As concerns about economic recession and geopolitical tensions cloud the global economic horizon, the financial services industry is preparing for a turbulent 2023.
How will industry leaders use their data and advanced analytics to weather this storm? Some of SAS’ leading experts predict what consumers, financial firms, and regulators can anticipate in the coming year.
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Predictability is back
“2023 will not be the year of chaos. It will mark the return of predictability. The economic impacts of the global health crisis were predictable: pent-up demand, tight labor markets, and a disrupted supply chain. The combination of these factors was expected to fuel inflation, leading to rate hikes as the obvious policy response,” said Anthony Mancuso, Director of Risk Solutions Consulting.
In an environment that will be marked by increasing defaults and high market volatility, scenario-based analysis, near real-time monitoring and overall organizational agility will be key differentiators.
Customer-centric decision-making confirms a new era of engagement
The ability to make decisions throughout the life cycle of a customer relationship will become a key differentiator in the race to acquire and retain customers. Financial players should think about holistic decisions that integrate risk, fraud, and marketing simultaneously, creating a unique customer experience that can set you apart from the competition. Stu Bradley, Senior Vice President of Fraud and Security Intelligence predicted that “the increase in fraud losses and the trend toward automation will drive centralized governance of disparate solutions as well as the consolidation of decision-making capabilities at onboarding and throughout the customer journey.”
‘Zombie companies’ face economic calculation
Bank Al Maghrib‘s raising of the lending rate, like central banks around the world, including the European Central Bank and the U.S. Federal Reserve, will push local banks into line by raising credit rates. This could lead to an exacerbation of the financial situation of companies, especially the so-called “zombie companies”, those that do not make enough profit to cover their debts, as borrowing becomes more expensive and less plentiful.
Companies that lack strong balance sheets and cash flow generation capacity will therefore be at high risk of default, while those that survive are likely to prioritize earnings quality and cash flow sustainability over their growth rates.
Banks step up ESG efforts for greater resilience
In the current economic turmoil, financial institutions are expected to pull back on environmental, social and governance (ESG) initiatives, however, there are signs that most banks are staying the course or doubling down. A recent survey of 500 banking executives found that three-quarters (76%) believe financial services has an obligation to address societal issues, yet 64% of executives believe the banking industry is lagging behind other sectors in advancing ESG goals.
“Clearly, financial services leaders recognize the opportunity to build long-term resilience, even as they weather the coming storm. With ESG as the North Star, banks may emerge from this recession more fiscally resolute, and those that lead the ESG revolution will undoubtedly reap the added reward of building customer trust and loyalty in the process,” believes Alex Kwiatkowski, Director of Global Financial Services.
Cryptocurrency boosts criminal organizations
While recent events will certainly lead to increased regulatory oversight, cryptocurrency is not dead. Criminal organizations will continue to use crypto to mask their nefarious activities and launder their ill-gotten gains. In turn, law enforcement and regulators will refine their ability to understand the movement and exchange of illicit funds. “This while also improving the industry’s ability to triangulate human trafficking, drug trafficking, money laundering and other criminal activities with speed and accuracy,” complemented Dan Barta, Senior Consultant in Fraud and Financial Crimes.
The rise of APIs and cloud computing
As the evolving relationship between risk factors exposes the limitations and weaknesses of legacy risk management systems, “financial institutions will turn to APIs (application programming interfaces) and other tools to correct or replace weak links as they are detected,” said Martin Zorn, Managing Director Risk Research and Quantitative Solutions.
As a result, cloud computing and speed to market for targeted solutions will become much more important as institutions look to “plug the leaks in the dam” first before tackling large-scale replacement of legacy systems.
Consumers are at risk from climate change
“As the financial risks of climate change become better understood, banks will begin to incorporate them into mortgages and business loans,” confirmed Naeem Siddiqi, Senior Advisor for Risk Research and Quantitative Solutions. Customers should be prepared to pay higher prices if they live in active hurricane, flood, and fire zones.
Regulators unleash a wave of anti-money laundering modernization
Financial intelligence units (FIUs) have been in the global markets for more than a year. Criminals and tax evaders have become the biggest “innovators” of the cryptocurrency boom, leaving a significant gap in the effectiveness of reporting suspected activity. As global conflicts continue to fuel significantly increased sanctions against malicious actors, FIUs will rethink how they operate and their legal authority within the IT systems that support their missions.
“Let’s point to Singapore, Germany and Canada as likely precursors to trigger the first wave of modernization that will spur broader anti-money laundering innovation focused on Artificial Intelligence and real-time capabilities,” spearheads Shaun Barry, Global Director, Fraud and Security Intelligence in this logic.
Globalization’s loss of momentum is a real opportunity for fintech startups
Against a backdrop of continued supply chain contraction and increasing political and social pressures, we will see a massive retreat from the globalization that has driven the world over the past 30 years. Norman Black, Director, EMEA Insurance Solutions says, “As business ecosystems move to a more regional mode of operation, companies in the financial services world will adjust their strategies and operations quickly and pragmatically.
This could provide new opportunities for geographically aligned fintech companies and insurtechs to integrate with traditional industry players, driving agility and innovation for all. “As the business climate becomes less hospitable, such partnerships would represent a valuable lifeline for tech startups. Those that go it alone will struggle to survive,” he adds.
Financial services are experiencing a renaissance in scenario-based analysis
The swirling uncertainty around climate change, geopolitical instability, energy crises, and other factors will inspire a renaissance in scenario-based management and analysis. “Far from being a static output, the scenario will become a dynamic output of dedicated risk models,” said Christian Macaro, Principal Risk Solutions Advisor. Topics such as scenario creation, scenario perturbation, scenario risk analysis and scenario reverse engineering will be able to answer questions left unanswered by traditional approaches.
DISCLAIMER: This article was written by a third party contributor and does not reflect the opinion of Born2Invest, its management, staff or its associates. Please review our disclaimer for more information.
This article may include forward-looking statements. These forward-looking statements generally are identified by the words “believe,” “project,” “estimate,” “become,” “plan,” “will,” and similar expressions. These forward-looking statements involve known and unknown risks as well as uncertainties, including those discussed in the following cautionary statements and elsewhere in this article and on this site. Although the Company may believe that its expectations are based on reasonable assumptions, the actual results that the Company may achieve may differ materially from any forward-looking statements, which reflect the opinions of the management of the Company only as of the date hereof. Additionally, please make sure to read these important disclosures.
First published in LES ECO.ma, a third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.
Although we made reasonable efforts to provide accurate translations, some parts may be incorrect. Born2Invest assumes no responsibility for errors, omissions or ambiguities in the translations provided on this website. Any person or entity relying on translated content does so at their own risk. Born2Invest is not responsible for losses caused by such reliance on the accuracy or reliability of translated information. If you wish to report an error or inaccuracy in the translation, we encourage you to contact us.
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