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The financial services sector has continued to change rapidly in recent years. Operators have had to adapt quickly to policy changes and mounting competition from external parties to remain operable, resulting in structural changes across several markets. These changes have had mixed results for procurement professionals.

Interest Rates

  • The Federal Reserve has continued to increase the federal funds rate during the three years to July of 2019.
  • The Federal Funds Rate target range was decreased to 2.0 to 2.25 in August 2019 after the Federal Open Market Committee assessed the current economic conditions.
  • The Committee is waiting to assess economic conditions relative to its objectives to determine any future movement of the federal funds rate.
  • The cost of borrowing capital rises as the federal funds rate increases, hurting borrowers

Key Takeaway: Lenders adjust rates on loans and credit cards in response to changes in the federal funds rate. With the federal funds rate reaching its target and reducing slightly, buyers are not expected to face increasing interest rates until the Federal Reserve makes a decision about future rate strategy.

External Competition

  • Banks have recently faced greater competitive pressure from financial technology (fintech) firms
  • Artificial intelligence, big data and blockchain technology are among the biggest disruptors
  • Fintech firms have been flooding markets like payment processing, boosting competition among providers
  • Peer-to-peer lending platforms have emerged as viable alternatives to traditional bank lenders

Key Takeaway: The proliferation of fintech has altered the competitive landscape in several markets, whereby traditional financial services providers have had to compete more intensely for market share. Buyers should leverage competition between operators, especially among smaller providers fighting for market share, to achieve favorable contract terms and pricing.

Outlook

During the next three years, ProcurementIQ projects that average prices for financial services are projected to continue climbing, though, at a somewhat suppressed rate. Growing corporate profit and increasing business activity will drive demand for financial services, pressuring prices upward. However, the recent reduction in the Federal Funds target rate and the effective rate is expected to reduce interest rates slightly, weakening demand for some of these services.

Meanwhile, financial services providers have received some relief from policy changes introduced in May 2018. President Trump signed into law the Economic Growth, Regulatory Relief and Consumer Protection Act, which deregulates the banking industry by amending key provisions of the 2010 Dodd-Frank Act. The law aims to eliminate regulatory hurdles and compliance costs for small banks and credit unions, boosting their profitability. Overall, providers’ high and rising profit margins will give them additional room to negotiate on service rates without fear of hurting their ability to operate. Buyers should capitalize on this fact, along with mounting competition between providers, to better their leverage in negotiations.

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