Have you ever thought about how money circulates in an economy? If yes, then you must know that an individual’s expenditure is another individual’s income.
People take financial services from banks, insurance companies, and asset management firms and pay them for their services. At this point, you must be curious about what financial services these entities provide us. To get an answer to that question, you have to continue reading this article.
This article will analyse the financial services industry and discuss the services it provides. After that, we will also conduct a PESTLE Analysis of The Financial Services Industry to see what external factors impact this industry.
So empty your head and follow our lead. The financial services industry consists of various companies, banks, and stock exchanges across the globe that provide financial services. These financial services providers provide different services.
For example, one of the basic services that banks provide is to save, transfer and borrow money. Moreover, investment banks and mutual funds provide an option to invest. In contrast, insurance companies offer to cover the risk of potential losses due to accidents, health issues, property damage, etc.
In today’s world, an individual can’t operate without utilizing the services provided by the financial services industry. In return for these services, the financial entities charge some premium. That’s how they make money.
The foundations of the financial services industry were laid in the 15th century since that’s when Banca Monte dei Paschi di Siena was established in Siena. It is considered to be the oldest bank that still exists today.
In the coming centuries, more banks started to establish. However, the bank network was spreading slowly since most people didn’t have enough money to save. Even those with huge sums of money would keep it in their safes, not in banks.
The industrialization led to the rapid expansion of the banking industry. As financial transactions increased in the economy, the need for financial institutions increased.
Soon stock exchanges began to emerge. They helped businesses in raising capital by issuing shares. In the same era, investment banks got established and started providing capital to businesses through loans.
In the coming years, the financial services industry evolved as insurance companies and mutual funds began to operate. Moreover, in the late 20th century and early 21st century, the financial services industry started using technology to revolutionize its operations.
Computer-based trading started, and online transactions started taking place. Internet banking made it convenient for people to attain financial services. Currently, fintech companies are working on platforms that will make financial services more accessible.
Now that we have discussed the financial services industry and how it evolved over the years, let’s proceed and discuss what a PESTLE analysis is.
PESTLE analysis is a technique vastly used to analyze how various external factors impact businesses, industries, and countries.
In this today’s PEST analysis, we will discuss how political, social, environmental, economic, legal, and technological factors impact the financial services industry. So without further due, let’s conduct the PESTLE analysis of the financial services industry.
Political factors are the factors that are influenced by government policies or the way of governance. Let’s examine how various external factors impact the financial services industry.
Political stability impacts the financial services industry significantly. People take financial services when they have confidence in the market. For example, people invest in mutual funds or take loans when there is a certainty that everything will function the same way in the near future.
In the case of political instability, uncertainty will prevail in the economy. As a result, people will hold their investments, and borrowers will postpone their borrowing because they won’t know the next government’s policies.
Hence, smooth operations of the financial services industry can only be ensured if political stability exists.
Moreover, government controls the tax rates in an economy. Therefore, if the government increases overall tax rates in an economy, people would have less disposable income to take financial services such as insurance.
They also wouldn’t have enough money to invest in the stock market or mutual funds. Hence, it can be concluded that tight fiscal policy would cause the financial services industry to shrink.
Besides loose fiscal policy, government support is also essential for the growth of the financial services industry. Banks do come to state banks when they are about to default. Therefore, the state bank’s assistance can play an essential role in strengthening the financial industry.
Economic factors impact different industries significantly. This section will discuss how different economic factors impact the financial services industry.
Inflation is a key component of an economy that impacts the financial services industry. In an economy with high inflation, people have less disposable income, so the demand for financial services is less.
For example, an individual with access to money to invest might look elsewhere if the inflation is high. As a result, high levels of inflation impact the financial sector negatively.
Other than that, interest rates affect the financial services industry significantly. Lower interests provide less incentive for people to save. As a result, people invest rather than save.
Hence, in economies with high-interest rates, people tend to save money instead of availing of financial services. This is why high-interest rates adversely impact the financial services industry.
Besides that, economic growth impacts the financial services industry. People in a country that experiences economic growth have a better standard of living and high incomes. As a result, they are more likely to get financial services.
Furthermore, economic growth creates employment, and employees in a formal economy have bank accounts. Hence, economic growth causes the demand for financial services to increase.
Social factors are factors related to society. Consequently, social factors have a great significance on different industries. This section will examine what social factors impact the financial services industry.
The literate population in any country impacts financial services significantly. This is because financial services mainly target educated people with high incomes.
This is why any country with a high literacy rate would have a high demand for financial services. Hence, it can be concluded that the literacy rate and demand for financial services are directly proportional.
Besides that, consumer behavior and preferences impact the financial services industry. For example, there would be less demand for financial services in countries where people are not accustomed to investing in money and capital markets or seeking financial services.
Moreover, the size of a population affects the demand for financial services. In a country with a small population, fewer people would be willing to avail of financial services. However, if a country has a large population, the demand for financial services would be higher.
Other than that, the level of awareness about managing finances among people really impacts the financial services industry. In many societies, people are unaware of how to manage their finances and don’t know how financial services can improve their lives.
Technology impacts every industry significantly. This section will analyze how various technological factors affect the financial services industry.
As technological advancements have taken place, the financial services industry has been revolutionized completely. The financial services industry has used the Internet to make financial services more accessible to its clients.
For example, online banking and banking apps on mobile phones have made it more convenient for people to attain financial services. Moreover, the latest software and data analysis techniques have made it easier for people to forecast future returns.
For example, investors can predict future stock prices by analyzing previous data. Hence, the risk of investing in the stock market has been mitigated, so more people are now willing to invest. In addition, such technological innovations have directed more people to the financial services industry.
On the contrary, as many financial services industry operations have shifted online, the risk of data theft and breaches has increased. For example, recent incidents have taken place where hackers have previously taken out money from banks by hacking online bank accounts.
Businesses and industries have to abide by the laws of the country where they operate. So let’s examine what legal factors affect the financial services industry.
Several laws impact the financial services industry. One law that significantly impacts the financial services industry is the anti-money laundering law. Strict money laundering laws inhibit money laundering through financial intermediaries.
Entities of the financial services industry have to watch out for suspicious money and report it to law enforcement agencies, or else they could face heavy penalties and bans.
Moreover, privacy data protection laws affect the financial services industry significantly. If a country has strict privacy and data protection laws, people would feel comfortable sharing their private information with entities in the financial services industry. As a result, the demand for financial services would increase.
Furthermore, regulations related to the market and the operations of the financial services industry impact the industry significantly. For example, tight checks against insider trading and tough profit disclosure laws can create problems for entities in the finical services industry. Hence, strict regulatory laws can cause the financial services industry to suffer.
Environmental factors impact any industry significantly. In this section of the PESTLE analysis, we will discuss how different environmental factors affect the financial services industry.
People have gained awareness about climate change and realize the importance of protecting the environment. However, this awareness can bring trouble for the entities in the financial services industry, such as banks and insurance companies.
For example, the clients can demand that financial services entities consume clean energy by installing solar plates. Moreover, investors can also demand the mutual fund to invest in companies that have eco-friendly practices. Such demands can create problems for the financial services industries.
Besides that, as climate change is occurring, natural disasters are increasing. Knowing that the financial services industry heavily relies on the Internet to provide its services, if the Internet is disrupted due to natural disasters, the services that the financial services industry provides will come to a halt.
Natural disasters can also damage the buildings of banks, stock exchanges, and insurance companies. Such damage can disrupt their operations temporarily and cost them huge sums of money.
Furthermore, since much attention is being paid to the environment nowadays, investment banks can invest in companies working in the sustainability field. Similarly, banks can offer loans at low-interest rates to companies that follow eco-friendly practices.
The financial services industry is important in today’s world. In every country, it has a lot of significance. The financial services industry consists of entities such as banks, investment companies, stock markets, mutual funds, etc., that provide financial services to their clients.
The history of the financial services industry is pretty long. The first bank was established a few centuries back. From there onwards, the number of banks increased over time. Then the evolution and adoption of technology shaped the financial services industry for good.
Currently, people across the globe are availing of financial services through the Internet just by sitting in their homes. In today’s article, we conducted the PESTLE analysis of the financial services industry to see what impact external factors have on the industry.
The PESTLE analysis framework helped us examine how various political, social, environmental, economic, legal, and technological factors impact the financial services industry. If you found this article enjoyable and would like to read more about the PESTLE analysis technique, look at some of its examples to see how the PESTLE analysis works.