Joy Macknight

Slowing economic growth and rising interest rates will lead to challenging conditions for banks, insurers and fund managers next year, according to the EIU. However, fintech may fare worse.

While traditional financial services players will face a difficult environment in 2023 due to weakening economic output and rising interest rates, new challengers will have an even harder time, predicts the Economist Intelligence Unit (EIU). The latter, which includes fintechs and cryptocurrency platforms, are likely to see investors make more demands around their road to profitability.

In its report, ‘Industry outlook 2023’, the EIU examines how the war in Ukraine, lockdowns in China and escalating inflation have affected seven global industries. Both financial services and technology are expected to be buffeted by strong economic headwinds, but all sectors will face significant challenges in the coming year. As such, the EIU forecasts that global real gross domestic product will increase by just 1.6% in 2023, down from 2.8% in 2022 and 5.7% in 2021.

Global financial firms, according to the report, “will face tougher conditions in 2023 in an environment marked by slowing economic growth, spiking prices, unevenly rising interest rates and sharpening international political tensions”. However, it notes that incumbents have increased their resilience over the past decade by improving capital and liquidity positions, as well as exiting non-core activities and markets. This should help them ride out the storm, as will rising interest rates in the near term.

Moreover, the EIU predicts that bank lending in four major countries – the US, China, Japan and Germany – will continue to rise in 2023.

But it is the new players in the market, the fintech challengers, that will face the greatest difficulties in the next 12 months, according to the EIU, which predicts that a large number will fail. The froth has gone out of the market, with investment in cryptocurrency and decentralised finance firms, fintechs and special purpose acquisition companies drying up.

“Funders such as venture capital and private equity firms are insisting in the current market environment that financial challengers stop making losses and chart a path to profitability,” says the report. “This will prove impossible for some upstarts in consumer credit, payments and robo-advised fund management. Others will have to sharply curtail their expenses, including for marketing and customer acquisition. The culling of competition will ease pressures on established banks, insurers and fund managers.”

Overall, the EIU believes that a number of enduring trends will sustain most financial firms. “Most will enjoy a tailwind from citizens’ rapidly rising use of formal financial services, increasing needs for savings for ageing populations and the huge financing needs for policy objectives such as decarbonisation and infrastructure improvements,” says the report. “A shift to digital strategies focused on mobile and online services will allow firms to close physical locations and trim staff expenses.”

Not to be overlooked, next year will see a major milestone on the regulatory front. January 1, 2023 is the final implementation dates for Basel III (also known as Basel IV), after having been delayed by one year due to the pandemic. While customers will not notice the changes, this will “require new government regulations and will change the way that banks account for base capital, credit risk using standardised or internal models, as well as mandatory disclosures”, according to the report.

Joy Macknight is editor of The Banker. Follow her on Twitter @joymacknight

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