The financial services industry includes various services ranging from banking services to tax preparation. The PESTLE analysis of financial services industry includes discussion on the macro-environment factors that determine the industry dynamics. These factors can influence the performance of businesses in the industry and determine their progress in the market.
Industry Information
| Financial Services Industry | |
|---|---|
| Definition | A sector that provides a range of financial products and services to individuals, businesses, and governments, including banking, investment, insurance, and other related services. |
| Key Players | Banks, investment firms, insurance companies, credit unions, stock exchanges, and other financial institutions. |
| Market Size (2021) | $22.5 trillion (Global) |
| Top Markets (by Revenue) | United States, Japan, China, United Kingdom, Germany |
| Employment | 19.7 million (Global) |
| Growth Rate (2021-2026) | 6.2% (CAGR) |
| Trends | Fintech innovation, digital banking, sustainable finance, increasing regulatory scrutiny, and consolidation within the industry. |
Political Factors
The continuous or repeated political issues in a country limit the growth of the financial services industry. The turbulent external environment makes the industry a high risk segment. The dysfunctional government poses the threat of business closure creating lower investments and financial transactions. This leads to decline in the output and revenue of financial institutions.
Russian decision to invade Ukraine carried negative implications for the financial services sector as some banks closed down operations. The institutions that continued with the operations were facing issues in terms of loan and lending process due to the heightened risk (Damyanova &Taqi, 2023). The banking segment specifically faced a lower profitability due to geopolitical conflict.
The policies of the government pertaining to financial institutions and the overall economic dynamics of the country shape the business environment for this industry. For example the scheme of lending to businesses was facilitated by the UK government, which enabled the different organizations to take loans and manage the impact of the pandemic.
Such schemes are offered as an intervention by the government to reduce the negative impact of external environment on the financial services. Since the industry as at the core of the economy, the government creates policies that are supportive of the firms in the industry.
Economic Factors
he economic condition of a country determines the pace of growth of financial service providers. With economic decline, the banking, lending and debt financing processes slowdown, causing a reduction in the revenues for firms in the industry. There is a higher probability of the people becoming defaulter due to restricted economic activities and high unemployment.
Decisions made by the government influence the economic performance of a country which further effects the way financial services sector performs. One of the main areas which can disrupt the outlook of the industry include inflation. A high inflation has a direct impact on the price structure, increasing the operational expenses of financial service providers.
On one hand, the rate of interest being charged serves as a positive development for the firms in the industry as it increases their interest based earning. However, the people may find it difficult to manage the payment with high interest rates. Purchasing power of the people is negatively affected, while higher interest rates make it more challenging.
Furthermore, organizations are at the risk of bankruptcy, which adds further pressure to the financial services sector as there is risk of defaulter and credit loss. Negative economic environment effect this industry through high inflation rate as well which creates a discouraging outlook for the people thus reducing the number of investments (Batayneh et al., 2021).
Social Factors
The increasing population and life style changes are two of the main social factors which influence the progress of the financial services industry. A large number of people who are in the age range of 60 and above are likely to seek retirement plans, while the population in general would be focusing on borrowing, mortgage, investment, taxation and other related services.
Customers demand better services which pushes the financial service companies to shape their services according to their needs. The digital medium has offered an alternative means of handling the financial transactions and customers prefer it due to the ease of use of the online option. Organizations had to embrace digital presence due to the changing customer preference.
For example, banks have initiated their apps to allow the people to manage financial transactions without visiting in person. The pandemic has further created a higher need of online financial services, which allowed the people to maintain social distancing while handling their financial processes.
Pandemic has also initiated changes for the operations of the financial services organizations. As stated by Heussner et al. (2020) the policies related toTransfer Pricing (TP) and advanced pricing arrangements had to be revisited. Moreover, the risk of credit loss significantly increased due to the pandemic and changing financial stability of the households and businesses,
Technological Factors
The digital payment solutions and financial management via online medium is dependent on technology. Banks and other financial institutions have integrated the technology based processes as a part of their system. These organizations require technology to handle the efficient operations and to avoid facing any glitches in the online services.
Block chain technology and Artificial Intelligence and big data are few of the terms that denote the way technology has contributed in the development of the financial services sector (Turpitka, 2020). The rise of Fintech is another example that shows technological evolution of the financial services.
Legal Factors
The regulations for maintaining security of the consumer data indicates that the firms need to integrate strong cyber security systems specifically for digital medium (Lake & Foreman, 2021). Inability to protect consumer data or overlooking the cyber security mechanism can lead to legal issues.
Moreover, the financial services need to adhere to the regulations related to handling of fraud and financial crimes. Policies developed by the Central Bank also effect the businesses practices of the industry. Moreover, employment laws and labor laws have to be implemented across the organizations to avoid litigations.
Environmental Factors
Organizations in the financial service industry are focusing on their Environmental, Social, and Governance initiatives to indicate their positive role in climate protection. The zero emission goal is applicable to the financial services industry as well, however the industry finds it challenging to achieve this goal owing to the multiple stakeholders involved in the operations.
Another way financial service industry is implementing environment friendly practices is through the initiation of recycling of plastic. Credit and debit cards are made of plastic which can contribute to environmental harm and the financial service firms try to tackle their environmental impact through collecting the discarded cards and utilizing them for new card.
Conclusion
The financial services industry is effected by the external environment, specifically the political, economic and social challenges. Technology development offers growth opportunities to the firms in the industry and help in expanding the operations to digital medium. The management also needs to make decisions considering the legal regulations and environmental standards.
References
- Batayneh, K., Al Salamat, W., & Momani, M. Q. (2021). The impact of inflation on the financial sector development: Empirical evidence from Jordan. Cogent Economics & Finance, 9(1), 1970869.
- Damyanova, V., & Taqi, M. (2023). Russia-Ukraine war splinters Europe’s banking industry. S&P Global. Retrieved from: https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/russia-ukraine-war-splinters-europe-s-banking-industry-74075106
- Heussner, R., Ma’ilei,S., & Weston, S. (2020). How COVID-19 has impacted the financial services sector. International Tax Review. Retrieved from: https://www.internationaltaxreview.com/article/2a6a6bvc2wekzhd70696o/how-covid-19-has-impacted-the-financial-services-sector
- Lake, R., & Foreman, D. (2021). Increase In Digital Banking Raises Consumer Data Privacy Concerns: How To Protect Yourself. Forbes. Retrieved from: https://www.forbes.com/advisor/banking/digital-banking-consumer-data-privacy-concerns/
- Turpitka, D. (2020). How To Improve The Financial Services Industry With Artificial Intelligence And Blockchain. Forbes. Retrieved from: https://www.forbes.com/sites/forbestechcouncil/2020/04/21/how-to-improve-the-financial-services-industry-with-artificial-intelligence-and-blockchain/?sh=43f079a270c6