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Provenir Perspectives from Around the World
No matter where you are in the world, the economy is a hot topic. In almost all regions globally there are increasing signs of economic uncertainty – layoffs in multiple sectors, stock market fluctuations, rising interest rates, and escalating inflation. And that economic uncertainty has a noticeable impact on the way financial institutions make decisions and offer products and services to their customers. Consumers may pull back on discretionary spending, but on the flipside also require more access to credit – which financial institutions may be reluctant to give thanks to more conservative risk appetites. Whether we’re entering a full recession or not continues to be debated, but experts agree that either way, a recession or economic downturn “is a significant, widespread and prolonged contraction in economic activity, which can cause reduced sales, leading to layoffs, tightening credit access, and increased loan defaults and bankruptcies.” Provenir experts from around the world are weighing in on what they see happening with the economy now, what lies ahead, and the impact this will have on financial services and lending. Brendan Deakin, Provenir’s GM of the United States, shares that “consumer debt in the U.S. is rising dramatically. Consumer credit card balances rose $46 billion in Q2 2022, a 13% lift from the previous quarter – marking the highest rise in consumer credit card balances in over 20 years.” Also rising are 30- day delinquencies, as borrowers begin to fall behind on their debt obligations. Likewise in Canada, there is troubling evidence of economic uncertainty – increased food and gas prices, geopolitical issues, inflation. Cheryl Woodburn, Provenir’s Country Manager for Canada, says “some reports are showing that by 2025 and 2026 we may see mortgage payments increase between 30 and 45%.” Latin America, which historically reflects the economy of the United States, is seeing its own signs of trouble. Jose Vargas, EVP and GM of Latin America, points out that Argentina is experiencing the worst inflation in the region (64% in June 2022), Colombia’s peso is falling, interest rates in Brazil have
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risen to 13%, and in Mexico, fewer new loans are being originated. But this is part of the nature of economic cycles. As Jose puts it, “Through economic cycles during crisis, or slowdowns, or recessions, there are always new opportunities.” Chris Kneen, Provenir’s GM of UKI, points to stagnation, recent inflation, rising interest rates, the political unrest and cabinet reshuffle, and the accelerating cost of living as clear signs of economic uncertainty in the region. Corinne Lleti, GM of Southern Europe, is seeing similar signs including rising inflation, remaining shortages from COVID-19, rising interest rates, and price increases. “Generally, the underlying problem is the whole financial services industry is based on confidence – and people’s confidence levels are low – which is making us realize how interconnected things are.” Meanwhile, many African countries are dependent on international funding, and the strengthening of western currencies against African currencies has resulted in a higher cost of borrowing, which is compounded by an increase in interest rates and relative scarcity of funding. However, in the Middle East, “the price of crude oil was up 73% year over year in May 2022 and coupled with the relatively stable governments and pegged currencies, has resulted in a much more favorable economic outlook for the region,” according to Adrian Pillay, GM of MEA. In the Middle East in 2022, GDP growth will be up 40% versus 2021, and “while inflation is equally the highest it has been in years, the robust economy is abating the economic uncertainty sentiment.” Bharath Vellore, GM of APAC for Provenir, shares that the Asian Development Bank (ADB) has recently downgraded its economic growth forecasts for the region, based on worldwide challenges including supply chains affected by COVID-19, the war in the Ukraine, and government fiscal policies. Inflation rates across the region have risen between April and September (5.8% to 6.7% in India, 3.7% to 5.2% in Southeast and South Asia), and “as a result consumers are cutting back on discretionary spending, and lenders are shoring up capital while becoming more cautious with their funding.”
Read on for more about what’s happening in various regions around the globe:
Canada
United States
Latin America UK + Ireland
Middle East + Africa
Europe
Asia-Pacific
India
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Cheryl Woodburn, Country Manager, Canada Kathy Stares, EVP, North America
Current banking/lending landscape: • Canada has the lowest unemployment rate since 1976, and over 400,000 new permanent residents in 2021, meaning lots of people eligible for lending products. These are positive factors to offset the challenges of rising inflation and the increasing cost of goods. • In reaction, lenders are still looking for ways to grow given the current widespread economic uncertainty, while also cutting capital spending. Lenders are using alternative data for more accurate risk assessments, especially with newcomers to the country who may not have robust credit histories. How can financial institutions support their customers? • Lenders need to understand their customers’ historical, current, and near-term financial positions, and know how to support their customers by ensuring payment plans are reasonable (i.e., proper debt servicing). • Financial institutions also need to invest in technology that enables greater visibility, like integrating alternative data sources. New innovations and lending products from fintechs/ banks: • We are already seeing a sharp increase in innovation from banks and fintechs, with product roadmaps advancing 5-10 years in a very short period of time. New innovations include using predictive analytics through alternative data, machine learning and AI. Alternative data can help encourage more financial inclusion, and tech like AI/ML can take into account real-time attributes that inform how customers are going to behave – almost before they do.
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• Overall, there will be more flexibility in the payment sector, with partnerships between larger financial institutions and fintechs like BNPL providers, or banks offering post-purchase conversion of credit card purchases into installment payments. Predictions: • We’ll continue to see record lows in terms of unemployment rates, but we will see the housing market continue to slow down and Canada’s collections activity spiking upward as consumers start to struggle with debt servicing. • Some of the most predictable outcomes of every economic downturn are increases in fraud, as well as collections and defaults. We need to create an operational environment that enables smart decisions with AI running to predict consumer movements and get to them before that default. Whether that means a reduced credit limit, a restructuring, or early collections process, this is where we need to turn to the power of behavioral models and AI and analytics to see how customers behave over time.
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Brendan Deakin, GM, United States Kathy Stares, EVP, North America
Current banking/lending landscape: • We are seeing rising interest rates in an effort to reign in inflation, and with growing inflation, consumers’ purchasing power is being eroded, meaning they’re looking at credit options to provide flexibility. • We’ve seen a retraction in some segments like Buy Now Pay Later, which has been growing over the past four or five years. We still see strong demand for unsecured personal lending and auto lending is still strong. The credit card segment still appears to be fairly healthy, although delinquencies are up. How can financial institutions support their customers? • The entire industry has always had a focus on helping consumers with personal financial management, and personal financial health. FIs need to continue to emphasize that even when times get tough, they’re going to be there to help consumers and their business clients weather the storm. • FIs that can deliver products that allow their customers to live a financially healthy life, even when there may be bumps in the road, will reap the benefits associated with customer loyalty, product graduation and expansion. This will be especially relevant in the new to credit/immigrant populations, as well as the sub-prime segment, all of which have traditionally been poorly served by this industry. New innovations and lending products from fintechs/ banks: • There a growing area of innovation around employer-based lending, where companies can extend credit indirectly as an added benefit to a company’s employees and helping those employees gain better cash flow.
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• Additionally, we’re in the early stages of social media-driven credit… there are opportunities to enhance a full view of consumer health that we haven’t fully tapped into, by leveraged Facebook/LinkedIn networks, time in employment – things that can offer a better view to consumers who are in the margin. Predictions: • The U.S. economy is incredibly resilient – unemployment is low, wages are up, gas prices have come down since their peak. Today’s ecosystem of data sources, infrastructure providers, and data science professionals will be presented an incredible opportunity (and challenge) to demonstrate how best to operate in uncertain times. • The FIs that can leverage additional data sources, and test/deploy new strategies to ensure the business is operating in a healthy manner, will be the ones that can capture new market share during this downturn and reap the benefits of growth when others are pulling back from the market. This is not only true in Originations/ Acquisitions, but also in Portfolio Management and Collections .
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Jose Vargas, EVP, Latin America
Current banking/lending landscape: • It depends which country in the region, but in general we’re seeing slowdowns in revenues and loans being originated. Interest rates are being increased to contain inflation, and you’ll have less access to credit due to it now being more expensive/less affordable credit. • Some larger banks are cautious, with some international banks exiting some markets or focusing in on those regions that are more profitable. But we continue to see fintechs that push forward. They will be cautious and stricter on their credit policies to avoid big losses in uncertain times, but they’re continuing to enable access to credit for consumers. How can financial institutions support their customers? • Financial institutions need to continue to find ways to grow in sustainable, efficient ways by using technology to better manage risk and continue to provide credit and financial services products to consumers. • Rather than focusing on acquiring new customers, FIs need to leverage their existing customer base and grow organically by supporting customers across the entire lifecycle. New innovations and lending products from fintechs/ banks: • Necessity is the mother of all invention. We continue to have the pressure of inflation and a slowdown in the economy, which means a flourish of innovation, as fintechs have shown over and over. Banks historically take a more conservative approach, but fintechs will more easily accept new risk and try to cover the gaps that more risk-averse FIs will expose.
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• Buy Now, Pay Later is a prime example of this innovation, and we’ll continue to see the market grow and expand to additional/adjacent segments, particularly in Latin America where a large portion of the population remains underbanked/underserved.
Predictions: • With the recent fintech innovation boom comes a natural period of focusing on being more efficient to manage risk, including more processes and technology to better handle fraud, identity verification, and assess creditworthiness. • Fintechs are great at creating products that fill a necessary gap and appealing to a variety of consumers, but in order to continue to grow in uncertain times, they will need to focus on technology, data tools, and advanced analytics to ensure a healthy risk management practice and encourage continued innovation.
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Chris Kneen, GM, UKI
Current banking/lending landscape: • The recent paper from the Financial Conduct Authority (FCA) on consumer duty ensures that consumers will be communicated to more clearly, products will be more understandable and the services that financial institutions provide will be clearer. But challenger banks will struggle to make a profit due to the current financial problems and the predicted market crash. There is a question around where the more digitally-savvy challenger banks will end up, as they need to plan how they will grow their market share and become profitable. • London will continue to be the global hub for fintech innovation. Expect continued investment into the fintech market, which will further drive innovation and pave the way for more innovative products. How can financial institutions support their customers? • Traditional banks become very risk-averse amid economic uncertainty, struggling to make loans to small businesses to support them through difficult times. But the need for credit doesn’t go away. Innovation will be necessary as we head into a predicted recession. • One key change is making use of all available data and leveraging AI-powered decision making to address a rapidly changing consumer and business behavior landscape. How lenders leverage new data sources to better understand consumer situations and how to best combine this with AI is key to adapting.
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New innovations and lending products from fintechs/ banks: • The economy is built on credit – the need to access credit to live your life is always there despite the inevitable recession, so there is a need to innovate with fintechs who will address different ways of working and what’s going to happen next. • We’ll see an increased appetite for data, including increased adoption of open banking data as it provides access to more timely information on how to run their finances. Combining this with sophisticated analytics and AI provides a better customer experience, allowing lenders to serve customers better from a product and experience perspective. Predictions: • There are more consolidations to come across the BNPL industry, as well as more focus on leveraging data and analytics to improve customer outcomes. As things become more uncertain, it’s becoming more important for banks and financial services to leverage data analytics and take advanced of explainable AI.
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Corinne Lleti, GM, Southern Europe
Current banking/lending landscape: • We’re not necessarily at a crisis point, but there is a marked slowdown, with indicators of loan charges going up, and rates of investment banking going down. Fintech valuations are falling… and even the bigger companies in the fintech market are feeling the pinch and laying off staff, so the more you can automate your processes, the more you can reduce costs. This slowdown reinforces just how critical the customer journey is. If you have a good customer, make sure you have an excellent customer journey so you don’t lose them. • Lending policies are tightening, and so lenders are much more cautious about how they’re lending, while tactically, lenders are looking to increase net commission interest, given that income is decreasing. The demand for consumer credit will continue to rise because the cost of living is increasing, so consumers are diversifying their credit products. How can financial institutions support their customers? • While not a traditional, general approach, companies should make the decision to support all of their customers through the recession who want to keep paying. This is an ethical standpoint, to honor the customers that signed with them in good faith, and an effective long-term strategy, especially given the market of lending products and serving those who need credit the most.
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New innovations and lending products from fintechs/ banks: • BNPL 3.0, where the financial institutions still offer a BNPL service, but it’s guaranteed on an open balance on a credit card, which is with another financial institution. So the BNPL company still receives the commission from the merchants, but they don’t take the risk of non-payment. • Given the current situation we’ll see more innovative solutions like this, where if you can avoid being the organization holding the risk, but still get the transactional revenue with the relationship to the customer… this is the best position going into a recession. Predictions: • A huge factor in determining the future lending landscape in southern Europe is what happens in the Ukraine, as this is a significant driver of the markets here. If the war carries on, things will continue to slow down and prices will increase (i.e., supply chain, fuel/gas over the winter, etc.).
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Bharath Vellore, GM, APAC
Current banking/lending landscape: • While other regions may be staring down a recession, here in APAC we aren’t facing the same degree of economic uncertainty. The key markets here are more worried about slower growth rates, and how to support our customers when capital is not as easily obtainable. • The operating environment in APAC continues to be positive, with lots of opportunity in the markets. Fintechs continue to innovate and disrupt – digitization and helping the underserved remains a priority. The capital environment was very favorable, with many considering lending ‘easy money,’ particularly for digital businesses post-Covid, but it has become more strained recently with increased rates, the war in Ukraine, inflation, supply chain issues etc. How can financial institutions support their customers? • More mature lending organizations with an established/proven product and customers, need to ensure responsive, reactive, dynamic risk policies with a segmented approach to support their existing customers and still aim for growth with those upwardly mobile segments. • Earlier-stage startups experimenting with their value propositions need to focus on building a solid product (good risk management policies in place, superior customer experience) before bringing them to market and raising money – long-term planning is critical as is focusing on the sustainability of the business. New innovations and lending products from fintechs/ banks: • Fintechs are already bridging the gap that larger, less adaptive banks have created. Fintechs were previously very focused on retail segments from a lending/payments point of view and are now increasing their reach (i.e., working with SMEs, working capital for business owners, e-commerce players, etc.).
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• While both lenders and consumers are more cautious and sensitive to risk in volatile times, there is still a huge portion of the population that is upwardly mobile (particularly in Indonesia, India, Philippines, Vietnam), and lenders/solution providers are seeing positive growth and continued demand for innovative credit products here. Predictions: • Consolidation. We’ll see the good businesses with good management, good policies, good products, good solutions – those businesses will survive and continue to grow and thrive. The earlier- stage businesses that are on paper only will experience more of a consolidation. • Having survived a low-capital period will ensure confidence to scale for those businesses that not only survived but thrived during this period and enable greater momentum. There will be a distinct separation and stark contrast between the good businesses and those are that are less well-thought out.
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Varun Bhalla, Country Manager, India
Current banking/lending landscape: • The landscape is changing very rapidly in India, and as innovation flourishes, the regulatory side is also evolving quickly to keep pace and guide these changes in the industry, balancing innovation with risk management and ensuring systematic risks are taking into consideration. • Credit demand in India continues to increase, thanks to upwardly mobile customers and pressure on income thanks to inflation. Lenders are becoming more prudent in evaluating these customers – there is a level of caution across the board, where they aren’t pulling back entirely but watching carefully for early signs of stress in credit portfolios. How can financial institutions support their customers? • Financial institutions and lenders should leverage Artificial Intelligence (AI) and analytics to use the massive amounts of data being generated in India’s digital ecosystem. This will enable hyper- personalization of financial products/solutions to reach all micro- segments within the population and help customers through this economic slowdown. • Financial inclusion is also critical, as you have a large portion of the population that remains underserved. By underwriting based on payment data, lenders can service those who would not qualify under traditional risk models and support growth in a more equitable way.
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New innovations and lending products from fintechs/ banks: • There is lots of innovation happening and lots of experimentation with regards to expanding the definition of the market (i.e., BNPL, invoice financing, SME lending), more digital advancement, advancing the financial infrastructure to ensure better access to data systems, etc. Predictions: • The next few months are critical, and only the strongest (those with the best risk models and solid solution offerings) will survive. We’ll see evolution of business models altogether. Will be a strong shift thanks to digital lending guidelines (i.e., in the BNPL segment the industry is undergoing a complete model shift); the way they engage both with consumers and their own banking partners on the back end will continue to evolve and we’ll see new models of engagement emerge. • Account aggregation is coming of age now and adoption is increasing in India, affecting how customers are sharing their detailed information and the level of innovation in the products from both banks and fintechs, which depends on the data available from consumer accounts.
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Adrian Pillay, GM, MEA
Current banking/lending landscape: • Appetite for credit always increases during economically challenging times, and it is good to see that the region is able to service this increased demand. Across the entire region, total loans value has grown almost 10% YoY at the end of Q3 2022, with almost 14% in Africa. This is enabled by the rise in lending within the underbanked and unbanked categories, driven by the rapidly growing fintech sector. Africa has seen an almost 150% growth in the number of fintechs operating in the continent since 2021 alone. • In terms of consumer reactions, in a recent study by TransUnion Africa, 60% of households surveyed indicated that they are focused on cutting back on discretionary spending, which is up 4% from the previous quarter. These sentiments are shared across generations (Gen Z: 46%, Millennials: 54%, Gen X: 54%, and Baby Boomers: 57%). How can financial institutions support their customers? • Regular and ongoing Account Management reviews will ensure that lenders effectively track any shifts in the financial positions of their existing customers and are able to quickly respond to any negative indicators – be it in slowing down lending to such customers or reducing OTB lines of credit. For new customers, regular and ongoing reviews of lending strategies will be crucial for lenders to stay ahead of any headwind and ensure that NPLs do not dramatically rise.
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New innovations and lending products from fintechs/ banks: • Traditional risk strategies are not always effective for shifts during economic uncertainty and recession. Banks are likely to continue taking a more conservative approach, will tighten lending initially and loosen up as market indicators become more favorable. • Fintechs will continue to lead the way with innovation, but more as a matter of necessity. Fintechs are likely to find new ways to evaluate risk and unlock new, untapped lending segments to drive their growth. What’s interesting is how fintechs in the region are continuing to service and penetrate the short-term, nano-loan segment. Fintechs are providing a critical bridge for the gap that the recession creates for some borrowers. Predictions: • Unless the instability in Eastern Europe comes to a swift end and we start seeing signs of a recovery from the recession, we will continue to see an economic slowdown, including in fintech investments. Those that remain and survive will be the ones that are able to innovate and address the gaps created by the slowdown from mainstream lending.
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Regardless of the region, there are parallels drawn across the financial services industry worldwide. Namely that yes, we are facing economic uncertainty of varying degrees across the globe but thankfully, with innovative technology like AI/ML, and with a focus on real-time, data-driven risk decisioning, the financial services industry can continue to support its customers effectively – and see growth as a result. They say knowledge is power – do you have the tools that you need to make informed risk decisions across identity, fraud, and credit? Discover Provenir Data. Learn More Optimize your decisioning with the right data at the right time Optimize your decisioning with the right data at the right time.
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