With the recent banking implosion, the global financial services industry, technology companies, and service providers will be hit in different ways. Let’s explore the reverberations of these concerning banking trends.
The failure of Silicon Valley Bank (SVB) along with Silvergate and Signature Bank raises the question: Are these isolated incidents or signs of greater trouble in the financial services industry signaling a recession in the US? We believe this will start a domino effect impacting banking regulations, profitability, and technology spend.
The recent collapse of the banks will have repercussions across the financial services system and may trigger the following aftermaths:
- Opportunities for large banks to capture business from banks with similar concentration sector risks of sectors that are seeing slowdowns (e.g., the start-up and tech concentration for SVB)
- Rising mergers and acquisitions (M&As) to counter concentration risks and take advantage of current banking valuations, especially in the mid-market and regional banking segments
- Reversing rate hikes by the Federal Reserve could bring about a multi-fold impact, as most organizations have planned their business strategy with the assumption of additional hikes for rates in 2023
- Tightening of spend across organizations to manage near-term profitability. This could also cause spending slowdowns this quarter for IT outsourcing suppliers. Discretionary spending also will dry up, and decisions on new large modernization deals will be delayed
- Declining revenues and loss of business in the current and following quarters for IT outsourcing suppliers catering to these banks
After the dust settles, these bank collapses can bring about the following two key learnings in the long term:
- Data and analytics and Artificial Intelligence (AI) technologies could play a key role in better risk management (e.g., for the SVB asset-liability mismatch issue) to predict similar risk scenarios and prevent future failures
- Additional stress test scenarios can help avoid future bank runs on non-SIFI institutions
Banking trends and impact
As the events played out, Moody’s downgraded its view on the US banking system from stable to negative, citing a rapidly deteriorating operating environment. Banks with sector-specific concentration risks, specializing in two or three sectors, have grown deposits in the last couple of years and also have a higher percentage of customers with average deposits exceeding the FDIC-insured limit, putting them at higher risk.
These banks will need to assess their portfolios and provide assurance to their customers. Even with these guarantees, customers still may decide to change their banking partners and seek traditional large banks that have more liquidity, impacting regional and smaller banks’ growth.
Declining customers and subsequent deposits will also affect other banking portfolios, and digital and technology transformation spend may take a hit. Banks’ risk management functions also will be scrutinized again. For example, only one of the seven members of SVB’s Risk Committee had risk management experience.
Implications for the financial services industry
The global financial services industry also could be impacted. Other geographies like Japan and the UK are showing signs of distress with banks of similar portfolios and exposures.
The bank failures could have a lasting impact on the sector as the financial services industry restructures and implements new processes to avoid similar scenarios, including:
- Stricter stress testing rules to prevent further risk to the nation’s financial stability
- Increased frequency and number of stress testing within banks as they reassess their portfolios and plan for any asset-liability mismatches
- Greater focus on banking governance in the US triggered by the questions raised over systemic risk exemptions for SVB and Signature
- Layoffs and hiring freezes as the industry becomes more prudent and conservative
- Larger banks taking business from banks that have similar risk issues and might struggle
- Rising M&As, especially in the mid-market and regional banking segments
Opportunities for providers
Here are our recommendations on how technology and service providers can capitalize on these new banking trends:
- Adopt a multi-stakeholder approach with large banks: More than half of the business and financial services (BFS) technology spend comes from Tier 1 banks, and we expect investments by these market giants to remain strong and even expand to address the ripple effects. Providers should adopt a multi-stakeholder approach to target risk and compliance, marketing, operations, technology, and business unit leaders who all might course correct their strategies (in response to potential Federal Reserve reverse rate hikes, products being stress tested, new ones being launched, increased regulatory reporting activity, etc.)
- Prioritize accounts for small and mid-size banks and credit unions: Service providers need to re-prioritize their account strategy for these banks as they renew priorities and focus areas. We expect overall spending by small- and mid-size banks to decline, making it critical for providers to identify and pursue the right accounts with the most relevant messages (based on the level of financial health)
- Reenergize pre-COVID cost-takeout playbooks with next-gen elements: As banks come under immense margin pressure, some asset takeovers and carve-out opportunities may arise. A solutions mindset will resonate more soundly with clients than a pure talent-led play. Providers should plug gaps by working with technology partners and/or bring in-house technology assets.
We expect an increase in offshoring intensity and a push for captive setup conversations through a build-operate-transfer (BOT) model approach. Service providers should watch the direction of US dollar prices as commercials will need to be revised for the foreign exchange (FX) impact (the double impact of potential rate reversal and wage inflation)
- Support clients on product/portfolio diversification strategies (long-term): BFS firms entering and/or expanding their asset and wealth management business as part of their revenue diversification plan will spike. We hold onto our growth forecast in this segment with renewed affirmation from the market
- Pivot to growth pockets that will be less impacted: Not all lines of businesses will be equally affected. There’s a glimmer of hope for a revival in investment banking, private equity, treasury, and brokerage spending on technology outsourcing. However, cards and payments will stay flat, and lending might struggle
Looking ahead, BFS firms will cautiously approach technology and outsourcing spending, resulting in another quarter of soft demand. We also expect increased medium-term regulatory actions leading to spending increases across risk and compliance functions for non-SIFIs.
Rippling effects across geographies
The recent bank failures have an underlying mix of bank-specific (micro) and macro-economic factors in play. The macro factors have the potential to increase fear in the markets (and depositors) as government bond yields have shown signs of reversing their course, and the added factors of slower economic recovery, inflation, high-interest rates, and the resulting layoffs in specific sectors add further pressure.
Credit Suisse saw a 20% fall in share price on fears of a liquidity crunch on March 15. This also impacted shares of other European banks, such as BNP Paribas, Societe Generale, Commerzbank, and Deutsche Bank falling between 8% and 10%.
We are closely observing the market and regulatory actions and are available for any questions you or your teams might have about the impact of these latest banking trends. Please reach out to Ronak Doshi, [email protected], Kriti Gupta, [email protected], or Pranati Dave, [email protected].
Learn about key trends and the outlook for the global services market in 2023 in our webinar, Global Services: Lessons from 2022 and Key Trends Shaping 2023.