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An Uncertain Landscape in North America: Downturn Can Be Eased With Data and Emerging Technology

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December 20, 2022 | Jonathan Pryer

In North America, consumers, fintechs, and financial institutions face economic uncertainty across the board. There are major question marks around the change in ability to qualify or even pay off loans, cost of living has substantially risen, and the consumer appetite for credit has increased as the institutional appetite for risk has decreased. Provenir’s North America experts, Kathy Stares (EVP, North America), Cheryl Woodburn (Country Manager, Canada), and Brendan Deakin (GM, United States) share insights on what it will take to manage these concerns and where industry leaders can focus in order to innovate and grow.

The current banking/lending landscape: widespread financial hardship impacts the region

Economic slowdown is occurring in both the US and Canada, accelerating financial challenges for consumers. Interest rates are up: the Bank of Canada recently raised interest rates for the 8th time in a row for a total of 400 basis points, going from 0.25% in February 2022 to 4.5% in January 2023. Inflation has declined from 8.1% in June 2022 to 6.3% in December 2022, showing these policy changes are working and causing the Bank of Canada to signal they will pause rate hikes while observing the impact of the cumulative interest rate increases. In the US, we’ve seen rising interest rates in an effort to rein in inflation.

There are serious pressures on consumer finance and consumer consumption due to rising prices for groceries, gas, rents, and energy. Mortgage rates are also rising. Some reports on the Canadian housing market are showing that by 2025 and 2026, we may see mortgage payments increase between 30-45%. 

Consumer debt in the US is growing dramatically. Consumer credit card balances rose $46 billion in Q2 2022, a 13% lift from the previous quarter – marking the highest rise in consumer credit balances in over 20 years. Also rising are 30-day delinquencies, as borrowers begin to fall behind on their debt obligations. FIs should prepare for what could be a pretty significant retraction in the economy.

The impact on lenders/consumers: increased credit appetite and fraud challenge lenders

With growing inflation, consumers’ purchasing power is being eroded, and they’re looking at credit options to give them more flexibility. Many have committed to payments they may no longer be able to make due to changing financial circumstances and climbing interest rates. This leaves a lot of open-ended questions on how and if they’ll pay.

Across the region, lenders are looking for ways to cut spending, primarily capital spending, during this period of economic uncertainty. In the US, we still see strong demand for unsecured personal lending and auto lending is still strong. The credit card segment still appears to be fairly healthy, although delinquencies are up. 

In Canada, account takeover fraud and synthetic ID fraud are increasing steadily, especially in the telecom market. Lenders face challenges in making sure that they are actually lending to the real person who owns those accounts. 

How fintechs/FIs can support their customers: anticipate needs with data and AI

FIs need to continue to emphasize that even when times get tough, they’re going to be there to help consumers and their business clients weather the storm. FIs that can deliver products that allow their customers to live a financially healthy life, even when there may be bumps in the road, will reap the benefits associated with customer loyalty, product graduation and expansion. 

Machine learning and AI will be crucial to delivering those products well. This tech can help lenders understand not only a customer’s historical financial position, but also their current and, potentially, near-term position. Traditional data is not the most accurate predictor of future ability to pay. Investing in alternative data is also key. It will provide the information needed to be able to see and understand the early warning indicators for those who might be headed for significant financial trouble and be ready to help them with payment options. 

The FIs that can leverage additional data sources, and test/deploy new strategies to ensure the business is operating in a healthy manner, will be the ones that can capture new market share during this downturn and reap the benefits of growth when others are pulling back from the market.  

Outlook in North America: financial institutions that embrace tech can find success

Overall, we are going to see consumers who are still looking for credit. Lenders must aspire to capture the most market share that they can in the least risky manner, and the right data and technology combination can help them do that.  

With today’s alternative data sources, open banking, AI and advanced data science, banks and FIs are now looking at fresh ways to assess risk in a more effective way. Today’s leading banks and fintechs that can leverage these new data sources and techniques, while delivering a stronger customer experience will weather this downturn quite successfully. 

Get the global perspective

Want to dive deeper into North American insights with even more breakdowns and predictions? Curious about how other regions will fare during economic uncertainty? Get the full picture from Provenir’s experts, who cover everything from the current landscape to tips for FIs looking to weather the global slowdown.