19 Apr Twenty years of financial services. Our look at the past and into the future.
In the 20 years that PX has been advising clients on pensions and wealth, much has changed in the financial services sector. We thought we’d look at some of the key changes from the past 20 years, as well as our top predictions* for the financial services of the future.
Our top 5 financial changes of the past 20 years
Contactless debit and credit cards
The way in which people spend their hard-earned money has changed dramatically in 20 years. We can pay for services with a swipe – not just of a debit or credit card, but of a smartphone or watch. This all started back in 2007 when Barclaycard introduced its contactless cards – and by the time a £5m ad campaign hit out TV screens 1 million people had them in their wallets.
While some people think cash is the safest form of currency, the convenience of contactless has seen a dramatic uptake in cashless payments and today there are 135m cards in circulation.
Pensions ‘A Day’
In 2006 sweeping changes were made to pensions by the UK Government and the simplifications became known as A Day. Under the new rules you could contribute and receive tax relief on up to 100% of your earnings each tax year, subject to an annual limit. Anyone could be a member and contribute to as many different pension schemes as they wanted up to their annual allowance. A cap on the total amount you could put into a pension over your lifetime was set at £1.5m, increasing to £1.8m by 2010/11.
They also changed the age at which you could draw your pension from 50 to 55 (which came into effect in 2010). On retirement anyone could withdraw up to 25% of their fund as a tax-free lump sum, subject to the rules of their scheme. And the old rule requiring an annuity to be purchased by age 75 was scrapped, enabling the option of an alternatively secured pension instead. While in recent years these changes have flexed and adapted, this was seen as a landmark simplification of the rules.
The 2007/8 financial crisis
The financial crisis of 2007/8 was a global phenomenon – and it rocked the UK financial sector and led to some significant financial changes. We saw the collapse of some banks and government bail-outs. The UK Government injected £137 billion of public money in loans and capital to stabilise the financial system.
The finger of blame was firmly pointed at cheap credit and relaxed lending standards that fuelled a housing bubble – that inevitably burst. Banks were left holding trillions in worthless investments in subprime mortgages. The worst recession since 1945 ensued. Changes were necessary, and the global financial system has become less interconnected and vulnerable than before, with less money flowing across borders.
The lack of trust in banks and regulatory changes following the 2008 crisis not only opened up the market to new providers but lit a fire under Fintech – financial technology. In 2009 we saw the birth of Bitcoin followed by other cryptocurrencies using blockchain technology. Smartphones started to become the primary means of accessing the web and other financial services. And newly established banks and digital banking products using Open Banking, that allows third-party companies to access financial data, fuelled a rise in digital banks seeking to improve the customer experience.
The Covid pandemic
We’re still in the throes of the woes caused by the Covid-19 pandemic, with the UK officially back in recession in November 2022. For the pubic we saw a necessary move to home working, and billions was paid out to businesses and employees via the furlough scheme. Yet there was a sharp increases in characteristics of vulnerability such as poor health, low financial resilience or negative life events placing greater demands on the financial services sector to protect and support vulnerable customers. For example, the FCA in 2021 suggested 1 in 6 households had opted for mortgage payment deferrals. The effects of the pandemic are ongoing.
Our 5 predictions for the future of financial services
What will the future of financial services look like over the next 20 years? These are our predictions – and may, of course, not come to fruition!
A shift in wealth
We believe there will be a shift in wealth in coming years. The State Pension age is gradually increasing for men and women, and will reach 67 by 2028. And with expected changes in life expectancy – with more of us living into our hundreds – this remains under review.
Money will pass from baby boomers to Gen X and Millennials – a group that is more racially and culturally diverse, that has a different outlook on lifestyle and investment, and is both more educated and socially connected. The amount of private wealth is also expected to shift towards women, who tend to have different goals from men and react differently towards risk. So we expect to see a more risk-averse, more socially conscious pattern of investment that is open to embracing new forms of services signalled by the Fintech era.
The number of people with mobile phones by the end of 2021 was around 8.3 billion and growing as quickly as the world population. This alone will affect the type of investments, retirement products and insurances available.
The decline of the West and rise in the East
While we’re currently in the Fintech 3 era, people are looking towards Fintech 3.5 – which accounts for the changes in consumer behaviour and how they access the internet in the developing world. This signals a move away from the Western dominated financial world towards the advances in digital banking around the globe. The influence of China and India is sure to grow, with their developing banking systems that haven’t been burdened by the brick and mortar legacy of the West. They will be better able to adopt new solutions more quickly than their Western counterparts.
Blockchain and crypto currency
While it’s not new, Blockchain has opened up new possibilities in financial automation and transactions, and we expect significant changes in how we see our personal financial positions in the coming years. Imagine periodic reporting and valuations being instant and real time, and self-service becoming the norm as people can make financial decisions in more secure ways and with more information. And imagine the computing power of the future. Transactions could be made if not in nano-seconds then far more quickly than the days or sometimes weeks we see now.
Cryptocurrencies could also easily become a mainstream that overcomes cross-border exchange rates and makes currency truly digital. Could pension plans convert to crypto, or be valued through an online pensions and investments universe?
Artificial intelligent investing
Dare we say ‘robo advisors’ will be making investment decisions for you in the future? And if they do, would that make it a more level playing field for everyone – with AI and machine learning effectively coming up with the same decision on your circumstances, wherever you get your advice? From your likes and dislikes to your spending habits (which we’re already seeing to some extent via Open Banking), your outlook could radically change your investment and wealth options.
Money management will become more transparent and you will have more choice to invest your wealth in ways that meet your values. Currently many of your investments may be out of your control with the brief just to create growth or income, which means you could unwittingly being investing in initiatives you don’t support. Could this mean banks and financial institutions have to really get to you know you again – even if it’s through artificial intelligence?
Alongside this sits ‘invisible identification’. Forget the current forms of ID. The future could use invisible forms of identification, enabling you to access financial products and investments anywhere quickly and securely. Behavioural biometrics, for example, brings an extra layer of security to help determine the probability that you are who you claim to be. This will offer a smooth end-user experience, balancing greater security with greater convenience. But what is the pay-off? More financial institutions and ‘algorithms’ knowing all about you!
We could move to DeFI – decentralised finance – where the idea of brokers, IFAs and banks is swept away and we embark on smart contracts on the blockchain.
It’s a complex concept but is already making strides. In effect DeFi is replicating financial services in an open and transparent manner where applications are not managed or controlled by any central authority but based on blockchain technology and transactions between users. A smart contract means that the terms of an agreement between buyer and seller is represented directly in lines of code – and it is the code that enforces them, not institutions. If you need a loan you won’t go to a bank but can borrow (or lend) in a peer-to-peer network.
It will be interesting see see what the future holds. In the meantime, contact us if you have financial query.
* Please note, our predictions are only our thoughts at a point in time and cannot be guaranteed.