Europe, like much of the world, is facing global economic uncertainty, especially as war continues to wage in the East of the region. Consumers and lenders alike are contending with the effects of a slew of factors that point to an impending recession. Our regional experts, Chris Kneen (GM, United Kingdom + Ireland) and Corinne Lleti (GM, Southern Europe), share their outlook on the current economic trends across the continent and how financial institutions can look to technology to support their customers and spark innovation during this slowdown.
The current banking/lending landscape: widespread slowdowns and high cost of living
There are concerns about rising inflation, interest rates, fuel prices, and general cost of living. While the region is not in danger of economic crisis, slowdowns are happening due to the above factors, along with uncertainty around the war in Ukraine and the UK’s political shuffling of its Prime Minister and cabinet. Banks that have business in Russia are feeling the pinch, and fintechs are on unpredictable ground as valuations decline.
However, investment into the fintech sector is still expected in UKI, paving the way for financial innovation that will benefit the entire region. There may also be space for digitally savvy challenger banks that can meet consumer needs with strategic approaches that still provide commercial ROI. The question remains who will take that challenge on.
UKI-based consumers will also have the new rules of the Consumer Duty on their side, which “sets higher and clearer standards of consumer protection across financial services, and requires firms to put their customers’ needs first.” This includes:
- A requirement to act to deliver good outcomes for retail customers.
- A requirement to act in good faith, avoid causing foreseeable harm, and enable and support customers to pursue their financial objectives.
- Rules requiring firms to ensure consumers receive communications they can understand, products and services meet their needs and offer fair value, and the support they need.
As Europe heads toward a recession and consumer needs become more complex, the Consumer Duty will be an invaluable tool to help reduce risky financial situations for those in the UKI market.
The impact on lenders/consumers: increased interest in open banking to manage risk
Risk appetite of financial institutions will continue to decrease, following the trend of lenders who are pulling out of risky deals and going more mainstream. It’s no surprise that the lending policies and regulations also reflect a more cautious approach. Interest rates are up to offset losses and lack of growth, and banks have an increased interest in retaining their creditworthy customers with improved customer journeys.
The focus on improved customer relationships has translated into a renewed investment in data and open banking, so FIs are armed with the information they need to provide better customer experience, including personalized products and proactive account management. These organizations will need the technology to support such an approach.
On the consumer side, vulnerable populations are facing hardship and difficulty accessing the credit they need to stay ahead of their finances. Those in the most need are diversifying the credit products they have to get more income as fuel prices and the cost of living continue to increase.
How fintechs/FIs can support their customers: leverage technology to anticipate needs
Consumers generally want to keep paying on time and in full, and the lenders that approach this downturn with that desire in mind will be able to support their customers and reduce losses. Lenders will not be able to address needs with a one-size-fits-all mindset. Tapping into technology that leverages new data sources and AI-powered decision-making that is able to adapt to rapidly-changing customer behavior will be key for long-term success on both sides.
Success will also come from new innovations, born from necessity in an uncertain landscape. The economy is built on credit, so the need for access is always there, especially so in the current scenario. Historically, fintechs have been able to offer new solutions to old problems and we expect to see that creativity emerge as we head toward recession.
Already on the horizon is what’s being called BNPL 3.0, which will be a fantastic resource to both lenders and consumers. Financial institutions still offer a BNPL service, but it’s guaranteed on an open balance on a credit card, which is with another financial institution. The BNPL company still receives the commission from the merchants, but does not take on the risk of non-payment, while the consumer is still able to access the service in the same way. The climate is ripe for these kinds of products.
Outlook in Europe: slowdown will continue but emerging tech can help
There’s no way around the economic slowdown. Valuations have plummeted and consolidations are likely. Uncertainty will remain as long as the conflict in Ukraine continues and global inflation rates stay high.
Being prepared for increased consumer credit needs and changing financial standing for existing loan customers will help FIs manage risk effectively and ease losses. Data and analytics are important tools in an unpredictable period – having the most information possible can help improve customer outcomes, no matter how long the slowdown lasts. Banks and fintechs that leverage data-powered technology have market advantage and are better positioned to meet consumer needs while keeping risk low.
Get the global perspective
Want to dive deeper into European 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.