The Drivers and Barriers Affecting the Development of the Financial Services Industry - Term Paper Example

Sub Department Introduction The financial industry is probably one of the most important economic sectors in present-day societies. Thus, in the extremely advanced service economies such as the US-the financial industry employs more personnel than the apparel, computers, automobiles, steel and pharmaceuticals industries combined. The financial services industry therefore accounts for nearly 5% of the GDP in the US alone and almost 5.5 percent in Germany, 3.5 percent in Italy, with comparable statistics found in other European Union economies having exceptionally advanced financial intermediaries (Berges et al, 2014). Similarly in other regions of the world such as Japan, the financial industry accounts for nearly 9 percent of the nation’s GDP with Singapore financial industry commanding an impressive 6.5 percent of the total GDP of the country. On the other hand, smaller economies-particularly those aspiring to have considerable presence internationally via offshore banking techniques-the financial industry may even be more important. The Swiss financial industry accounts for more than 9 percent of the nation’s GDP. In addition, Cyprus-a tiny Mediterranean country providing off-shore financial services to Russia as well as Eastern European nations has over 18 percent of her GDP emanating from business and financial services, with these sectors keeping nearly 10 percent of the population employed. In Israel, 18 percent of the country’s GDP is because of the combined business and financial service industries, which keep 10 percent of the population gainfully employed (Berges et al, 2014). Inspite of the above impressive statistics, the financial services industry is driven by numerous drivers as much as it is faced by many barriers hindering its development. This paper seeks to analyse the various drivers and barriers affecting the development of the financial services industry (Huang, 2011). Drivers of financial industry The financial services sector especially the banking industry is quite sensitive and has over the years been facing numerous serious challenges. Thus technological innovations, rising taxes and stricter regulations all lead to doubting of the traditional business model. Consequently, the shifting of wealth towards emerging markets provides limitless opportunities. The following are some of the drivers of the financial services industry; The well-informed bank customer-There is going to be a profound change in business and consumer profiles over the coming years. Social, technological and demographic factors will greatly split customer tastes, preferences and needs. Thus, as people and by extension bank customers travel more, play and work “virtually” in addition to living longer, the financial services industry will not only have to readjust as well as manage its costs, but also enhance its value propositions as well as service concepts, if at all they are to effectively compete. Thus banks should look for techniques of designing particular services and products to address the above changes with labeling, category and packaging management becoming critical. So as to avoid reduced public confidence in their industry banks therefore should re-learn effective customer communication and restore as well as maintain customer confidence (Huang, 2011). Since the customer base is a key driver in banking sector; banks should tailor products as well as distribute them to every segment. In order to succeed, banks must make various choices such as embracing a consistent approach in the way they offer their products, brands, channels as well as cost-effective delivery of services. Moreover, banks must design ways of satisfying many customer segments arising from one product “factory” just like the automobile industry does when serving many consumers having different vehicles that have been built from the same platform (Mockel, 2010). Secondly banks must be flexible in the manner in which they deliver their services and products. Thus, for instance, a retired British officer holidaying in Spain should comfortably clear his bills using his British account. And a college student should have a savings account that can accept monthly remittances from two different accounts in two or more countries. Thus, in order for banks to thrive they need to bundle the accounts they currently have into packages that are tailored to fulfill such particular requirements. Thirdly banks need to constantly upgrade their IT infrastructure to ensure that they accomplish their aspirations. Banks in the UK, Canada, Germany and Australia have already overhauled their core banking systems so as to handle as many product variants as possible. Fourthly banks should embrace branch banking. Although internet is a main channel for investment decisions and transaction banking, more complicated customer requirements will still need some form of branch office where they can be effectively addressed. The very latest models have been implemented in Australia and Europe. Branches need not necessarily handle valuables or cash, but instead should act as a type of “foyer,” leaving the ATMS to cater for cash transactions, laptops to initiate other services and scanners should solely be involved in the processing of the needed documentation (Mockel, 2010). Money supply-this is the second driver of the financial services industry. Money supply is dependent on the industry’s competitive intensity, structural changes and the manner in which institutions bring services and products to the market. Activities such as invoice discounting, forfeiting and factoring provide cash to businesses. Thus, a method that transfers corporate invoices to banking institutions in exchange for hard cash is advantageous, specifically for companies in receivership or startups. Nevertheless, it can use a lot of cash when implemented on a bigger scale. Thus, as the chain of supply becomes longer as well as more fragmented the potential credit that the chain can hold increases, with the amount of capital required as risk buffer also growing during times of crisis (Berges et al,2014). Nonetheless, there is a superior way .More and more supply chains are turning out to be “ecosystems” .Because every supplier exchanges information electronically, banks can internalize their working capital function through buying of invoices sent as well as invoices received, hence effectively compensating the customer the value-added without any extra charges. Management-The third key driver in the development of the financial industry is management. Thus banking is extremely sensitive and regulators are everyday rethinking their supervisory and monitoring techniques, something that may result in new standards of accounting, capital adequacy as well as complete restructuring of the whole financial system. With almost 25% of the total national wealth having been lost during the 2008 financial crisis, central banks world over should put banks under strict regulatory framework. Thus banks should allocate well qualified and passionate individuals to chart the way for them. These professionals should allocate responsibility to various departments and come up with agreed-upon standards as well as procedures to steer their banks to the next level. The top management of these financial institutions must in addition make sure that minimum banking standards are adhered to by coming up with a common language and procedure of doing things. Finally the top executives of these institutions should offer real-time management (Berges et al, 2014). Technology and infrastructure-As financial institutions seek to be more entrepreneurial and innovative; they are embracing new technologies aimed at increasing their efficiency as well as providing satisfaction to their customers. Numerous banks have already invested in technology. Consequently, state of the art banking capabilities and applications are assisting in development of the competitive advantage, reduction of costs and achievement of efficiency as well as customer satisfaction. Thus, the integration of technology and data to assist customers in management of their money in a quicker and better manner together with the use of up to date channels such as social media and mobile devices will greatly assist in delivering banking services as and when needed by customers (Wang, 2012). Continuous technological advances will facilitate financial industry to implement high end and complex analytics to assist customers in making more informed investment decisions. Such innovations as cloud computing will assist in bringing a wide array of benefits to the customers ranging from capacity and on demand automation to hastened time to promoting instantaneous data infrastructure as well as strengthening client service. Using of the up to date technological advancements offers a window of opportunity that facilitates financial institutions in elevating business performance and gaining a competitive edge (Wang, 2012). Thus for instance, mobile banking has revolutionized the normal delivery channel and other touch points used by customers for banking services. In conclusion the following are key driving factors as far as utilization of technology in financial industry is concerned; greater transparency, faster information as well as enhanced risk management. The above factors together have cemented the way for the requirement of a new IT model and business model within the financial industry (Wang, 2012). Barriers to the Development of Financial Industry Lack of financial literacy-Over 2.5 billion individuals lack insurance or bank accounts services something that can make a big difference between development and lack of development of the financial industry. This financial isolation of impoverished people has frequently resulted in their lack of financial inclusion and understanding, something that further distances them from banks and insurance companies. A research on how Village Savings and Loan Associations(VSLAs) may link with financial services providers in Kenya found that, even though financial institutions had some products appropriate for the requirements of the poor, the same lacked knowledge or had incorrect understanding of such products and were therefore unwilling in utilizing formal financial services (Mention & Torkkeli, 2014). Thus poor financial literacy greatly limits the capacity of people in making informed choices, being aware of available financial opportunities as well as taking efficient action to enhance their financial welfare. The VSLA methodology can be used to greatly break this barrier by addressing the issue of insufficient financial understanding since after their registration in the group, members can be methodically trained over 12 months. Group members are able to manage their transactions fast enough and make such decisions as to who should be loaned out the money next, in addition to determining the rate of interest on the money as well as a repayment schedule. Such kind of financial education assists poor individuals in understanding the significance and basic finance mechanics. It assists VSLAs evolve into micro, informal fund management avenues where people can raise capital in form of savings, make decisions on the efficient deployment of money across members and ensure quick recovery in addition to sharing dividends when the savings cycle is over. This is one of the ways of breaking the lack of financial literacy barrier (Mention & Torkkeli, 2014). Small micro-enterprises are responsible for more than 45% of all employment in emerging economies. Thus, their growth and development is crucial in job creation as well as prosperity increment. Numerous obstacles exist that hinder development of financial industry. For instance, it is generally agreed that numerous barriers block poor persons from being included financially. And whereas reasons and obstacles vary between regions and countries, a number of widespread barriers surface that commonly represent a mix between demand-driven and supply-driven factors; First and foremost is lack of financial information and understanding between consumers and providers. Secondly, age and gender discrimination studies indicate that young people and women are most likely to be left out of financial inclusion as compared to others. Thirdly, the poor persons’ erratic cash flow and low income are also contributory factors. In addition, lack of appropriate processes and products from formal financial service providers catering for poor people’s needs is another contributory factor leading to poor development of financial industry. High transaction charges by banks and geographic distances particularly for banks operating in remote regions coupled with high transport as well as opportunity costs for individuals to bank formally with banks. Lastly, the other major hindrance is national as well as international policies inhibiting financial inclusion of the poorest people in the world (Harrison & Estelami, 2014).It is crucial to bear in mind that these barriers are, indeed, self-perpetuating. The fact that poor persons are not regarded viable customers by financial institutions. Strict regulation from various supervisory authorities such as central banks and the government. This kind of scrutiny of the financial services providers has been so aggressive against insurers, banks as well as funds. The following hard figures demonstrate rising clampdown. For example in the almost 3 years following 30 September 2014, the FSA and FCA imposed over 1 billion pounds in fines, which is 680 million pounds more compared to the earlier decade. The financial industry is therefore under immense pressure to demonstrate it can effectively mitigate risks, unearth previous misconduct and enhance resilience or ultimately pay the price. In addition, public opinion still widely mistrusts financial industry, further pressurizing the industry players (Harrison & Estelami, 2014). Another barrier facing the financial industry is talent. There is war as far as growing, keeping and acquiring talent is concerned. The financial industry should build, keep and expand workforce engagement for the whole workforce. There is no silver bullet when it comes to talent. Thus, there is no single individual who can be superwoman or superman, and accomplish enterprise competitive differentiation single handedly. Banks and other financial services providers should ensure that all employees are “All In” with unquenchable focus on providing world-class buying experiences to not only their customers, but also distributors, suppliers, investors, partners as well as shareholders (Mention & Torkkeli, 2014). Another barrier to the development of the financial industry is market abuse which happens through manipulation of interest as well as foreign exchange rates. Additionally, commodities price fixing has continuously damaged the reputation of asset and bank managers. Consequently, this has led to unprecedented and financially distressing settlements and fines especially for the institutions involved (Harrison & Estelami, 2014). Lack of accountability by senior persons is another barrier to development of financial industry. Thus, there is no personal responsibility whenever there is a corporate failing. Change is driven by accountability and as regulatory authorities seek to implement every clause to the detail, top management is increasingly being found culpable in more ways than one for their firm’s failings as well as any resultant losses incurred by investors and consumers. Macro-politics in a landscape that is constantly changing is another barrier that is hindering the development of financial industry. For instance, upheaval in the Middle East and Crimea has resulted in international condemnation as well as stifling sanctions against such nations as Russia that previously had been active contributors to international trade. Thus, the continuing democratization of the nations belonging to the former USSR together with the ongoing instability in both North Africa and the Middle East further complicate the environment for the financial industry. This is a great hindrance to finance industry especially since unraveling whom to do business with from the one whom you cannot is increasingly difficult, implying that financial institutions have to exercise due diligence when planning to venture into such regions for business (Mention & Torkkeli, 2014). Emergence of New “Virtual” frontiers is another barrier to development of financial industry. A technological advancement continues there has been shifting of borders as new frontiers emerge of conducting financial services. Thus, disenchanted consumers of financial services, new patterns of market behaviour as well as latest digital technologies have all teamed up to build viable and new channels combined with a completely new infrastructure for executing ‘virtual’ transactions, majority of which are outside the power and control of the current financial regulators and institutions. Although regulators are doing their best to catch up, banks need to understand that in reality such changes imply future exposure to not only to financial crime, lost opportunity but also other definite risks as far as their business models are concerned (Mention & Torkkeli, 2014). List of references Berges,A.,Guillén,M. Moreno, J &Ontiveros,E. 2014 A New Era in Banking: The Landscape After the Battle. New York: Bibliomotion,Incorporated. Harrison,T. & Estelami,H.2014 The Routledge Companion to Financial Services Marketing. New York: Routledge. Mention,A. & Torkkeli,M.2014 Innovation in Financial Services: A Dual Ambiguity. New York: Cambridge Scholars Publishing. Mockel,C.2010 European B2C E-Commerce in the Banking Sector. New York: Magisterarbeit. Yongfu,H.2011 Determinants of Financial Development. New York: Palgrave Macmilan . Wang,J.2012 Implementation and Integration of Information Systems in the Service . New York: IGI Global. Read More