As we enter 2025, it’s time to look forward and consider what the year ahead may hold for the Financial Services sector. Continuing change and volatility across global and domestic markets makes forecasting particularly challenging, but our Financial Services team have identified key trends that are likely to be evident over the next 12 months.

Our thinking benefited greatly from the recent Johnston Carmichael Financial Services report, which we published in November 2024. Responses from over 300 senior executives offered their valued perspectives on a sector that is still experiencing profound transformation – driven by technological advancements, shifting customer demographics, and ongoing fiscal and regulatory reforms.

Five key trends for 2025

1. AI – shifting from concept to business case

Whilst the opportunities presented by AI capabilities have been rapidly recognised by firms, 2025 will see many take a step closer to realising the potential of AI with the development of more granular business cases – shifting from concepts and ideas towards practical uses and realised benefits. Our survey showed that 53% of organisations intend to make substantial investments in the next two years in areas such as process automation, artificial intelligence, and machine learning.

Data quality remains the key to realising the benefits of AI, although 3 in 10 firms still see this as the main barrier to adoption and integration. 2025 needs to be the year when datasets achieve a critical mass of both quantity and quality, training AI enable meaningful insights and informed decisions.

This rapid adoption will also require a focus upon transparency, data privacy, and robust governance to ensure the new technology is controlled, compliant, and effectively managed.

• Retail banking – predictive AI has enabled more efficient risk assessments and fraud detection, based on customers' transaction histories.
• Insurance – AI-driven analytics and real-time data enables insurers to better tailor pricing models, improving risk assessment accuracy and reducing underwriting costs.
• Wealth – AI-driven analysis empowers wealth managers to predict needs and preferences, offering more personalised financial advice and product recommendations to customers.

2. Mergers & Acquisitions – more deals to be done

2024 saw increased M&A activity, especially in the retail banking sector. The mergers between Nationwide/Virgin Money and Cooperative Bank/Coventry Building Society, as well as the acquisitions of Sainsbury’s and Tesco banks, highlighted a continued appetite for deals as organisations seek synergies in their business models and leadership teams. 

With the prospect of further interest rate reductions in 2025, the incentive for inorganic growth will become increasingly appealing.

• Could larger ‘Group’ structures offer opportunities for growth through diversification, scale, and coverage? For example, the Skipton Group includes a building society, estate agency, and technology business.
• Could cross-border deals enable institutions to diversify their customer bases geographically, potentially into territories with regulatory advantages? (Conversely, could domestic pressures lead foreign owners to divest from non-core business lines or territories?)

3. Consumer Duty… again!

The embedding of Consumer Duty into ‘BAU’ is well underway, capping a significant year with the final regulatory deadline for implementation and the first of the annual Board Reports being agreed. Yet, the FCA's priorities (published December 2024) emphasise that the industry’s cultural change and scrutiny of individual firms still has some way to go.

For 2025, firms need to expect and pre-empt a higher bar for standards. As well as feedback from the first Board Report, the FCA’s work into vulnerability will challenge firms to go beyond a binary focus upon ‘identification’ and ‘treatment’. Work around customer support and communications also signposts that the regulator will reach deeper into journeys and further into the customer lifecycle.

Many firms have developed an interim view of Price and Fair Value, so we expect these models to mature over the next year. Just as the regulator will focus upon industry hotspots, so individual firms should seek out anomalies and pockets in their own business where the value offered to particular cohorts of customers varies from the norm.

• With the last two of the FCA’s Financial Lives Surveys suggesting 1 in 2 UK adults may be vulnerable, how do firms identify and address the practical implications, especially where characteristics are hidden, not disclosed or even acknowledged?
• How well are third party service providers overseen and managed by firms, especially where they have a significant influence over the outcomes delivered to customers?

4. Investing for the future, not just the present

Both global and UK economies continue to navigate a challenging environment characterised by high inflation and slow growth, with central banks using interest rates as their primary policy tool. Currently at a 15-year high of 5.5%, UK interest rates are exerting downward pressure on consumer spending and business investment, further complicating growth prospects for firms.  Whilst overall consumer defaults have not reflected previous peaks in 1992/3 and 2008/9, the rising cost of borrowing has stretched affordability for many customers.

Faced with this pressure in core markets and territories, we’ve already touched upon how mergers and acquisitions – including cross-border banking partnerships – are providing an attractive avenue for growth, by building a diversified customer base.

Additionally, many organisations are investing heavily in technology, driven by customer demand for better digital services and a need to compete with the experience-led solutions offered by fintechs – for example, HSBC is investing billions to improve its customer experience through digital platforms. For many banks, these significant investments – equating to several years’ worth of profits – are a bet worth making on their continued viability, even if platforms will ultimately require further upgrades within 5-10 years.

As we enter 2025, we expect firms to pivot investment priorities further towards more future-oriented capabilities. By creating longer-term strategic growth in areas such as technology, talent acquisition, and customer service, firms are more confident in building upon platforms that will persist for the decade ahead.

One of the primary beneficiaries will be customer experience, which was identified in our survey as a strategic priority for 57% of companies.

• Driven by regulatory pressure and a cultural shift toward “putting customers first”, banks are striving to retain their customers by leveraging a blend of in-person and digital services to meet consumers’ “phygital” needs seamlessly.
• Insurers are now focusing on the delivery of more personalised products and services to retain customers and meet evolving expectations.
• In the Wealth sub-sector, investments in innovative technology will enable the sector to provide tailored advice to a new generation of investors, who prioritise convenience, personalisation, and simplicity.

5. Resilience – a stable base to weather the storms

2025 is poised to be another challenging year, testing firms' resilience as they navigate uncertainties. Global volatility will likely persist, driven by economic and political shifts. Cross-border conflicts are likely to intensify the demand for stable markets and pricing. Within the UK, the impact of the recent budget will play out across the overall economy, government spending, and consumer confidence. Additionally, rising risks of data leaks and cyberattacks make robust cybersecurity essential to protect customer trust and financial stability in an increasingly digital landscape. Businesses will need that relentless focus to safeguard against criminal attacks, outages, and ransom demands. Getting all of this right is business critical in order to maintain trust and avoid reputational damage. No organisation wants to become the latest victim to this rapidly growing challenge.

This challenging environment will continue to drive organisations to sharpen their competitive advantage, developing a deep understanding of their target markets, and balancing the focus on both customer acquisition and retention.

At the same time, firms must also uphold the strength of oversight and controls that will ensure their business models, infrastructures, and strategies have the resilience to withstand external pressures.

• The launch of the EU’s new Digital Operational Resilience Act (DORA) on 17 January is an opportune time for firms to examine their own resilience and security best practices.
• A recent Bank of England (BoE) survey revealed that around half of firms plan to raise prices in response to tax increases, while a similar proportion expect to restructure their operations. These uncertainties highlight the critical need for banks to effectively manage financial risks and perform comprehensive scenario testing.
• Within the Insurance sub-sector, persistent systemic risks (including geopolitical uncertainty, inflation, and climate change) continue to drive consumer price sensitivity, increasing policy cancellations as customers seek to cut monthly expenses.

Summary

It remains difficult to predict which of these five key trends (and in what combination) will be most prevalent in 2025. However, one thing is certain – Financial Services will remain in the frontline of transformation. Those organisations who anticipate the future trends that have greatest impact for them, and plan accordingly, will be best positioned to meet the opportunities and challenges ahead.

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