SERVICES: FINANCIAL SERVICES

Developments in the sector

The financial services sector has gone through a period of significant changes over the last few decades.


 

 

These changes have been due to the interplay of a number of factors, such as:

back to top

Financial sector reform 

After decades of ‘financial repression’, most countries in the world underwent significant financial sector reform over the last two decades in an attempt to reduce or eliminate distortions in financial markets, deepen the financial sector and strengthen financial institutions. Trade liberalization — i.e. market opening and the elimination of discrimination against foreign services and institutions — was a crucial part of those endeavours.
  

back to top

Technological developments 

Technological developments are changing the nature of the financial system, modifying the organization of financial activity, and challenging the dominance of traditional distribution channels. The Internet is a good example of this.
  

back to top

Consolidation 

Consolidation in the financial services sector, both domestically and cross-border, is one of the key trends affecting the sector, as a consequence of a perceived need for firms to secure economies of scale and scope in an environment characterized by more open and less fragmented markets. This is reflected in the decline in the number of financial institutions, and the rise of mergers and acquisitions, both in developed and emerging economies. This process has also had the effect of increasing concentration levels in some national markets, and is also changing the ownership structure of domestic financial institutions.
  

back to top

Internationalization of financial services 

Financial services have become increasingly internationalized over the years. The presence of foreign financial services providers in national markets has grown significantly in the last two decades. As shown by recent studies, market shares of majority foreign-owned banks increased dramatically in East Asia, Eastern Europe and Latin America, sometimes exceeding 50 per cent of the market. Cross-border trade in financial services is also an important component of services exports worldwide. In 2005, financial services and insurance accounted for 18 per cent of world exports of ‘other commercial services’. Financial services trade has experienced rapid growth in recent years. For example, between 2000 and 2005, insurance was among the top three fastest growing sectors, with a rate of 14 per cent (WTO International Trade Statistics 2007).
  

back to top

Changing role of financial services providers 

With falling barriers to entry in the financial services industry, the differences between financial institutions have been eroded, and an increasing number of competitive services and products are being offered by different types of institutions. For example, commercial banks have been allowed to enter into investment banking, finance companies provide banking products, and insurance companies also provide different forms of financing.
  

back to top

Competition and outsourcing  

Cost reduction has become a priority for institutions in the new competitive environment, and one of the responses to cost pressures within the sector has been the outsourcing of specific functions to other countries, a process usually referred to as ‘offshoring’. Outsourcing/offshoring has become a significant feature of the international financial services sector.