Horizon scanning

From friend-shoring and 5IR to the cost of talent and energy supply, we explore six disruptors and emerging trends set to have an impact on your business in the coming years

Inflation overdrive

Owing to the soaring costs of food and fossil fuel, inflation in the UK hit a 40-year high of 10.1% in July, before dropping slightly to 9.9% in August. It’s a similar picture around the world.

In the US the current annual rate is 8.3%, while Sri Lanka hit an incredibly worrying 70% in August as it struggled with its worst economic crisis in more than seven decades.

But what does this mean for financial services firms?

While higher inflation is generally seen as a positive for banks – in that it raises net interest income and therefore boosts profitability – it often proves to be troublesome and destabilising. 

Late last year, Goldman Sachs Chief Operating Officer John Waldron identified inflation as the number-one risk that could derail the global economy and stock markets, while JPMorgan Chase Chief Executive Jamie Dimon told analysts that banks “should be worried” that high inflation and high interest rates increase the risk of extreme price movements.

Credit exposures in sectors most affected by inflation – for example, in the consumer discretionary, industrial and manufacturing sectors – should therefore be closely monitored, while investment houses should remain wary of the fact that inflation and monetary tightening could disrupt deal pipelines.

As ever, those with diversified businesses are likely to fare best. 

Goodbye offshoring, hello friend-shoring 

Recent events such as Trump’s trade war and Russia’s invasion of Ukraine have called into question the notion of a globalised economy. Covid-19, meanwhile, disrupted supply chains around the world. 

In response, many nations attempted to address these factors with reshoring – the practice of transferring a business operation that was moved overseas back to the country in which it was originally relocated.

This, however, often proves to be a limited process. As an alternative, some countries are looking to friend-shore – a solution that involves relocating elements of supply chains to friendly trading partners.

US Treasury Secretary Janet Yellen has touted the strategy as a way to reduce the vulnerabilities of a supply system badly strained over the past two years and a tool that will deepen relationships and “diversify our supply chains with a greater number of trusted partners”. 

It will also, she says, protect households from inflation and disruptions caused by geopolitical and economic risks.

Critics, however, say that the method could split the global economy into hostile camps, hurting growth and worsening inflation.

Others fear that restricting trade and direct investment to political allies could undo decades of gains from globalisation, including raised incomes for hundreds of millions in the developing world and lower prices in the West.

There is also unease around the fact that this approach could place security and political concerns above those of economic efficiency. 

In terms of its impacts on financial services firms, companies may be called on to provide pathways to their commercial accounts by recommending friend-shoring routes and offering overall expertise.

Banks with wider networks and ‘boots on the ground’ in the places where friend-shoring is attractive will be best placed for success. 

Entering the Metaverse 

It’s suggested by Gartner that by 2026 a quarter of us could be spending at least an hour a day in the Metaverse. 

Accenture, meanwhile, says that the Metaverse brings with it “tremendous opportunity” – 71% of executives say it will be good for business – but that lots of work is needed first.

This includes redesigning today’s internet from a “disparate collection of sites and apps” to a “continuous 3D universe”. 

Banks and other financial services firms will benefit from this space in a number of ways – one being the richness that the Metaverse can provide. 

While digital banking offers convenience, it lacks experience – so little today is done in branches or face to face alongside real people.

But with the Metaverse, firms have the opportunity to use AR/VR and other technologies to overhaul how they connect with clients and staff; they can once again deliver advice and build relationships in a more meaningful way. 

In fact, some 47% of bankers believe that customers will use AR/VR as an alternative channel for transactions by 2030.

Banks are also extremely well placed to address the growing demand for digitally native currency by securing, insuring and lending against cryptocurrency, NFTs and virtual real estate (see box overleaf, for a rundown of some of the banks already active in the Metaverse).

The great energy transition

The need to decarbonise energy usage and reduce reliance on fossil fuels in order to meet net-zero targets and address the climate emergency is now nothing short of imperative. 

This will require the support of both investors and lenders. A report from NatWest recently revealed that as the energy sector transforms, and as a result new business, new markets and new technologies emerge, companies will need to assess and analyse the credit risks arising from such lending. 

They will then have to structure their debt offering to meet client needs, but also to protect against these new and different risks – such as the viability of new technologies, particularly those “that have little track record of being scaled-up for use on a commercial scale”. 

The report also says banks and investors will need to dedicate time and headspace to gaining a better understanding of new markets, such as the hydrogen market or the market for voluntary carbon credits, and how demand and pricing for new products will evolve.

The fifth industrial revolution 

The fifth industrial revolution – or 5IR as it’s being termed – will see “human creativity integrated back into the technology landscape”, providing a real need for businesses to keep pace with, if not outpace, their competitors.

This will mean banks and other financial services businesses will need to develop human-centric internal and external strategies – ones that offer more purposeful, self-fulfilling and sustainable solutions. 

Essentially, this means focusing on putting people front and centre, and providing them with precisely what they want in terms of experience. An emphasis on empathy will also be imperative. 

This thinking should be applied to everything from the recruitment and onboarding process and a more flexible approach to work through to meaningful interpersonal interactions with customers, even on digital platforms. 

The high cost of talent and productivity dips

Since Covid-19, the world of employment has been upended. First, we had furlough and mass redundancies, then the Great Resignation, and now Quiet Quitting – whereby employees are said to be doing only what their job demands and nothing more.

On top of this, the cost of living has rocketed, which is causing employers even more problems as staff seek rises to cover the additional costs. 

As a result of all of this, talent is expensive – Goldman Sachs, for example, is one of the many industry giants reporting record-high annual expenses fuelled by soaring compensation and benefits costs. Productivity, meanwhile, can be low – often the result of low morale. 

Financial services companies must therefore work hard to retain existing members of staff by listening and reacting to their individual wants and needs and fostering an inclusive environment that celebrates diversity. 

They should also build their own supply chain, becoming creators – not simply consumers – of talent. Here, a focus on upskilling and reskilling opportunities will be key, with customised training and learning programmes being developed and embedded into the company culture.