks seeking to expand their Gen Z customer base. It is also an affordable way to advertise.
“People actually watch the ads, enjoy them, and comment on them,” Boyland explained. “It’s a whole different advertising world.”
Trend No. 2: Automation and Machine Learning Gain Momentum
Some market watchers have predicted that a recession in 2023 could reduce investments in automation technologies after years of rapid growth. However, a downturn in the economy could have the opposite effect as more businesses seek to increase operational efficiencies and profitability by automating processes that have traditionally been time-consuming, tedious, and prone to human error. For example, technologies that enable automated workflows and robotic processes (such as intelligent document processing) have the potential to transform every aspect of a business, including the supply chain/ERP, finance, customer experience, product lifecycle management, and logistics management. Regardless of the exact technology a company might leverage to achieve automation, the keys to success are working with an experienced implementation partner who understands the business and jointly developing a detailed action plan to address your unique goals.
The finance industry is also likely to continue its adoption of machine learning in 2023 as a way to increase efficiencies and overcome whatever challenges the economy might throw its way next. Machine learning refers to the automated analysis of enterprise data, the extraction of insights from that data, and a system’s ability to change functionality without requiring any direct human supervision or direction. With machine learning informing their decisions, finance teams can increase workforce capacity, use financial and human resources more prudently, and ensure the integrity of their data. That, in turn, allows them to do a faster and better job of closing, reconciling, detecting anomalies in trend analysis, and connecting enterprise systems.
Trend No. 3: Continuing digital transformation maturity
Just as technology is constantly advancing, the same is true for financial institutions and their digital transformation journeys. Even though digital transformation has been underway for well over a decade, the non-stop nature of innovation requires that banks — and financial services as a whole — remain apprised of which solutions are outdated and need to be updated.
And while financial institutions have had success with their transformations and deployments, they have encountered some growing pains. For example, in a global survey performed by Digital Banking Report, more than 60% of financial institutions said they had only “partially deployed” their digital banking solutions, The Financial Brand reported. More specifically, just 24% indicated that the digital solutions in place had helped to significantly improve both the customer experience and engagement. Approximately 10% said they had made no progress whatsoever. The same study revealed that only 30% felt they had achieved great success with their utilization of social media.
Resistance to change may be contributing to some financial institutions’ shortcomings with respect to digital transformation. Digital transformation requires adapting and embracing next-generation technologies that are designed to be more efficient and more customer-facing. But for many in the financial industry, there seems to be a general sense of discomfort with new technology and processes, particularly for employees who have been in the industry for a long time. According to the most recent statistics available from the U.S. Bureau of Labor Statistics, the median age in the banking industry is 43 years old. More than a quarter of the financial institution workforce is 55 years of age or older. Many of these individuals were working in this sector prior to the widespread adoption of digital innovation.
In order for digital transformations to fully take hold and mature, financial institutions and their decision-makers may need to lean on change management resources that can help stakeholders better cope with new processes and learn to embrace change. As more banks implement and roll out open banking concepts, financial institutions may turn to these service providers to effectuate change and make more significant inroads in their digital transformation journeys moving forward.
Trend No. 4: Hardening data collection strategies and security methods
Similar to many other industries, financial services not only run on money but also runs on data. Thanks to mobile banking, cloud computing, and the ubiquity of smartphones and digital wallets, consumers as well as financial institutions have access to that data like never before. And while financial institutions also have security systems in place designed to protect data from cyberattackers and identity thieves, the expanded availability and sharing of data has created more opportunities for sensitive information to be stolen. The financial services industry is frequently targeted, with financial institutions experiencing a 238% increase in cyberattacks during the first half of 2020 compared to the same period in 2019, Fintech Magazine reported.
In light of the troubling trend, the U.S. government is looking to give more teeth to data-sharing rules. As soon as 2024, the Consumer Financial Protection Bureau plans to make changes to Section 1033 of the Consumer Financial Protection Act. The move would impose more stringent regulations on how financial institutions handle their customers’ information, maintain it, and exchange it with other enterprises. It would also require financial institutions to ensure that their customers have the ability to access their financial data on demand.
Rohit Chopra, Director of the Consumer Financial Protection Bureau, discussed some of the forthcoming changes recently at an annual summit, noting that the ultimate goal is to give consumers more power. “While not explicitly an open banking or open finance rule, the rule will move us closer to it, by obligating financial institutions to share consumer data upon consumer request, empowering people to break up with banks that provide bad service, and unleashing more market competition,” Chopra said.
He added that decentralization and greater market competition will also help improve the security of personal financial data because firms would be required to ensure that customers’ personal information was available to them through more secure methods than the ones that exist today. Currently, companies are able to access consumer data through screen scraping, which enables users to gather data from multiple accounts, often without their authorization. In short, firms that offer checking accounts, credit cards, digital wallets, and the like would have to prove how they are hardening their data collection and transmission processes.
“People would feel secure knowing that both the data holder and the data receiver follow secure practices,” Chopra added. With stiffer regulations looming, financial institutions will need to establish new processes and systems that demonstrate both to their customers and to the government how they are better-protecting data while at the same time making it more easily accessible to consumers.
With so much economic uncertainty in the air heading into 2023, it is safe to say that this could be a decisive year for the finance industry — good or bad. But it is also true that those businesses with the foresight, vision, and partnerships required to make the most of digital innovation opportunities are the most likely to continue thriving well into 2024 and beyond. The ultimate aim for the financial services sector is year-over-year improvement. Inspirage brings the right teams and technologies together to accomplish this goal by optimizing agility, enabling resilience, and driving operational excellence. Contact us today to see how we can help you grow your business.
