PESTEL analysis of the financial services industry
This detailed ‘PESTEL analysis of the financial services industry’ explores how this industry is influenced by global macro factors. Financial services are an essential part of the modern economies. This industry comprises of variety of firms and institutions e.g. banks, credit card companies, insurance companies, building societies, lenders, and real estate brokers.
Political factors that affect the financial services industry
Political factors can significantly affect the financial services industry due to its reliance on government regulations. These factors can either positively or negatively impact on it. The major factors to consider include but not limited to legislation and regulation, public policy issues, and the geopolitical environment.
As with all industries, the financial services firms are affected by the regulatory and legal framework that exist in the country in which they operate. However, some analysts argue that unnecessary government involvement is not always helpful for the industry. Conversely, others argue that the government’s intervention is very important for the confidence of the financial institutions.
For instance, in early 2020, the British Government developed different loan schemes to support businesses affected by global lockdowns. As the schemes were backed by the government, the financial institutions made quick decisions to issue loans to interested businesses without much worry.
In many countries, financial services industry may or may not be at the top of the national election campaign agenda. This depends on how political parties see the impact of it on their campaigns. It is worth mentioning that USA, and some other countries may sometimes sanction financial institutions of a country for various reasons.
Economic factors that affect the financial services industry
Economic environment is an important area of discussion in this PESTEL analysis of the financial services industry. Financial services are important contributors to economic growth and employment. This is because they support spending and economic activities through the services they provide.
The macroeconomic factors affecting the financial services industry can have a significant influence on the profitability of the institutions involved. For instance, if a country experiences a recession, then the profitability of financial institutions is likely to be negatively affected, as the demand for debt financing is likely to fall.
On the other hand, if a country experiences steady economic growth, then the profitability of financial institutions is likely to be positively affected, as the demand for debt financing is likely to go up. Financial services are highly conglomerated as well, meaning they are dominated by a few large players. This can make it difficult for new entrants, and limits competition and innovation.
There are some top financial centers in the world that influence the global economy. The leading financial centers are New York, London, Hong Kong, Shanghai, Los Angeles, Singapore, San Francisco, Beijing, Paris, Seoul, and Tokyo. A financial center is considered a strategic location where top financial institutions are concentrated in one area (Norrestad, 2022).
Social factors that affect the financial services industry
The social factors that affect the financial services industry include demographics, lifestyle, lifestyle change, and increasing population size. For example, a growing population of senior citizens will demand a lot of financial services such as retirement planning and healthcare.
The social and cultural factors that exist in a country can affect the demand for products and services within the financial services industry, particularly those related to debt financing. For instance, some people may not use credit cards because of interests which are not allowed by their faith systems.
The number of unbanked populations varies from one country to another. For instance, over 99% people have bank accounts in countries such as Denmark, Finland, Norway Sweden, Canada, Netherlands, New Zealand, Australia, and Germany. On the other hand, only around 10% people have bank accounts in Madagascar, Niger, and Chad. Morocco, Vietnam, Egypt, and the Philippines are also some other countries with very high share of unbanked populations (Norrestad, 2022).
Most youngsters are comfortable to use debit/credit cards, and mobile payment methods for transactions. They may also have PayPal and similar accounts. However, many senior citizens are not much keen on using mobile payment methods.
Technological factors that affect the financial services industry
Technological environment is another key part of this PESTEL analysis of the financial services industry. The technological factors that affect this industry include the characteristics and degree of automation, the growth of digital financial services, and the presence or absence of a technological barrier to entry.
Financial services that are becoming more digital and automated will become more appealing to consumers. At the same time, the lack of advancements in technology, or being unable to bear the costs of technological adoption can be barriers to market entry for new players.
Tessel (2020) states that technology gives people more visibility of all their financial information in a timely fashion. They can check out their credit score, and balance in their bank accounts online. Artificial Intelligence can help them make more educated decisions on cash flow and forecasting. However, it is worth mentioning that tech glitches can also sometimes disrupt the services they need.
Environmental factors that affect the financial services industry
The financial services industry has taken several environmentally friendly initiatives such as paper less bank statements. Customers also do not need to go to a bank branch for many banking activities. However, Mullan, West, and Braithwaite (2021) state that the physical parts and activities of the financial services industry have a direct effect on emissions and therefore, firms need to adapt to the requirements of meeting net zero targets by the government, rather than leaving the action to others.
Legal factors that affect the financial services industry
Legal environment is the last part of this PESTEL analysis of the financial services industry. Different countries have different laws and regulations that affect the industry differently. Generally, financial institutions need to follow the rules set by the central banks. Financial markets and some participants in those markets may also be regulated by some market regulators. Anyone found committing financial crime are subjected to different penalties and sentences. In the UK, the main fraud offences are contained in the Fraud Act 2006 and Theft Act 1968.
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Last update: 27 April 2022
Norrestad, F. (2022) Leading financial centers worldwide 2022, available at: https://www.statista.com/statistics/270228/top-financial-centers-on-the-global-financial-centres-index/ (accessed 27 April 2022)
Mullan, H., West, R., and Braithwaite, M. (2021) Banking, climate, and competition, available at: https://www.fca.org.uk/insight/banking-climate-and-competition (accessed 20 April 2022)
Tessel, M. (2020) Three major ways technology is changing the financial industry, available at: https://www.forbes.com/sites/quora/2020/03/22/three-major-ways-technology-is-changing-the-financial-industry/?sh=20ed841441b1 (accessed 26 April 2022)
Author: Joe David
Joe David has years of teaching experience both in the UK and abroad. He writes regularly online on a variety of topics. He has a keen interest in business, hospitality, and tourism management. He holds a Postgraduate Diploma in Management Studies and a Post Graduate Diploma in Marketing Management.