Financial Services Industry: Industry Overview

People seemed content with ATMs, POS systems, and other traditional banking services only a few years ago. Not anymore. Rapid changes are happening in the financial space. Regular customers would rather make payments and manage their finances remotely. Plaid finds that fintech adoption among US consumers reached 88 percent in 2021.

The industry relies on financial software development to meet the demand for more digital financial solutions. As a result, new digital technologies are shaping the trends in the sector. This guide gives an overview of the current realities in the financial service sector while highlighting dominant trends and the challenges that key players would have to overcome.

What Is The Financial Services Industry?

The financial services industry is a broad sector that provides financial services to individuals and organizations. These services transcend the traditional banking services extending into insurance, wealth management, and an ever-growing bouquet of innovative digital banking solutions. Financial players that make up the sector include banks, investment firms, lending houses, insurance firms, and finance companies. These stakeholders range from big conglomerates to small fintech startups offering financial services like banking, mutual funds, wealth management, advisory, and insurance.

The financial services sector is best explained under three broad categories vis-à-vis personal, consumer, and corporate services.

Personal Finance Services

Individuals use financial services and tools to manage their income, savings, spending, loans, and financial goals. These tools and services constitute personal finance management (PFM). PFM has become a crucial segment of financial services, especially as financial services become more accessible via personal devices like smartphones. In addition, the younger tech-savvy generation is demanding more PFM tools, leading to the rise of neobanks like Chime and other fintech products.

Consumer Finance Services

Consumer finance covers areas of household borrowing, savings, investments, loans, payments, and the like. Consumer finance services allow households to pay for products and services over a period of time. Typical services could be mortgages, college payments, device financing, and other installment payments. Key players in this space are mortgage lenders, credit card providers, and various loan services.

Corporate Finance Services

Corporate finance covers financial services available to businesses and organizations, which could be funding, valuation, resource allocation, equity, and financial management. Angel investors, private equity, and venture capital provide funding, while financial experts like business analysts, accountants, and investment advisors add value to the business.

Financial Services Industry Statistics To Keep In Mind

Just before we x-ray the trends shaping the financial service sector, let’s look at some vital stats that portray the current state of the industry.

Financial Services Contribute Significantly To The US Economy

The financial services industry employs 9 million people and contributes 8 percent of the U.S. GDP. According to a whitepaper by the Securities Industry and Financial Markets Association (SIFMA), financial services fund 72 percent of U.S. economic activity. The indirect impact is even more pronounced; for every new job in the sector, 3.6 new jobs are created in the economy.

United States Leads a Growing Global Economy in Financial Services

According to BusinessWire, the global financial services sector will grow from $23,319.52 billion in 2021 to $37,343.95 billion in 2026 at a compound annual growth rate (CAGR) of 9.6 percent. In addition, SIFMA finds that the United States capital market accounts for over 40 percent of equity globally.

Main Trends In The Financial Services Industry 

Here are some trends predicted to shape the financial industry in the near future. As expected, many activities revolve around the digital transformation of financial services.

Digitization of Financial Services

In the recent past, financial services have tended towards digital. Fewer people visit banks and ATMs or use traditional financial services. Digital solutions are easier and faster and offer more personalization, making them attractive to the new generation of consumers. Expect new consumers to choose providers of the best online platforms and mobile apps featuring tools for saving, budgeting, spending, and financial planning.

Demand For Innovative Financial Services Drive Fintech Growth

Fintechs are stepping up to meet the present-day needs of consumers of financial services. Digital banks, Neobanks, PFM tools, and other innovative products are attracting a lot of young and tech-savvy users. This market segment is always on the lookout for easier, faster, and more personalized financial services.

Big Tech Competes With Traditional Financial Institutions

Apple, Google, Amazon, and other tech giants are leveraging their massive reach as they enter the financial services space. These big tech companies offering financial services are expected to claim up to 40% of U.S. financial services revenue.

The Rise of the Gig Economy Presents New Opportunities for Financial Services

Income from digital gig work is projected to reach $455 billion in 2023, according to a MasterCard study. Half of the U.S. population is expected to do gig work by 2028. This presents a huge opportunity for financial service providers to attract this market segment. Until recently, gig workers were neglected because they were deemed too risky for most traditional financial products. However, modern technologies are making it easier and safer to integrate this demographic.

Utilizing Emerging technologies

Emerging tech like big data, artificial intelligence (AI), and blockchain are finding a home in the financial sector. Financial software developers are finding ways to use large volumes of data generated by financial institutions to understand customer behavior better and provide better, more secure, real-time services. For example, open banking, an API model that let’s financial companies securely share customer data with other firms, is gaining traction.

Financial services industry Challenges

Some concerns threatening to peg back the sector include security, regulations, new technologies, and business interruptions.

Data Security

Cyber security is one of the providers’ biggest concerns as financial services become more digitized. More than half of respondents in an Allianz annual survey pointed to cyber-attacks as the biggest risk. Another survey found that financial services faced the most online attack threats of any sector.

Keeping Up With Regulations

Changes in legislation and regulations pose the challenge of compliance for financial institutions. They are subject to both banking regulations as well as digital technology regulations. Changes in legislation are among the top three challenges the sector faces.

Adopting New Technologies

Technology is advancing rapidly, one innovation on the heels of another. These changes force financial institutions to invest more in tech and alter their business and marketing models. If they fail to keep up, there’s usually a startup keen to disrupt their niche.

Internal And External Competition

Traditional finance institutions are losing business to fintech startups that are better positioned to fulfill the needs of specific customer segments. On the other hand, big tech companies are raising the stakes as they chase a large chunk of financial service revenues.

In addition, covid-19 pandemic exacerbated some of these challenges. Cyber-attacks, for instance, more than doubled at the peak of the lockdowns.

Summary

Digital transformation has been a recurrent theme in the financial services industry over the past few years. Institutions that will excel are those that find a way to integrate new technologies while mitigating the challenges that come follow.