Financial services will be focusing on the following priorities: Personalizing customer treatment, understanding borrowers’ financial resilience, and scenario simulation and testing.

The industry has experienced a number of unique events over the past two-years. There was a global pandemic that quickly followed by double-digit inflation reaching a 30-year high. However, the current problem for borrowers is the rise in costs. The spike in energy prices due to the conflict in Ukraine has had an impact on the price of basic items like food and clothing.

This combination of events led to unprecedented levels of financial assistance being offered by governments worldwide to individuals and businesses in order to help them survive the economic consequences. The UK will continue to provide support through 2023 and possibly 2024. However, it is likely that this support will be more targeted as governments are facing rising debt burdens as a percentage of GDP.

Regulators are increasing their expectations of financial institutions and lenders in order to provide ongoing support for those deemed vulnerable or in financial difficulties. This is a move that was exemplified in the UK with the launch of the FCA Consumer Duty which strengthens customer safeguards.

In the face of continued economic uncertainty and turmoil, we can expect an increase in the number borrowers facing financial difficulties through 2023. This problem will only get worse as an estimated 1.4million UK households remortgage when their fixed-rate agreements expire this year. This will add further pressure to budgets as higher interest rates cause loan repayments to rise.

Consumers and businesses have come to expect that banks and other financial institutions will continue to offer support, help, and forbearance as they are affected financially by the unprecedented level of financial assistance over the past two-years.

Although predictions about the depth and duration of recessions vary, as well as whether or not the global economy will recover completely, one thing is certain: 2023 will be a difficult year for both consumers and businesses.

It’s safe to say that institutions with a history of delivering accurate scenario planning, hyper-personalized customer insights, customized treatments, and well-informed customer service will be the most resilient. These are my predictions for customer treatment and risk management in 2023.

1. Acceleration of Hyper-Personalised Treatments and Insights

Everything is possible with insight. Customers expect tailored communications that anticipate their needs, rather than generic offers that target large segments of demographically similar groups. This trend is being driven by the constant focus on customer experience, thanks to agile fintechs as well as disruptors operating in multiple markets. This expectation is also applicable to banks and financial service firms. As a result, 2023 should see an increased focus on building capability that enables hyper-personalisation.

In fact, the combination of hyper-personalization and prescriptive analytics has already proved to be a game-changer for customer offers. The results are often impressive and can boost sales conversion rates by 20 to 100 percent, while also increasing growth margins and customer retention.

Strategic advantage will be gained by investing in open ecosystems that can ingest traditional and non-traditional data in real-time and batch data streams. Providers will be able to tailor services to consumers’ changing needs by using data to create contextual profiles. There is also the upside to real-time communications, two-way dialogue and direct delivery of services via customers’ preferred channels and at the most convenient times. This type of activity, when done properly, can increase customer engagement and advocacy, particularly among customers who might need financial assistance.

2. Greater understanding of consumers’ financial resilience

According to recent research from the Money Advice Service, half of UK households don’t have enough money to cover unexpected expenses up to PS300. It is becoming more important to learn about the financial resilience of customers and how changing economic conditions are affecting them.

It is crucial to have a comprehensive picture of the financial situation of customers and how it changes over time. This will help you be successful in 2023 and beyond. Each individual and every business is unique, and each person and company has their own inflation levels based on their respective debt and spending. It is crucial to monitor and understand key factors at the customer level. This insight includes:

• How long they have been on a fixed rate mortgage.
• The savings made during the pandemic have been recouped over time.
• The way credit card and debit card spending and borrowing change over time.

While some consumers might appear to be “good customers” today, credit risk can quickly lead to a consumer’s financial woes. It is important to forbear on time. Customers who are given the wrong collections or forbearance solutions at the beginning will likely have a significant knock-on effect and higher default rates. This situation can only be solved by the intelligent, adaptive and smart use data, analytics, and insights to inform treatments. Failure to provide the necessary capabilities will result in customers not being identified and treated according to pre-established policies.

3. Advanced Scenario Planning and Simulation

Due to the ongoing economic and social turmoil over the last three years, it’s never been more crucial to have robust scenario planning tools and simulation tools. It’s driving an increase in the focus on rapid simulation capabilities as organisations realize how difficult it is to respond, understand, and manage unexpected and fast shocks to their portfolios.

Banks and financial service firms must be able adapt existing strategies from origination through to collection and recovery — and model and simulate their effectiveness in different economic scenarios. Continuous simulation of the effects of changes in strategies should be done to determine the best course of action in different scenarios.

All simulation must be performed at the customer segment level. Then, the aggregated portfolio level should be used. This is why more companies are looking to adopt simulation planning/tools that are based on predictive and prescriptive analysis to allow them to quickly and efficiently model complex scenarios.