Complex Made Simple

Predictions and trends impacting finance and banking in 2021

COVID-19 has certainly helped catalyze a move towards digitization. Banking and finance stand to reap benefits in 2021

The UAE is leading the way when it comes to utilizing fintech to foster and develop smart cities There is still a need for relationship banking, particularly for vulnerable and non-digital customers The GCC public cloud market is expected to grow from $956 million this year to $2.35 bn in 2024

COVID-19 is still very much present in our midst, spreading not only a killer virus but also economic uncertainty and unease. 

But it has certainly helped catalyze a move towards digitization. Banking and finance stand to reap the benefits of this via fintech, cloud adoption, and more.

Below we look at what the experts are saying regarding these and more.    

China’s new digital currency inspires a tectonic shift in capital flows

In its ‘Outrageous Predictions: The Future is Now,’ Saxo Bank says that in 2019, 80% of all payments in China were via WeChat Pay and AliPay.

“The People’s Bank of China (PBOC) wants to take this one step further and in the process improve the efficacy of monetary and fiscal policy through an increasingly cashless society,” the bank said.

The Digital Currency Electronic Payment (DCEP) will be a blockchain-based digital version of the Yuan (CNY). 

Allowing full access for foreigners into Chinese capital markets will reduce the main barrier of concern for foreign investors for using the CNY in trade and investment: its liquidity and direct access to their investments inside China. 

Meanwhile, the stability of the Chinese currency and the built-in traceability and oversight that blockchain tech enables would virtually eliminate the risk of capital flight or illegal transfers out of China. 

Read: Recession, oil, fintech, crypto, China and GCC economies in 2021 and beyond

Increased investment in fintech

Miljan Stamenkovic, General Manager of the Middle East and North Africa region at Mambu, a SaaS cloud banking platform, revealed the ‘2021 Banking and Finance Predictions’, of which we picked 3 starting with fintech.

The United Arab Emirates is leading the way when it comes to utilizing fintech to foster and develop smart cities. In fact, Clifford Chance named the UAE as the MENA’s leading financial technology market, predicting that it will increase to $2.5 billion by 2022.

The digital push that was imposed on businesses by COVID-19 indicates we can expect to see many digital banks continue to come to life as financial institutions make the transition from traditional to online.

Similarly, we also see that significant changes in consumer spending habits with more demand for digital banking to continue. According to the National Economic Register reported by Emirates news agency WAM, UAE’s e-commerce sector was issued the highest number of licenses, 196 in May 2020, while the first five months of 2020 saw a 300% rise in consumer demand for e-commerce services.  

A return to relationship banking

There was a time when having a personal relationship with your local branch commonplace. Digital technology changed this, focusing on convenience, increasing competition, and making the mobile customer experience the key differentiator. While these advancements have benefited customers in many ways, in some instances it has placed the emphasis away from the customer-centric model which once defined banking.

There is still a need for relationship banking, particularly for vulnerable and non-digital customers.  With many new entrants, banks are now faced with having to adjust and ward off competition, while also maintaining the relationship with customers who favor traditional banks and processes, as well as those who prefer digital banking.  

Key services in the GCC market that still require relationship banking are wealth management, retail banking, and trade finance mainly because they still require advisors, account managers, etc.

Read: Infor’s top cloud and AI technology predictions for 2021

A significant increase in cloud adoption within banking

The business risk to not implement cloud technology has overtaken the technology risk. 

With competition reaching critical mass in the banking industry in recent years, agility is essential in being able to compete and drive new products quickly to market. A bank can no longer decide to forgo modernization and cloud adoption unless they are open to the risk of becoming overtaken and obsolete.

As the COVID-19 crisis continues to evolve, banks are navigating blind on how to proceed. This has emphasized the need to have a system that allows banks to pivot quickly and smoothly. 

According to IDC’s research, the GCC public cloud market, which includes IaaS, SaaS, and PaaS, is expected to grow from $956 million this year to $2.35 bn in 2024, at an annual growth rate of 25%.

Finally, Barclays Private Bank has released their 2021 Outlook, of which we selected 2 developments as detailed below. 

Financial markets on a leash

While volatility may be less elevated next year, financial markets and the economy could remain at the mercy of COVID-19 developments, especially on a fast vaccine rollout. 

We expect a growth rate of close to 5% in 2021. That said, some areas of the economic landscape may change dramatically. High government debt levels are a legacy to manage carefully and inflation is a risk to monitor.

Turning to financial markets, in a world characterized by record-low rates and high equity valuations, the five-year expected total returns on equities and bonds are likely to be lower than previously. 

As for equities, coronavirus is shuffling the cards, accelerating structural trends. The rise of technology companies, aided by home working and online retail sales, reflects the attractions of growth.  

The pandemic showed the limitations of only relying on equities and government bonds. We see value in adding alternative assets such as private markets, gold, or hedge funds to a portfolio to diversify and improve its risk-return profile.

Sustainability will be key

Another area of interest is sustainability, as pandemic recovery plans from governments have a sustainable bias. Companies too are being drawn to opportunities available, and potential growth prospects, from transitioning to a low-carbon world. Similarly, including environmental, social, and governance (ESG) considerations in asset selection can boost returns. The momentum behind investing sustainably, and with ESG considerations, suggests that increasingly, investors agree.