In a year that promises uncertainty, these macroeconomic forces will challenge the sector.
The economy remains unstable as we enter a recessionary period for the first two quarters of this year. Yet despite this, the capital market industry showed strong resilience with positive results through 2022 allowing them to double down on investment for change.
The most progressive organizations will thrive by simplifying and designing for efficiency, improving data management, and taking advantage of loosening regulations, as well as dialing up digitization to accelerate innovation.
Cognizant’s 2023 capital markets outlook offers six key trends that are likely to impact the market over the next 12 months:
1. Reforming the regulatory agenda to stimulate growth
When Jeremy Hunt, the UK’s Chancellor of the Exchequer, revealed his so-called Edinburgh Reforms on December 9, it was an early Christmas present for those operating in the City of London. Previously, in the Autumn Statement, Hunt had identified financial services as one of the country’s five growth sectors. Hunt announced over 30 regulatory reforms to repeal and replace European Union laws.
The Chancellor set out “a bold collection of reforms taking forward the government’s vision for an open, sustainable, and technologically advanced financial services sector that is globally competitive and acts in the interests of communities and citizens,” adding that the reforms “will create jobs, support businesses, and power growth across all four nations of the UK.”
By removing the ring fences around retail and investment banking, Hunt hopes that the UK financial services would be liberated, enabling them to be more internationally competitive in 2023 and, as a result, stimulate economic growth. The impact of the Edinburgh Reforms can potentially reduce the cost of transacting business and accelerate the delivery of broader financial benefits.
Conversely, in the United States, there are signs that regulations will remain tight under President Joe Biden. His administration has imposed more than $317 billion in final rule costs and over 216 million hours of new paperwork since January 2021, far exceeding the two previous incumbents’ regulatory activity, according to the American Action Forum.
2. Managing profitability pressures through technology ownership
Although the uncertain economic outlook in 2023 is unlikely to change technology investment budgets drastically, there will be more scrutiny on returns. Investors will be looking for short-term returns. It’s here that more and better data is required to provide smarter analysis, better predictions, and increased transparency.
The global mergers-and-acquisitions (M&A) market cooled last year after reaching an all-time high in 2021 as a reaction to the pandemic fallout and the urgency for organizations to accelerate their digital transformation journeys. Near the end of 2022, though, there were signs that partnerships between financial services firms and technology companies were heating up.
This surge in M&A activity is expected to continue through 2023, before market consolidation. This means there will be increased pressure for financial institutions to spend big on technology, while demand for services will remain flat. Once new operating methods are in place, as-a-service offerings will become key delivery streams that reduce pressure on tech debt. These will also enable greater agility for organizations to better manage profitability.
3. Harnessing the monetization of data
Quality data is the lifeblood of any company, but there is a widespread belief that the financial services industry is failing to evolve as quickly as others. Indeed, as the volume of data grows exponentially, it is harder to collect and share helpful information quickly without robust data standards and foundations.
The combination of legacy infrastructure, siloed data sets, and regulatory concerns have limited progress for many financial institutions. This sluggishness will be damaging to organizations in 2023.
Increasingly, though, progressive players are beginning to understand that data monetization is an innovative way for companies to generate a measurable economic benefit. By modernizing systems and collating data on a centralized platform, operators can take advantage of real-time insights, gain efficiencies through cost reductions and better analysis, and boost revenue by spotting opportunities quicker.
Organizations that double down and invest in technology infrastructure to manage and access data will accelerate innovation. At the same time, teams will be empowered by having the correct data at the right time. This win-win scenario will deliver more value faster. And given the laggard approach by many operators, there is still time to gain competitive advantage. For wealth and asset management firms, harnessing data to provide a personalized service for clients is the natural next step.
4. Moving to a transparent and accurate sustainability agenda
Since BlackRock CEO Larry Fink’s 2021 open letter to CEOs, in which he called for organizations to disclose how their business models were compatible with a net-zero economy, the clamor for more transparency and accurate reporting has increased. In 2023, following widespread “greenwashing” practices that misleadingly present an environmentally responsible public image, there will be more pressure from all sides to come clean about being green.
Responsible investors now realize climate risk is investment risk, and that they must direct significant capital to tackle the issue. As such, the industry’s approach to environmental, social and corporate governance (ESG) has matured.
Initial ESG efforts centered on data and reporting. Recently, though, there has been a growing trend toward greater accuracy and transparency, which bring accountability—ensuring that meaningful change happens at scale.
5. Rebuilding the core through fintech and innovation
Fintech firms have been nibbling at the edges of the financial services industry for years, but in 2023 they will move to the core of organizations thanks to more partnerships. Operators know that to scale at speed, keep pace with competitors, and disaggregate the value chain, mutually beneficial alliances with expert fintechs are critical.
There are other ways in which this type of interchange could be beneficial. For example, financial institutions are taking seriously the start-up mentality that fintechs embrace and are seeing results in the form of increased competitiveness, customer focus and collaboration.
In mid-December, Microsoft bought a 4% stake worth $1.5 billion in the London Stock Exchange Group (LSEG). LSEG informed investors it would be spending $122 million over the following three years, as part of the decade-long deal, for Microsoft’s analytics, cloud and artificial intelligence (AI) infrastructure.
6. Digitizing the operating model for agility
The increasing intensity of competitiveness in the industry has necessitated the shift to deeper collaboration with fintech firms to digitize the operating model. Organizations that haven’t progressed sufficiently on their digital transformation journeys will, in 2023, struggle to compete effectively.
It is imperative to evolve and modernize the operating model; otherwise, businesses risk slipping further behind, ceding position, relevancy and share in the market. This reality should force leaders to build more agility into their structures through digitally enabled organizations.
By trusting fintech partners and establishing and nurturing a partner ecosystem, financial services can leverage expertise and take advantage of the in-built agility to adapt quickly to ever-changing market demand. This approach will also help businesses manage profitability pressures through shared ownership. And in 2023, when change is likely to be the only constant, managing and mitigating pressures will be crucial.
For more insights, read our 2023 outlook series on Cards & Payments and Banking, visit the Capital Markets section of our website or contact us.
