United States

Financial services industry outlook

Key takeaways from the summer 2020 financial services industry outlook

  • Lenders in banking must decide whether to cut losses or stay the course.
  • Cheap credit and the economic recovery create opportunity in capital markets.
  • The pandemic has accelerated the emergence of the virtual family office.
  • COVID-19 provides a catalyst for digital transformation in the insurance industry.
  • RSM has identified five ways the pandemic is changing private equity.
  • More losses are on the horizon in private debt markets.

See full industry outlook report


The coronavirus pandemic was the perfect storm of sorts for the financial services industry. What began as a supply shock to the economy quickly morphed into a demand shock, and financial services firms were left scrambling to adapt as markets unraveled, working environments changed and the longest running business cycle in American history ended. Now, with the economy reopening and markets more stable, financial services firms are looking for the best way to prepare themselves for the post-coronavirus landscape. From managing credit risks among borrowers to embracing digital initiatives to reemphasizing opportunities for revenue growth, financial services firms are now searching for the best way through an economic landscape that few could have imagined only six months ago.



Financial institutions have been busy since the launch of the Paycheck Protection Program (PPP) on April 3. In that time, financial institutions and other lenders have funded more than $514 billion of the program’s $659 billion in allocated assistance to small and midsize businesses as of June 20.

But that, in a sense, was the easy part. Now, the lenders are facing a new challenge. As the economic recovery begins to take shape, lenders are in the early stages of processing nearly 4.5 million applications for PPP loan forgiveness, giving them a better picture of their borrowers’ financial condition.

It is at this point that financial institutions will be faced with a dilemma: Do they mitigate future credit losses over commitments to borrowers, or do they bear down and work with borrowers through the sharpest economic downturn in recent history?

To find the answer, they will have to look beyond the traditional economic data, which often summarizes events that have taken place, and consider using alternative data that has a more forward-looking focus.

It’s clear that the assistance provided through the PPP and the recently launched Main Street Lending Program has been sorely needed for those businesses hit hard by the coronavirus pandemic. Yet these loans, even if they are ultimately forgiven, are only part of the answer. It will take a long time for businesses to even partially recover from the supply and demand shocks that brought the economy to a dead stop.

MIDDLE MARKET INSIGHT: Financial institutions will be faced with difficult decisions on extending future credit should the government assistance not be enough for some borrowers.

Already, many financial institutions have also offered loan modifications to help businesses weather liquidity challenges. But for some borrowers in industries that have been hit harder than others, forbearance will eventually lead to loan losses.

In the end, financial institutions will be faced with difficult decisions on extending future credit should the government assistance not be enough for some borrowers.

This is especially the case for businesses in higher-risk sectors like leisure and hospitality, restaurant, retail, manufacturing, and energy exploration. Lenders to businesses in these industries will need to understand not only the specific financial situation of their borrowers, but also the industry as a whole. While all industries have been affected, the recovery of each will look very different.

To assist in monitoring their credit risk, lenders should not only look to leverage the financial information their borrowers make available, as well as economic information published by myriad sources, but they should also seek out alternative data sources to assist in this process. Examples of using such data may include:

  • Analyzing reservation data from OpenTable to assess how and when consumers are returning to dining establishments
  • Analyzing TSA traveler data to study patterns that may help in assessing recovery of hospitality and leisure businesses
  • Analyzing payment transaction activity from First Data to understandwhen customers are returning to retail establishments and how much they  are spending

As financial institutions have become a conduit for providing government assistance to small and midsize businesses, the effort required to help their borrowers weather an unprecedented economic storm while at the same time protect their bank from credit losses is far from over.

THE TAKEAWAY: Understanding borrowers’ needs will not stop with simply knowing their current financial state. It will increasingly become important to look for alternative ways to assess their performance and determine what recovery will look like to navigate the remainder of 2020.



As the longest-running business cycle in U.S. history came to a sudden halt during the first half of 2020, the shock that reverberated through the capital markets affected businesses and industries in different ways.

With financial conditions tightening and as uncertainty grew, underwriting slowed for high-yield borrowers and mergers that weren’t nearly complete were shelved.

Yet at the same time, as the volatility on Wall Street increased and the major indices lost years’ worth of value, traders, speculators and short sellers capitalized on this volatility as a record or near-record number of securities and values of securities exchanged hands and bets were made on where the bottom would land.

Now, as the macroeconomic data points to a floor on the current recession and markets show strong signs of price recovery, the outlook for the second half of 2020 is beginning to come into focus.

With financial conditions improving and support from the Federal Reserve and U.S. Treasury blunting the steepest economic decline in generations, a combination of confidence and cheap credit has companies and municipalities looking for liquidity to help them navigate the remainder of the current crisis.

This has resulted, for example, in corporations tapping into the public debt markets at a rate never seen before. By the end of May, according to Bloomberg, corporations had issued more than $1 trillion in debt, an amount that in 2019 was not reached until the end of November.

Although this has led profit generation at the onset of the current recession, the pace of bond issuances is likely to subside as companies replenish their reserves and build liquidity that will be needed to return to the next normal.

MIDDLE MARKET INSIGHT: The pace of bond issuances is likely to subside as companies replenish their reserves and build liquidity that will be needed to return to the next normal.

Investment banking advisory activities tied to mergers and acquisitions will continue to feel the pain in the second half of the year as business challenges tied to the economy reopening and the continuing effects of the coronavirus pandemic contribute to a softer deal pipeline.

But as the recovery gets underway, prospects of so-called cheap deals paired with a potential backlog of pending deals will create opportunity late in the third quarter and in the fourth quarter, reversing the double-digit declines in deal count seen in both the first quarter and second quarter and thereby delivering marginal increases in advisory revenues.

With volatility remaining elevated compared to pre-coronavirus levels, trading activities will look to continue the momentum. This will be built on the perceived uncertainty from investors surrounding a reopening economy after an abrupt shutdown, and the effectiveness of the government programs implemented to combat the economic downturn.

Strong trading revenues during the first half of 2020 will most likely subside in the second half of the year, but offer continued revenue support to organizations that can react and benefit from shorter and narrower periods of volatility.



As the human and economic toll of the coronavirus mounted in the first half of 2020, organizations of all kinds were forced to consider what the future of their operations would look like in a post COVID-19 world. Family offices were no exception.

Rapidly fading are the days when a family office would hire the right staff members, provide a space where they could work and then convene the family members a couple of times a year to discuss the strategy.

Most of these physical offices now stand empty as working from home has become the new normal. At the same time, family members—especially the younger generation—have been demanding ever more access to the office’s day-to-day workings as the economy has experienced wrenching change.

The answer, for many family offices, is to become a virtual family office.

But getting there has not been easy. Many family offices were simply not equipped with the technology to support a seamless remote work environment. They needed to quickly upgrade their technology and temporarily outsource back-office functions-all of which changed the way offices met the needs of individual family members.

As this coronavirus pandemic heads into the second half of 2020, family offices will have little choice but to evolve as the digital transformation is forcing them to begin exploring the new world of a virtual family office.

Second business

Family offices have existed in many shapes and sizes since the 19th century, serving names like Rockefeller, Morgan, Rothschild and others. According to PitchBook, a research firm that compiles data on family offices, there are more than 1,900 offices around the globe, with more than 800 in the United States.

And there is no set approach. In some cases, multifamily offices provide investment management services to a range of families. In others, a single family office has several generations to support.

Increasing costs

Families are dealing with a number of issues such as cybersecurity, tax law changes, regulation updates, family dynamics and the digital transformation. With all of these variables in play, the mobility and intellectual horsepower of the single-family or multifamily office structure is debatable.

In addition, there are a number of vulnerabilities in the traditional family office structure that were exposed during the pandemic. A perfect example of this was outdated technology where working from home was a challenge. As the costs to manage the business climb and performance fades because of economic conditions, the structure of the office might limit the ability to meet the family’s goals.

The next generation

According to Bloomberg, millennials are set to inherit about $30 trillion from their parents in the coming decades.

Those in the next generation share very different characteristics from their parents. First, they are always connected. This is a generation that grew up with technology and demands full transparency to data and information with no disruption. Second, this is a generation that expects immediate results. They live faster-paced lives and demand immediate changes when problems arise.

Digital transformation

A virtual family office is the ideal structure to do more with less by leveraging outside specialized expertise, embracing emerging technologies and deploying resources more quickly. This structure allows the family to have a leaner staff that is focused on the biggest goals for the family. In addition, there is no need to have a physical office because everything can be done remotely.

As the next generation is about to take the reins of the office, a single platform holistically focused on the family that provides real-time data and transparency will be adopted more quickly than the older office structures.



Insurance companies are responding to the coronavirus crisis by adopting premium relief initiatives, offering payment deferral plans and expanding coverages.

The industry is also accelerating its digital transformation strategies, focusing on customer experience as buying preferences shift online and away from the traditional face-to-face agency model.

At RSM, we have identified three core areas where insurance companies are accelerating the digital transformation to respond to the needs of their customers and shareholders in the wake of COVID-19:

Driving customer acquisition

As risk exposures change as a result of the COVID-19 crisis, consumer demand is increasing for new insurance products like usage-based automobile coverage, Internet of Things-enabled life insurance solutions and cyber-risk insurance.

MIDDLE MARKET INSIGHT: Middle market insurance carriers have lagged substantially behind their larger competitors from a strategy perspective in recent years and have little choice but to embrace new technologies.

The accelerated pace of innovation across other industries is fundamentally changing what customers expect from their insurance carriers. As a result, leading companies are leveraging these technologies in simplifying their customer acquisition process while maintaining underwriting quality. In addition, companies are collaborating with technology-based distribution platforms to modernize their user interface and to simplify the insurancebuying experience.

Enhancing the customer experience

For a number of years, the insurance industry has invested in digital tools and capabilities to streamline the end-to-end customer experience, from binding a policy to paying a claim and all communications in between.

But consumer adoption of technologies such as web portals, mobile applications and internet-enabled devices has historically been slow to modest at best in the insurance industry. The current COVID-19 environment has provided a tangible purpose for digital platforms and how they can be leveraged as an integral part of firm strategy in the new economy.

Fueling growth

Revenue growth will be challenging for insurance companies in a post-COVID economy, particularly for personal lines. People are driving less as more companies allow their employees to work remotely. On top of this, with higher unemployment, people have less income, and near-zero interest rates will constrain insurance company growth and profitability.

Innovation within product offerings will be critical for carriers to meet prior premium growth expectations. With the top-line headwinds come shareholder pressures to lower costs and operating expenses to maintain profitability. As much as digital transformation has accelerated in the insurance industry in recent years, middle market insurance carriers have lagged substantially behind their larger competitors from a strategy perspective. Also, middle market companies rely even more heavily on outdated, legacy systems and technologies. Companies will need to adapt in order to ensure their longterm survival.



The future of private equity work is being changed by the day, and innovative practices are needed to drive more lucrative deals.

Here are five lasting changes for private equity firms that will follow COVID-19:

People remain your No. 1 asset...

Private equity firms already attract the best and brightest in corporate America, including top performers from Fortune 500 companies and elite banking firms. This won’t change. But the methods taken to do so will. Virtual interviews will need to include aptitude tests to measure critical thinking skills, learning ability and problem solving.

And determining emotional intelligence will be equally important to establishing the type of trust that will be needed to work alongside management teams in a remote setting. LinkedIn, for example, is expanding its curriculum to engage more of its users with soft skills that private equity firms will need.

...Yet data is becoming increasingly important

Data handling has the chance to revolutionize deal-making. Without having the benefit of physical access to evaluate company performance, analysts will instead look for alternative data sources to determine the areas for greatest earnings impact.

Alternative data sets will reveal strategic movements within companies and help track when companies are hiring or firing employees, interacting with customers, moving product and other metrics that offer insight into a company’s performance.

As talent disperses, offices fade

Investment managers will stretch for talent outside of their geographic region as the in-office workforce diminishes. New York, Chicago and San Francisco have long been the hotbeds for finance talent, but that will change as private equity staff increasingly work outside of concentrated urban neighborhoods. Firms will find that lavish office spaces are overly costly.

MIDDLE MARKET INSIGHT: Lean private equity firms will focus on their front-office deal functions and leave back-office responsibilities to the outside firms.

The fluid workweek and gender diversity

Private equity has a culture for competition that is not easily compatible with family life. Private equity professionals managing parental responsibilities amid the pandemic have learned to schedule around other commitments. This is difficult and trying-especially as parents manage home schooling-but a positive aspect is that men and women are sharing childcare duties more regularly.

Outsourcing will grow

Limited partner and regulatory requirements for greater transparency are driving the need for substantial investments in technology, which middle market firms aren’t always willing to make. Lean private equity firms will focus on their front-office deal functions and leave back-office responsibilities to the outside firms. Human resources, fund administration and regulatory compliance will be one less worry for investment managers looking to make deals.



Before the current economic crisis, middle market companies benefited from an abundance of capital pouring into private debt markets in search of yield. This enabled them to borrow at attractive rates with loose restrictions, as competition among lenders intensified.

Now the pendulum has swung in favor of lenders who will now be able to dictate pricing and terms as borrowers scramble for liquidity and battle for survival.

The next two quarters will bring about a wave of defaults and a spike in loan portfolio losses for private lenders who overextended before the crisis. New capital flowing into leveraged loans and distressed debt markets can expect opportunities for better risk-adjusted returns to be plentiful as companies that endured a downturn during the shutdown begin to emerge from the crisis.

In the years leading up to the current credit crisis, lending standards had deteriorated as a low interest rate environment (including negative yields in parts of the global markets) forced institutional investors to reach for returns in alternative asset classes such as private debt. This boosted the issuance of covenant-lite loans, which are defined as loans with no maintenance covenants.

Market observers warned that excesses in the private debt markets were harboring companies with weak fundamentals. Such companies managed to avoid default as the steady flow of capital allowed for easy means to refinance or increase leverage even further. Liquidity in the leveraged loan market was also bolstered by a robust market for new issuances of collateralized loan obligations, which facilitated the repackaging and redistribution of corporate loans that is reminiscent of the mortgage-backed securities that brought down the financial system in 2008-09.

The coronavirus created the economic shock that many had feared would spell trouble for companies that were overburdened with debt. Loan defaults have risen as companies experienced a sudden loss of revenue and cash flows from the drop in consumer demand. The number of loan defaults in the first five months of 2020 has already surpassed the full-year total for each year since 2009, based on data from S&P Global Market Intelligence.

As states lift shelter-in-place orders and businesses reopen, the credit risk associated with certain businesses will diminish. However, default rates are not expected to slow and may continue to rise over the remainder of the year, even as commerce returns to normal. While income will be restored for some businesses, and certain industries will experience a boost from the release of pent-up demand, others will continue to struggle as consumers defer discretionary expenditures and other products fall out of favor in the
aftermath of the coronavirus.

MIDDLE MARKET INSIGHT: Managing credit exposures has become a key focus for lenders, which will result in loan underwriting standards tightening.

Managing credit exposures has become a key focus for lenders, which will result in loan underwriting standards tightening. This will prove restrictive for so-called zombie companies that had, until now, benefited from a lapse in standards. Expect more of these companies to continue experiencing distress over the next two quarters. The weak interest and cash flow coverage ratios that have so far been masked by the lack of maintenance covenants, and the ability to tap a vibrant private debt market will be revealed in the form of defaults and bankruptcies.

Loan terms will swing in favor of lenders as providers of capital will be able to lend on their terms. This environment will be attractive for distressed credit investors with a longer-term horizon as they will pick up good-quality credits facing temporary dislocation at attractive bids.

For private debt asset managers with dry powder or access to cash, the next two quarters will present opportunities. Capital deployed in private debt markets in the next two quarters will enjoy better pricing, more credit protections and less competition for higher-quality borrowers.

See the full industry outlook report

The Real Economy: Industry Outlook

The Real Economy: Industry Outlook

Get data-driven economic insights and outlooks on a variety of middle market industries provided by RSM US LLP senior analysts.

  • July 13, 2020