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:
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.
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.
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.
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).
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.
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.