Customer Development
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 at FICO see for next year.
1. The Focus Will Change from Digital Transformation to Digital Engagement
Prior to COVID, 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.
2. 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. 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.
3. BNPL Will Expand Amongst Mainstream Lenders
BNPL (buy now, pay later) will continue its rapid expansion in 2022 from its current position, where transactions values are expected to exceed £6 billion in 2021 in the UK alone. 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). There is also continued investment in the sector, with Klarna’s recent capital raising of $639 million being an example.
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).
4. The ESG Agenda Will Drive the Search for Cleaner Decisions
The ESG (environmental, social, governance) agenda has grown rapidly in recent years and is forcing seismic shifts in some industries such as energy and transportation, as consumers, investors, employees and regulators raise their expectations of corporations. The recent COP26 Conference statement prescribed that in order to “power us towards net zero by the middle of the century every financial decision needs to take climate into account”. The COP went on to state in one of its four associated actions that “Banks, insurers, investors and other financial firms need to commit to ensuring their investments and lending is aligned with net zero.”
In financial institutions, much of the ESG agenda is delivered at the corporate level, but in 2022 we expect to see an increased focus on bringing ESG data into more granular lending and investment decisions. This will require increased innovation in the use of alternative data across all kinds of lending. One example would be the inclusion of property energy ratings data in mortgage valuation and decisioning, and CO2 emission data for small businesses.
As new data sources come on stream, such as IoT device data, there will be an increased focus on developing new data assets such as individual carbon profiles. Organisations will increasingly need flexible data and decisioning platforms that enable these new data sets to be ingested, assessed rapidly for their validity and then deployed into decision-making processes. Over the longer term, we expect that ESG and climate risk evaluations will become an integral element of credit risk and affordability assessments, and banks and financial institutions will increasingly seek to help consumers and businesses to improve their carbon footprint through provision of education, insights and incentives.
5. Open Banking May Hit an Inflexion Point
The Open Banking ecosystem continued to evolve at pace during 2021, with the OBIE reporting 330 regulated providers in the UK marketplace. These providers generated 4.9 million API calls and 11 million Open Banking payments in the 6 months to August 2021 in the UK alone. It is estimated that approximately 8% of digitally enabled consumers are now using Open Banking, with 76% stating that they will continue to use the service. This suggests that those Open Banking propositions are driving sustained behaviour changes amongst consumers.
We expect to see the above trends growth continue in 2022 and beyond. This represents both a challenge and an opportunity to the traditional incumbents in the payments and lending markets, who will need to have and execute clearly defined Open Banking strategy.
Whilst the overall scale of Open Banking usage is still relatively small, there will be a point of inflexion where customer adoption rises exponentially, as was seen with the take-up of contactless and mobile payments. Could this point of inflexion be in 2022?
