How consumer financial habits are going to evolve in the years ahead
What financial leaders, including those in technical roles (CTO and CIOs) need to understand and think about is how these changes are going to evolve into trends. What will those look like, and how should financial institutions and FinTech providers adapt and iterate accordingly?
Short-term impacts of Covid-19
There is no doubt that this is a storm. The world is being pushed into a recession. Will we experience a sharp bounce-back, or more of a gradual recovery?
Firstly, from a financial perspective, that partly depends on how bad it gets and how much governments do to help make the storm easier for everyone to weather.
Right now, and at least until the end of 2020, confidence is down.
Although ‘confidence’ might sound intangible, it isn’t. Confidence is tied to real-world economic influences, real and imagined. If someone has lost a job, or business is down, then that is real. Millions of people are without an income, or down to government support/social security to cover the basics.
In some countries, bills and major expenses, such as the mortgage have been paused. Even debt payments are forgivable right now, giving millions of consumers much-needed payment breaks. Consequently, for financial firms loan books are going to be strained, returns down, and risk levels higher. FinTech companies and lenders that aren’t as well capitalized could struggle during this.
However, with government help potentially available, and interest rates so low, the financial sector will get through the immediate storm. One of the most serious challenges, certainly in the immediate sense, is maintaining service levels for customers when staff suddenly need to work from home (WFH). Customers either need to know they can have payment breaks, or can borrow more. In recent weeks and months, from a service and sales perspective, many lenders have been overwhelmed.
What this means for the long-term?
Once the economy makes it through the immediate storm, financial companies are going to find themselves with larger loan books than ever before. At the same time, there are going to be many customers who are going to need long-term payment arrangements.
Until the economy fully recovers, it’s going to be difficult for banks to know where they stand. Managing risk has always been a proactive operation. But now more than ever, risk management needs to be in real-time (up to the minute) to align liquidity and deposits with lending commitments.
As part of this, banks need continuous data to assess affordability and prevent pre-delinquency. This acts as a consumer safeguard, protecting the most vulnerable, and at the same time, reducing the risk of customer defaults. From a risk perspective, this is a difficult albeit with AI-powered assessment systems, financial companies can more accurately manage risk.
With the right approach to risk management, lenders can offer the right products at the right time to customers. Especially those with fairly consistent affordability and payment histories who might need more help right now. Making sure those products are aligned with new levels of income is key, to avoid over-selling credit and debt to customers who may not be able to afford as much as they once could.
In the years ahead, financial firms need to approach this similar to previous recessions. Consumer and business confidence is down. Borrowing will be up, but defaults will also be higher. Use of digital services will also increase. From this, with the right services and data being generated, FinTech companies and challenger banks can create new products and services that more effectively serve the needs of a changing market.
In the long-term, your digital assets and services are going to play a key role in identifying growth opportunities in a more challenging market.