Doug Craddock | Senior Principal Consultant | FICO | mail me |
In an environment where everything is changing – the way we work, travel, meet and shop – the world of credit is adapting quickly.
The pandemic isn’t the sole cause of this, as fintechs have been upending traditional banking models for years. Here’s what we see for next year.
From digital transformation to digital engagement
Prior to COVID-19, digital transformation was gathering momentum in financial services and was then turbo-charged by the emergence of the pandemic.
Many journeys (both acquisition and servicing) are now well-established in the digital channel and customers have adopted them at an accelerated rate out of necessity during lockdowns. This speed of change, coupled with their experience of increased personalisation from firms such as Amazon and Netflix, has raised their expectation of how they expect their bank or building society to engage with them.
In order to retain customers and attract new ones, organisations will need to increase their focus on digital engagement, rather than just transformation.
In 2022 consumers will increasingly expect to be able to service all of their requirements, however complex, online. They will expect their bank to know when they last called a contact centre, logged into online banking, made a payment or queried a transaction.
Increasingly, they will also expect their bank to use this data to anticipate their next interaction and also help them make the best of their relationship with the bank. As a consequence, we can expect to see more banks adopt a ‘platform’ approach to their existing customer engagement.
By that I mean a platform that incorporates a real-time, 360-degree view of the customer, augmented by external data, such as Open Banking data and utility data. This data can be used by all areas of the bank that interact with customers, from marketing and customer service to risk management and collections. It can also be used to develop predictive and prescriptive analytics and next best action models to drive increased personalisation. This insight combined with an omni-channel communication capability will increasingly be the infrastructure that institutions move towards.
Lenders will take a new approach to measuring affordability
As economic activity rebounds, people are facing elevated levels of inflation with potential increases in interest rates forecast in early 2022, as well as higher energy prices.
Currently, the inflation rate for South Africa sits at 3.75% from its record low and the regulated fuel price has increased by more than 40% in 2021! These factors are putting pressure on consumers’ financial positions, which in turn is putting pressure on lenders to demonstrate that both new and existing credit facilities are sustainable for their customers.
This may prove problematic. Borrowing remains at high levels despite some households choosing to use excess income to deleverage during lockdown. In addition, a significant proportion of the adult population have never experienced rising interest rates or rising inflation and have based their borrowing decisions on more benign economic environments.
Today, assessment of affordability within financial institutions is fragmented, and there are different systems and approaches for each product and each stage of the credit.
In order to meet the increasing regulatory requirements and to ensure good customer outcomes, we expect to see a shift in 2022 towards more customer-centric affordability assessment with consistent modelling for income and outgoings across all areas of the business. This centralised approach will give lenders increased control, consistency, and agility to react to regulatory changes. It also will enable the simulation of multiple outcomes, which is crucial in a rapidly changing environment.
BNPL will expand amongst mainstream lenders
Buy now, pay later (BNPL) will continue its rapid expansion in 2022 from its current position, as it was reported by the Q4 2020 BNPL Survey that BNPL payment in South Africa will grow by 52.5% on an annual basis to reach US$ 268.7 million in 2021.
This growth is driven by the attractiveness of BNPL to both merchants and consumers; it has a positive NPS of 30, which compares favourably to other banking products (credit cards, for example, typically have an NPS in the single digits). This growth is just one of several threats (others include P2P payments, Open Banking, and fintech expansion) to the traditional business models of financial organisations, both in terms of lost revenue streams and reduced customer insight from less transactional data.
Despite the increased regulatory scrutiny, we anticipate that in 2022 there will be more mainstream lenders who introduce BNPL-type products in an attempt to compete and reduce customer attrition.
This could take the form of product innovation or partnering with existing providers; however, the focus will need to be on ensuring compliance with any new regulations that may be introduced (which could give banks an advantage, as they have more experience with regulations than fintechs).
