- Major economies face a potential downturn due to factors like COVID-19, geopolitical conflicts, and high inflation rates
- Gabriella MacKenzie, Head of Luxoft Insights, explains how financial institutions can navigate these times by embracing digital transformation across all operations, leveraging automation, AI, and optimized cloud usage
- The changing economic scenario influences global wealth, with growing emphasis on ESG investments and changing customer segments
- Luxoft offers robust digital solutions and insights to help banks and financial institutions mitigate the effects of economic downturns and strategize for future growth
It is no secret that the world economy is facing significant challenges. Major economies are on the brink of a downturn, and some may even be entering a recession. COVID-19 and geopolitical conflicts, such as Russia's invasion of Ukraine, have caused significant upheavals while the unexpected high inflation rates of 6.5% in the US and 9.2% in the Euro area in 2022 have also exacerbated the global economic uncertainty.
These pressures, plus the declining global GDP growth rate, have caused those in the financial services industry to question how financial institutions can navigate these tumultuous times. Luxoft Insights delves into this complex landscape in order to offer strategies to mitigate these impacts.
What’s driving the downturn?
Multiple economic factors, such as increasing interest rates, inflation, and the rising costs of natural resources, along with geopolitical uncertainties around global elections, heightened tensions, and climate-driven conflicts are all contributing to the current crisis. All financial institutions, regardless of specialization, are feeling these effects.
Moreover, this recession is distinct from those passed as decision-makers must tackle multiple simultaneous interlinked disruptions that did not occur all together in previous recessions.
The current state of the financial services industry
Interestingly, despite the downturn, the largest banks appear more prepared for this crisis than they were in 2007, suggesting lessons were learned the hard way. This readiness can, in part, be attributed to digital transformation and the implementation of IT solutions. Many investment banks have even posted impressive returns and boosted their Return on Equity (ROE) due to the volatility.
However, the crisis has not left the financial sector unscathed. For example, a reduction in lending operations and other banking services due to low demand is evident, as is the shift towards investment in safer instruments. The downturn might also impact homeowners struggling to make mortgage payments, leading to increased mortgage defaults.
Mitigation strategies: Embracing digital transformation
To mitigate the effects of the downturn, financial institutions must embrace digital transformation and strategically implement it across front-, middle-, and back-office processes.
Operational efficiency through automation can minimize the risk of errors and increase the convenience of services, substantiated by the fact that 49% of banks have indicated that they will increase their investments in automation.
Process automation can lead to a significant cost reduction – as high as 70% in some cases – ensuring consistency and transparency of repetitive manual workflows.
Artificial Intelligence (AI) for data management can yield cost and efficiency results, enhance fraud detection and compliance, improve personalization and productivity gains. Approximately 60% of banks have embedded at least one AI capability.
Optimization of current cloud usage remains a top initiative for 59% of organizations, helping to avoid overspending and underutilizing resources.
Overall, digital transformation can improve operational efficiency, open new ways for client engagement, and modernize business models. 53% of banks have reported a positive impact on business metrics due to digital transformation.
The changing landscape of global wealth
The current economic scenario is also influencing global wealth and revenue pools. As the affluent and High Net Worth (HNW) categories show robust growth, the mass-affluent segment will become more influential in the future. Meanwhile, commitment to Environment, Social, and Governance (ESG) is also growing, with a rise in ESG Assets Under Management (AUM) due to investors' interest in value-based investing.
Looking forward: Rising above the downturn
Given the current economic climate, the financial sector, like all sectors, faces a considerable challenge. The potential recession on the horizon marks a turning point, but it also provides an opportunity for innovation and growth. By leveraging digital tools and technology, financial institutions can fortify their operations and emerge stronger on the other side of the downturn.
The role of Luxoft
As a leading technology services provider, Luxoft plays a crucial role in helping banks and financial institutions navigate this economic downturn. We provide robust digital solutions and insights that can help organizations streamline their processes, minimize risk, and maximize operational efficiency. Employing an approach guided by in-depth analytics, Luxoft's solutions prepare organizations to alleviate the effects of economic downturns while strategizing for future growth.
By leveraging automation, AI and cloud computing, Luxoft's solutions enhance process efficiency, ensure consistency and transparency, optimize resource usage, and provide personalized customer experiences. This digital transformation has been proven to yield positive impacts on business metrics.
The future of banking: Embracing change
The banking sector is witnessing an unprecedented shift in the way business is conducted with traditional banking services being replaced by digital alternatives that provide greater convenience and efficiency. Despite the challenges posed by the economic downturn, banks that embrace this change are likely to thrive and outperform their competitors.
An increase in automation investments, a surge in the adoption of AI capabilities, and a focus on cloud cost control are all promising trends in the banking industry. Luxoft Insights predicts that these trends will continue to shape the sector in the coming years, allowing banks to provide superior customer experiences and achieve higher operational efficiency.
With a changing landscape of global wealth, financial institutions must also adapt their strategies to cater to evolving customer segments. The growing mass-affluent segment presents a significant opportunity for banks to expand their services and tap into new revenue streams.
Digital transformation for the future
In these turbulent times, it is essential to adapt and innovate. The current economic downturn has created undeniable challenges for the financial sector, yet it has promised a bright future where banks can reshape their strategies and embrace the potential of digital transformation.
Luxoft is committed to guiding financial institutions through these changes and helping them seize new opportunities. By leveraging digital tools, data-driven insights, and strategic research, we aim to equip organizations with the knowledge and resources they need to navigate the downturn and build a resilient future.
At Luxoft, we believe in the power of technology and innovation to overcome challenges and drive success. As the financial sector evolves, we're here to provide the insights and solutions needed to thrive in a changing world.
Interested to know more? Get in touch with Luxoft today!