During the past two years the industry has seen a series of once-in-a-generation events take place with the global pandemic quickly followed by the re-emergence of double-digit inflation hitting a 30-year high. But right now, it’s the rising costs that are proving an acute challenge for borrowers as prices are being driven primarily by the spike in energy costs due to the war in Ukraine which, in turn, has had a direct impact on the pricing of essentials such as food and clothing.

The combination of events prompted unprecedented levels of financial support being provided by governments around the world to both individuals and businesses to enable them to survive the economic consequences.  While UK support will continue through 2023, and possibly into 2024, we can expect to see it provided on a more targeted basis as governments face rising debt burdens as a proportion of GDP.

FCA Consumer Duty: reinforcing customer safeguards

At the same time, regulators are doubling down on their expectations of financial organisations and lenders to ensure they provide continued support to those who are deemed to be vulnerable or in financial difficulty. It’s a move typified in the UK by the launch of the FCA’s Consumer Duty, which reinforces a host of customer safeguards.

We can expect to see an increase in the number of borrowers experiencing financial difficulty through 2023, amid continued economic turbulence and uncertainty. The challenge will be further exacerbated as an estimated 1.4 million UK households re-mortgage as their fixed-rate deals come to an end this year, heaping further pressure on budgets, as loan repayments rise due to the higher interest rates.

The unprecedented level of financial support during the past two years has created an expectation among consumers and businesses that banks and other institutions will continue to provide help, support and forbearance, as and when they are adversely impacted financially.

Despite differing predictions of the depth or length of any recession, whether the global economy will escape it completely, what is certain is that 2023 will prove to be a challenging year from a consumer and industry perspective.

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Given the challenges faced, it’s fair to say the most resilient institutions will be those already working on well-informed hyper-personalised customer insight, tailored treatments and accurate scenario planning.

My three predictions for risk management and customer treatment in 2023

Acceleration of Hyper-Personalised Insights and Treatments

Insight is everything. Customers increasingly expect their data to be used to deliver tailored communications that anticipate their requirements, rather than being presented with generic offerings that are targeted to large groups of broadly similar demographic segments. It’s a trend that’s being driven by the relentless focus on customer experience thanks to the agile fintechs and disruptors operating across numerous markets. It’s an expectation that also applies to banks and financial services firms. As a result, 2023 should see an increased focus on building capability that enables hyper-personalisation.

In fact, the combination of hyper-personalisation and prescriptive analytics has already proved to be a game-changer for customer offers. Typical results can increase sales conversion rates by 20% to 100% while also improving growth margins and customer retention.

Investment in open ecosystems that can ingest both traditional and non-traditional data from multiple, disparate sources, in both batch and real-time data streams, will deliver a strategic advantage. By using data to build contextual profiles that continually spot and flag changes in customers’ circumstances, providers will be able to deliver hyper-personalised offers and treatments that consistently suit consumers’ evolving needs. The flip-side comes from the value add of real-time communications and two-way digital dialogue, delivered direct to customers via their channel of choice and at the most appropriate times.  If it’s done correctly, this type of activity can drive customer engagement and advocacy, especially among those customers who may need financial assistance.

Increased Understanding of Consumers’ Financial Resilience

Recent research by the Money Advice Service suggests half of UK households simply don’t have sufficient funds set aside to handle an unexpected expense of up to £300.  As such, there is an increasing need to understand more about customers’ financial resilience and how they are being impacted by shifting economic circumstances.

Getting a complete picture of a customer’s comprehensive financial position and how it is changing over time will be key to success during 2023 — and beyond.  Every individual and business are different, with their own personal inflation level based upon respective spending and debt levels.  Monitoring and understanding key factors at a customer level is vital. Insight includes:

  • Whether they are on a fixed-rate mortgage and their ability to absorb any payment shock when their fixed-rate period ends;
  • How savings that were built up during the pandemic are being drawn down over time, and
  • How credit and debit card spending and borrowing are changing over time.

Some consumers may look like typically “good customers” today from a credit risk perspective, but their situation could quickly deteriorate if they suffer a payment shock from a re-mortgage, their savings are exhausted, or they experience reduced income.  Timely forbearance is everything.  Instances of customers being given the wrong collections or forbearance solution at the outset are likely to have a significant knock-on effect with higher volumes defaulting. It’s a situation that can only be resolved through the dynamic, appropriate and smart use of data, analytics and insights to help inform treatments. Those that fail to enable the required capabilities will not identify high-quality customers, will treat all in line with pre-set policies and will be unable to evidence or offer the right treatments.

Advanced Scenario Planning and Simulation

Given the continued economic and social turmoil of the past three years, the need to have robust scenario planning and simulation tools has never been more important. As a result, it’s now driving an increased focus on building rapid simulation capabilities, as many organisations realise the shortcomings in their ability to react, understand and handle unexpected and rapid shocks to their portfolios.

Banks and financial services firms need to be able to adapt existing strategies — from originations through to collections and recoveries — model and simulate their likely effectiveness in varied economic scenarios.  Simulation of the impact of changes to strategies should be run continually to inform the most appropriate course of actions in multiple scenarios.

To truly understand the impact of any actions, all simulation needs to be carried out at the customer segment level and then aggregated up to the portfolio level, rather than simply being modelled as a generic portfolio overlay. To achieve this, more firms are likely to adopt scenario planning / simulation tools underpinned by predictive and prescriptive analytics, to enable them to model large numbers of complex scenarios at speed and at scale.

Doug Craddock is a senior principal consultant at FICO