The world has been confronted with geopolitical and climatic instability, energy shortages and a spike in inflation. Globalization is becoming increasingly unfashionable as governments shift their focus to protect national interests. The war in Ukraine is seeing many more people, across a wide front, gaining experience in the dark arts of cyber intrusion. Crypto has crashed. With rising rates and an impending recession, analysts are once again predicting that delinquencies will soar and put stress on banks’ balance sheets.
Until now, banks relied on the truism that a rise in unemployment drives delinquencies and, ultimately, losses. Their response has been to turn to their collections departments, which are wired to ‘dial for dollars.’ This time, with gravity returning to markets and the distortion of zero rates easing, things will be different.
Homeowners in markets dominated by short-duration mortgages could face the prospect of their payments doubling. Political pressure will force many governments and central banks to look to their Covid playbooks to stabilize their markets. Banks will once again be expected to think differently and innovate quickly to prevent fire sales and perhaps even social unrest.
In commercial real estate, Covid drove down utilization in many of the bigger markets from as much as 95% to below 50%. When the loans on these properties come due the risk assessment by banks and borrowers alike will be quite different than before, with opportunities like the conversion of unused business premises into residential units being considered.
The drivers of auto financing are changing in similar ways, with affordability, embedded finance, subscription models and other trends combining to change both the level and nature of risk. As consumers tighten their budgets, expect them to arbitrage their options.
The warnings that accompanied the launch of buy now, pay later at first seemed to be overstated. However, in 2022 it was reported that while the UK market had more than doubled in 12 months to £5.7 billion (US$6.7 billion), almost one in four BNPL users (and 35% of those aged 18-34) had failed to pay their instalments on time. As inflation continues to choke household budgets, the collapse of these unsecured shadow lending markets cannot be dismissed.
These new risks and challenges are forcing risk leaders to determine—at high speed—what the likely impact is on the bank’s strategy and operations. They need to take a more holistic, forward-looking scenario approach to identify which risks should be prioritized, what the appropriate responses are and what investments make sense right now. Banks, and the risk function in particular, will need to continue to evolve. In most cases today, the risk dimension is considered at the end of a process review. In the future, it will need to be an important input in the early stages when decisions are made about business and operating models, organizational structure, product design, data, talent and other critical issues. Looking specifically at the growing risk of loan defaults, banks that have honed their digital capabilities will be much better equipped to help their customers manage their financial obligations. This is when their investments in a superior customer
experience, in behavioural economics and design-led thinking, and in digital collections will truly pay off.
Banks that focus on helping customers solve their problems, rather than getting collections to ‘dial for dollars’, will significantly outperform their peers—not only by minimizing losses, but by strengthening their long-term relationships with valuable but distressed clients.” Banking Top 10 Trends for 2023 15. The abundance of data has led banks to imagine a glorious future products and services could be personalized to game-changing customers could be understood in unprecedented detail, and where insight-driven decisions could be made in real-time, Data becomes a product.