UK financial services firms are under pressure from many directions. Margins are thin, while costs are rising as regulatory requirements become more demanding. Fraud is on the rise too, which is adding to the strain on the sector. Legacy systems already consume a growing share of IT budgets, but upgrading them is costly. Technological advances are reshaping finance while also opening new online channels that create fresh points of failure. When something does go wrong, for example, a scam gets through or a customer is sold the wrong product, the cost increasingly lands on the firm’s own books, making fast detection a direct profitability concern. These 11 challenges show where the industry is under pressure and how automation, AI and cloud ERP can help firms build resilience.
Key Takeaways
- UK banks’ return on equity is under intense pressure, and protecting it will take structural change to systems and processes.
- Customers want instant transactions and complete safety at the same time, and because the two pull against each other, a firm is blamed no matter which one falls short.
- UK regulators require firms to put customer interests first and use live data to demonstrate evidence of good customer outcomes.
- Criminals are using AI to build faster, more convincing scams, and firms are using the same technology to catch them.
- These challenges interlock, so a single fix, such as joining up data for regulators, can ease several others at once.
Why Financial Services Challenges Are Changing
Several structural shifts underpin the challenges financial services organisations currently face, and they explain why the pressure keeps building.
The FCA’s Consumer Duty and the FCA and PRA’s operational resilience rules now require a firm to demonstrate good outcomes for its customers and show that critical services can thrive under stress. The evidence must come from live operational data. Firms must monitor customer metrics and journeys continuously and be able to show them on demand.
A similar shift extends to losses. The cost of cyber fraud and scams is rising, and regulators expect financial institutions to absorb a larger proportion of it. The numbers add up quickly. Mandatory reimbursement for APP scams, introduced in October 2024, cost UK financial firms £316 million (88%) by March 2026. The principle that companies are on the hook for those losses is also being extended to poor customer treatment. Because losses that once fell on customers now directly hit their profits, firms have a direct financial incentive to prevent fraud and treat customers well.
Proving good outcomes to regulators and covering the cost of failures both require real-time tracking and rapid issue resolution, which point-in-time checks and siloed data cannot deliver. Legacy platforms are expensive to maintain and cannot provide the connected live data that supervisors and AI tools need. That’s why upgrading technology has become so important to managing risk. Automation, AI and cloud ERP systems are helping institutions deliver the products and services customers expect and generate the returns shareholders want.
Widespread technology enhancements, however, mean firms are becoming increasingly dependent on a few shared technology providers. Failure of one of these could cause industry-wide disruption. To reduce this risk, the Bank of England, FCA and PRA began directly overseeing the first providers formally designated as critical third parties in July 2026.
11 Challenges to the Financial Services Industry
Roughly half of the following challenges stem from pressure imposed on institutions from the outside, such as regulation and competition, and the rest sit entirely within a firm’s own control, such as its systems and its culture.
-
Regulatory Change and Compliance
The FCA’s regulatory approach is meant to give institutions the flexibility to innovate and invest while still holding them accountable for customer experiences that cause harm. Firms can only prove positive customer outcomes by continuously tracking metrics and analysing customer journeys, which requires real-time tracking systems. The aim of these rules is to stop persistent consumer threats, such as PPI and motor finance mis-selling, from building up again. UK financial institutions paid out £38.3 billion in PPI reimbursements between 2011 and 2019, and the motor finance compensation scheme recently announced by the FCA will cover roughly 12.1 million agreements and could mean total bill costs to firms of around £9.1 billion, making early detection the cheaper option. Prudential rules are tightening as well. Banks face stricter, more risk-sensitive Basel 3.1 capital rules from 1 January 2027. The FCA is also extending its rulebook to new products, having published cryptoasset rules in June 2026 that will come into full force in October 2027. Underlying all of this is a shift in regulatory policy. Since 2023, the FCA and PRA have been mandated to encourage market competitiveness and foster economic growth, an approach that involves simplifying rules while tightening outcomes, and that leaves firms managing a moving rulebook that puts a premium on adaptable systems.
-
Operational Resilience and Risk Management
Operational resilience is a firm’s ability to keep its important business services running through disruption, and to recover and learn afterwards. Disruptions might come from a cyberattack, an IT outage, a supplier failure or a natural hazard such as a flood or pandemic. Institutions frequently deliver those services through others, which raises the risk of disruption. Open banking, SaaS applications, cloud platforms and API links route a single service through providers a company does not own. It stays accountable even when a supplier is the weak point. Operational resilience now depends on visibility over that whole chain, including the third parties in it, which is exactly what the Bank of England checks. It assesses whether a firm’s operational risk framework can identify and manage its material risks, and sets capital requirements that are “reflective of the firm’s operational risk profile”.
-
Cybersecurity and Data Protection
Fraud frequently comes from outside an organisation, such as a social media advert or a spoof phone call. BioCatch’s global survey of 1,440 fraud-management, anti-money laundering (AML), and risk and compliance leaders found that four in five institutions have already encountered attacks built with AI agents, which can draft and adapt scam scripts faster than a human fraud ring. By the time a customer notices they have been scammed, the money has gone. In response, financial services firms are investing in front-end fraud prevention tactics such as customer alerts and prompts. But with the growth of embedded finance, this means using and sharing more customer data. Meanwhile, UK GDPR and customers’ expectations push towards stronger data protection. Institutions are left weighing how much data to share against how much to protect, and there is no settled balance. Regardless, the penalties for misjudging either side are rising. Despite that, institutions still retain the ability to stop payments before they settle. Companies are now on the hook for losses from cyber fraud and scams, but software that can continuously track transactions and spot anomalies can prevent substantial losses. AI cannot police third-party platforms or resolve the data bind, but it can help prevent money leaving the firm.
-
Environmental, Social and Governance (ESG) Issues
Like other regulatory requirements, ESG rules are subject to change. In February 2026, the UK government published the final version of the new UK Sustainability Reporting Standards (SRS), replacing older fragmented rules and aligning the UK with international ISSB standards (IFRS S1 and S2). Meanwhile, in 2025, the UN-backed Net-Zero Banking Alliance, a sector-wide net-zero commitment, wound itself down. Changes in reporting requirements can mean institutions start building software and processes only for them to become out of date before go-live. And there’s a second problem: The data firms need for emissions disclosure reporting can belong to their customers and counterparties. Institutions can be held accountable for figures they cannot fully assemble from their own records. Data sharing agreements and SaaS architectures can help firms compile more complete emissions data.
-
Legacy Systems and Transformation Complexity
For decades, deferring system upgrades was the rational choice. The systems worked, and the cost and risk of replacing them outweighed a payoff that was hard to justify. But now, the layers of software piled on top of ageing cores have grown fragile. Maintaining technical debt consumes around 70% of a bank’s IT budget. Despite the up-front investment cost and the pressure on firms’ margins, the business case for replacing legacy systems has become stronger. AI bolsters this case. It can deliver measurable efficiency savings, but needs clean, live data that ageing cores cannot provide. It can also ease the transition to newer systems by analysing old code and suggesting changes. Technological advances and regulatory expectations move quickly, but a single, comprehensive replacement programme runs the risk of building for requirements that are already out of date by the time it finishes. A phased approach to upgrading financial services infrastructure can prioritise the areas where the business is most at risk from legacy system inadequacy and the benefits are clearest.
-
AI Governance and Responsible Automation
Firms are accountable for what their AI does. However, only 34% of firms say they have a complete understanding of AI systems. A lack of understanding collides directly with what the FCA's Consumer Duty demands. Specifically, a firm must be able to show that a customer was treated fairly, and why they were declined or priced as they were. The most capable models are often the hardest to explain, so firms may face a choice between the model that performs best and the one they can defend. That same defensibility test applies to newer AI systems. Regulation governing AI agents in financial services has not yet been finalised. However, the FCA’s move to principles-based regulation allows companies to establish governance and controls without waiting for the standard to be fully settled. With a coherent oversight framework in place, firms can deploy AI agents and defend that decision.
-
Competition from Fintech and Online Banks
The line between banks and fintechs is blurring, with the latter moving into deposits and lending, while banks acquire fintech capabilities. Traditional institutions face competition from fintechs and neobanks that face the same regulations but are free of costly legacy systems and bricks-and-mortar branches, meaning they can build and modify products faster. The same blurring is happening in embedded finance. Payments and credit are being built directly in the software customers already use, and institutions that control embedded finance functions effectively own customer relationships. Incumbents can compete for embedded finance workflows, but so can software platforms that have never held a banking licence. One consequence already shows up on the balance sheet. Traditional banks’ share of UK deposits fell from 84% in 2019 to 80% in 2024 as savers chased higher rates at challenger banks and building societies. The Bank of England is now guarding against stablecoins draining deposits further, though that risk sits largely outside any single firm's control. What financial institutions can influence directly is the rate-chasing side: maintaining stable deposit funding means providing distinctive customer service and setting competitive rates.
-
Changing Customer Expectations
Customers want transactions to be instant and effortless (the standard set by the technology they use everywhere else) and they want their money kept safe. But these sometimes pull against each other. The effortless experience customers want can be exploited by criminals, and protecting customers means adding the friction they dislike. Too much friction can push a customer towards a rival offering less of it. Customers also expect their providers to know what they need next, the way a streaming service recommends a show. For example, a mortgage holder whose fixed-rate deal is ending in a few months wants a new rate offered proactively. Meeting that bar means connecting data that many firms still keep siloed across separate products and channels.
-
Cost Pressure and Margin Management
The high interest rates that have flattered revenue in recent years are now receding, but UK inflation remains elevated. Business costs are rising and squeezing margins, with institutions increasing spending in areas including compliance and cybersecurity, as well as the upkeep of ageing systems. But offsetting savings are hard to find. As a result, KPMG forecasts UK banks’ return on equity (RoE) falling from its 2023 peak of 18% to 10% by 2027. The decline is being driven from both directions: receding rates and rising spending. KPMG concludes that safeguarding RoE will require “decisive, structural change, not just tactical fixes”, such as investing in cloud-based systems, AI and automation.
-
Customer Trust, Financial Inclusion and Online Demands
Customers want their money to be safe and move rapidly and reliably when they ask it to. They trust firms that can demonstrate both. Electronic payments and rapid account opening make it easy for customers to transfer their business to a rival. The failure of the US banks Silicon Valley Bank and Signature Bank NY in 2023 showed just how quickly deposits can flee when a financial firm loses the trust of its customers. The same shift to online services cuts the other way too. Online and mobile banking and electronic payments have considerably boosted financial inclusion. For example, AI-assisted credit and risk scoring can open lending and insurance products to a wider range of people than traditional banks, and the FCA expects open banking to improve access even more. Most people now expect their banks to provide easy-to-use smartphone and web-based services. However, 1.2 million adults in the UK lack online access, most of them elderly or on low incomes. The FCA requires regulated banks to provide them with branch-based and telephone services.
-
Skills, Culture and Change Management Gaps
Institutions need people who understand finance and are skilled in the new technologies reshaping it. These people are rare, and building in-house skills takes time. Financial firms compete for people like this against tech companies that can pay more. Even those that succeed at hiring face a different obstacle: transformation stalls when technology and the business run as separate teams with different incentives. No amount of hiring can fix a siloed operating model. Successfully implementing major technological advances commonly involves rethinking the operating model and changing the culture. That kind of change cannot happen everywhere at once. Technological change affects all aspects of the business, but not all parts need updating at the same time. Some companies take on too much and fail to implement changes effectively. For them, the capacity for change itself becomes the bottleneck, and that capacity rarely runs out because of the technology. Implementing the software is the easy part. Embedding new business processes and a technology-forward culture takes time.
Finance Futures: Tomorrow’s Vision
How Challenges Differ Across Financial Services Segments
A bank’s established infrastructure, an insurer’s pricing expertise, a wealth manager’s fee-based model and a fintech’s outsider edge were all once clear advantages. Each is now also a source of risk.
Banks and Building Societies
Banks and major building societies are subject to heavy regulation, including capital rules that restrict investment capacity. In addition, their core systems are dominated by legacy technology that absorbs much of their IT budget. Migrating to an ERP system tailored for the banking industry can help satisfy regulators and defend the customer base from online-only banks and fintechs, but doing so while economic uncertainty squeezes margins can be risky. That hesitation may not last: shareholders can already see deposits drifting to online-only rivals.
Insurance Providers and Brokers
For insurers, climate change hits pricing and claims directly. Rising weather claims push premiums up until cover becomes unaffordable for the most exposed, but holding premiums down puts the risk back onto the insurer. Sharper, AI-driven underwriting could ease that trade-off, but ageing policy and claims systems hold them back from it. Ageing systems also make insurers prime targets for cyberattacks. Replacing those systems would also let AI catch unusual claims activity. Smaller brokers, meanwhile, carry conduct rules built for far larger firms.
Wealth, Asset and Investment Management
Against a backdrop of global fee compression and the growth of private markets, the UK’s investment industry is undergoing radical change. Fund tokenisation is moving from trials into practice, and the FCA’s emerging rules for tokenised funds reach beyond the product into how registers and dealing work. The regulator is also scrutinising valuation and conflicts in private markets, where fees are often calculated from asset managers’ own valuations. Meanwhile, fee compression is driving rapid consolidation in wealth and advice, which raises the question of how firms can maintain strong controls and good client outcomes as they grow by acquisition. A single system spanning every acquired book of business would make those controls easier to demonstrate.
Payments, Fintech and Non-Bank Finance
Payment rails are changing. The UK government wants instant account-to-account payments to rival credit cards, and commercial variable recurring payments are turning open banking into a payments rail. Stablecoins, another payment mechanism, are being brought into regulation for the first time. Beyond payment rails, the competitive structure of the market is also shifting. Firms are consolidating or partnering with the banks they once set out to challenge, blurring the line between traditional and alternative finance. That grey area extends to risk. Non-bank lenders add a systemic dimension, because the Bank of England’s system-wide exploratory scenario showed how their collective actions can amplify a market shock. To manage the situation, institutions’ own financial systems need to change as fast as the rails they’re building on.
How Technology Can Help Financial Services Firms Respond
Technology builds resilience by joining up a firm’s data, so it can see disruption as it happens, and by making its processes fast enough to change course when it does.
- Real-time reporting and dashboards: Real-time data provides evidence that customers are getting good outcomes and that services are staying within their impact tolerance under the operational resilience rules. The same live view shows where margin is being made or lost as it happens.
- Workflow automation and controls: Rule-based automation handles high-volume, predictable work such as transaction matching and routine checks. AI agents can continuously monitor for anomalies and resolve or escalate those that fall outside the rules.
- AI-assisted risk insights: AI can perform the high-volume analytical work needed to pinpoint shifts in credit or market risk early so companies can deploy defensive tactics or re-evaluate their risk appetite.
- Integrated financial and operational data: Bringing financial and operational data together in integrated accounting software gives AI models and humans the same figures to work from. Firms that have complete, consistent data in a single place can deploy AI effectively and trace every figure in a regulatory return back to its source.
- Cloud ERP and scalable infrastructure: Cloud ERP delivers unified data, but the rollout can happen in stages, at a pace companies can absorb. Cloud deployment on a subscription basis reduces the up-front cost of a new system implementation and lets infrastructure spending rise or fall with use.
How to Address Financial Services Industry Challenges in 4 Steps
Financial institutions that skip straight to buying new technology frequently end up fixing the wrong thing first. The following four steps put risk assessment before any spending decision.
- Assess business-critical risks. Identify services and exposures whose failure would most harm customers or the institution, drawing on the impact tolerances the FCA and PRA’s operational resilience rules already require firms to set. This is rarely a job for one team alone, because different parts of the business see different risks. Accurate ranking helps firms focus scarce effort.
- Map data, systems and third-party dependencies. Trace how each critical service is delivered, including suppliers the institution does not control, such as a cloud hosting provider or a data vendor that sits several layers down the chain. The exercise can expose single points of failure that would otherwise stay invisible until something breaks.
- Prioritise quick wins that improve resilience. Start with the single points of failure the previous step exposed. Focus on the ones where legacy systems and processes cause obvious problems and changes are straightforward, such as automating a manual reconciliation. This builds visibility and buys time for larger changes.
- Align technology spend with regulatory and customer outcomes. With that visibility in place, use measurable metrics, such as customer complaint volumes or the margin recovered from a specific fix, to measure the impact of proposed technology on customers and regulators. Concentrate spending in areas that deliver the best outcomes.
Future-Proofing Financial Institutions
Financial firms need to prepare for an uncertain future. Strategic plans should focus on sustainability and customer trust.
Long-term Strategies for Sustainability
Although ESG disclosure rules have changed, the need to achieve sustainability in financial services is still essential. Building climate data into core risk and pricing decisions delivers value regardless of the ESG framework in place. A bank that prices flood risk into mortgage lending, for example, protects its own loan book as much as it protects the borrower. Financing the transition of high-emitting clients supports relationships and promotes long-term business growth, because a client that successfully decarbonises is more likely to remain a customer.
Building and Maintaining Customer Trust
Good decisions and well-handled problems build customer trust. As AI takes on limited decision-making and problem-solving, humans will shift to reviewing what AI does and explaining it to customers. In the future, convincing customers that decisions made by AI are in their best interests may be the most important role that human staff play.
Strengthen Resilience and Visibility with NetSuite ERP
Fragile legacy systems and siloed processes prevent problems from being seen until they are already large. They also slow the response once issues are found. NetSuite ERP Software for Financial Services brings financial and operational data onto one platform, so a customer or an exposure looks the same everywhere it is viewed. Built-in AI agents scan data continuously for abnormalities, such as an unusual transaction pattern or a variance from forecast, and propose a resolution before they appear in a regulatory filing or a customer's statement. NetSuite’s Narrative Insights then turns that same data into a plain-language explanation, so a finance or risk team can show a regulator both what happened and why. That combination gives finance and risk teams the visibility to catch problems quickly and provide a thorough explanation when asked.
It’s easy to see the 11 challenges in this article as a major storm, but they are not as overwhelming as they might appear. Solving one problem can often help solve another. For example, the data needed to satisfy a regulator can also help a firm catch fraud. Building the resilience to ride out this storm will set the industry up well for whatever new challenges appear in the future.
See how NetSuite ERP benefits the Financial Services sector here. (opens in new tab)
Challenges to Financial Services Industry FAQs
What are the main challenges for the financial services industry?
UK financial firms face pressure from several directions, including increasing compliance scrutiny, rising fraud costs, ageing technology and squeezed margins. Many of these challenges are connected so institutions typically deal with several at once.
What is the biggest challenge facing finance today?
Resilience: how firms can build the visibility and adaptability to respond to rising pressure, and how they can use automation, AI and cloud ERP to get them there.
What is the biggest challenge in the banking industry?
Updating core systems while keeping critical, systemically important services running without interruption. Legacy technology already consumes much of a typical institution’s technology budget, which leaves little room to fund much-needed updates.
What are the challenges faced in financial management?
Obtaining timely, accurate figures from systems that were never built to work together. Manual reconciliation and scattered data also slow work down and raise the risk of error.
