In this extensive piece on how firms and regulators can tap into data-driven tech to alleviate economic pressures, Chris Kneen, Managing Director, UK and Ireland at Provenir, details varying degrees on how alternative credit products, AI and data can help during a challenging period for consumers.

The current banking/lending landscape

Much like the rest of the world, Europe is grappling with economic uncertainty. With a slew of factors pointing to an impending recession as the economy experiences rising inflation and interest rates and a cost-of-living crisis, both consumers and lenders alike are feeling the strain. 

Rising loan charges, decreasing rates of investment banking and the decline in valuations in the fintech sector, coupled with unprecedented levels of layoffs, all paint a pretty bleak picture of the European landscape. 

However, despite these factors pointing to a slow down, all is not lost. The UK and Ireland is expected to continue to be a global hub for fintech innovation, with continued investment into the market anticipated, paving the way for financial innovation that will benefit the region. 

In his 2023 spring budget, UK Chancellor of the Exchequer, Jeremy Hunt, outlined a strategy and funding for quantum computing to support the UK’s AI ecosystem which in part, aims to make the UK a “science and technology superpower”. 

With demand for consumer credit poised to increase due to the rising cost of living, consumers are likely to diversify their credit products. This creates ample opportunity, particularly for digitally savvy challenger banks, to meet the unique consumer needs with strategic approaches, whilst still delivering profitable returns. 

With an opportunity for the taking, the only question that remains is on who will take this unique challenge on.

The new Consumer Duty is a positive step towards higher consumer protection

A recent consultation paper titled ‘A new Consumer Duty’ was published and updated by the UK FCA in 2022, outlining significant changes to the UK’s regulatory framework, proposing the introduction of a new Consumer Duty that requires financial services firms to act in the best interests of their customers. 

The new Consumer Duty mandates financial service firms to prioritise their customers’ needs by setting higher and clearer standards of consumer protection. This requires financial institutions to act in good faith to avoid practices that could harm customers’ financial well-being and enable customers to pursue their financial objectives. 

Additionally, financial firms must ensure their communications are clear and transparent, their products and services meet customers’ needs and offer fair value, and that customers receive the necessary support throughout their financial journey. 

The impending European recession, combined with the growing complexity of consumer needs, makes the Consumer Duty invaluable guidance in mitigating risky financial situations and the handling of vulnerable customers in the UK market. 

The impact on consumers/lenders

Firms are shifting away from more speculative deals and tightening credit standards for consumers to prioritise investments within established industries and businesses with proven success rate. 

However, the demand for credit from consumers is continuing to rise. According to data from IMARC Group, in 2022, the consumer credit market surged to a staggering $110bn in market size. Consumers are increasingly becoming reliant on credit to meet their daily survival needs. 

In fact, according to Equifax’s 2022 Global Credit Trends report, transaction data reveal that in the UK alone, 60% more people have become reliant on high-cost, short-term credit. This trend is concerning for several reasons as it suggests that consumers are compelled to resort to high-cost credit options to support daily living needs, putting themselves at risk of falling into a cycle of debt. 

But perhaps more revealingly, the lack of accessibility to traditional forms of credit, such as bank loans for certain segments of the vulnerable population, is highlighted even more strongly by this data. 

The power of AI and data-powered technology

In this challenging landscape, lenders need to focus on enhancing their customers’ journeys to better serve their evolving needs. Data and AI-powered technology offer a lifeline to financial institutions to enhance their customer relationship and offer better lending solutions. 

Advanced analytics and data-powered decisioning tools can assist banks and fintechs in meeting these needs by speeding up loan application processing. The data integration capabilities can automate and streamline the process, gathering all relevant information from a wide range of traditional and non-traditional data sources such as credit bureaus, employment data and financial statements as well as mobile phone records, web presence, rental and utility data. This helps lenders to access the relevant information to make informed loan decisions promptly. 

One of the innovations that we’re seeing in this space that looks extremely promising for serving customers’ evolving needs is BNPL 3.0. 

Under this new model, financial institutions can continue to provide a BNPL service with the service guaranteed on an open balance on a credit card that is issued by another financial institution. 

This way, the BNPL company can continue to earn commissions from merchants without bearing the risk of non-payment, while consumers can still access the service in the same manner. 

Transforming consumer lending

It’s evident that in today’s economic climate, financial institutions need to better serve their customers to ensure they have access to affordable credit when they need it. 

Data and AI-powered technology offers a lifeline for firms to meet changing customer needs, offering automated decisioning, real-time alternative and traditional data integration, and advanced analytics to enable quick approvals and rapid innovation for a superior customer experience.