As we move further into 2021, the issues of health, resilience and livelihood will continue to prey on the minds of many people. With further measures announced in Europe following the second wave of Covid-19, alongside rising unemployment rates, there will be challenges ahead for both consumers and businesses.
2020 was the first time in 60 years when 45 economies across developing Asia contracted in economic growth. Fortunately, recovery is forecast to resume and growth is expected to rebound strongly in 2021. The recent announcement of Covid-19 vaccines has provided hope that the pandemic will be better controlled, giving confidence and much needed stimulus to the region.
The road to recovery, however, will be an uneven one. Twice as many consumers worldwide are having problems paying their bills since Covid-19, according to Experian’s recent data, and more than a fifth are struggling to pay their credit card and utility bills since the pandemic. Consumers in Asia Pacific (APAC) are spending less in response to increasing financial hardship, whilst seeking more assistance from banks.
There have been several relief measures provided by banks and lenders, such as individual payment deferments and loan tenure extensions, as well as various governments’ Covid-19 fiscal assistance programmes for banks. Before support packages run out, the banking sector needs new strategies to navigate new capital and liquidity requirements, carefully monitor loan loss provisions, and protect its financial health amidst broader global economic uncertainties.
Covid-19 will continue to challenge banks’ financial resilience
The pandemic is projected to add US$440 billion ($585 billion) to credit costs in APAC. Part of this will be due to consumers who are seeking more credit access and assistance from banks to overcome financial hardship. Experian’s data shows that 10% of the APAC consumers surveyed are requesting Asia Pacific time or deferring payment of bills, 9% are increasing usage of available credit, while 8% are taking out personal or short-term loans.
Despite record-breaking support packages and relief measures introduced in 2020, as observed in countries such as Australia, Japan and Singapore, these resources remain finite. Banks and lenders face several challenges when these relief measures are phased out. As customer demand and economic conditions change rapidly, banks and lenders face the prospect of steep provisioning. There are further challenges. Banks are facing declining revenue, higher personal debt and leverage, income shocks for consumers, and higher credit risk with significant shifts in customers’ income and segment profiles.
To tackle these challenges, banks will rely more heavily on forecasting tools and automated processes in 2021. Potential future lockdowns mean there will likely be a protracted rollback requiring adjustments in consumer services and processes.
Importantly, amidst an economic downturn, banks and lenders will turn to a decisioning system that identifies financially stressed customers with early-warning indicators to ensure resilience and business continuity. This enables them to respond quickly to change, predict future customer behaviour, and deliver the right offerings at the right time.
AI could help the vulnerable in road to recovery
Covid-19 has left an indelible mark on many individuals and vulnerable communities, exacerbating any pre-existing financial hardship. Those who were already struggling to pay for daily expenses prior to the lockdowns are potentially facing higher levels of financial distress, with many struggling with their credit bills and loan repayments.
While some institutions are offering grace periods for payments, what will happen once Covid-19 relief measures stop, or when government stimulus packages are not enough? How can financial services organisations ensure that they take a customer-centric approach whilst managing their own resources and budgets? Artificial intelligence is the answer.
In some markets, the authorities and financial institutions are partnering to develop blueprints for AI and analytics adoption that can be replicated across the region. Singapore’s Monetary Authority announced the first phase of the Veritas framework in May 2020 to support AI adoption in the financial services sector and to promote fairness metrics in credit risk scoring and customer marketing.
AI-driven decisioning will play a critical role in reshaping the way banks interact with and utilise data in Asia Pacific, particularly when processing new customers or economic data. This lets banks recognise patterns and anticipate trends better, which enhances their credit management and collections strategies.
Banks will continue collaborating with FinTechs; customers will benefit
Considering how extensively technology features in many banks’ future-ready strategies, there will likely be further collaboration between traditional banks and FinTechs in 2021. Experian’s data shows that 73% of Singaporean consumers have used a mobile wallet for online banking and making payments since the start of the pandemic, and this figure is likely to rise.
Much has been said about banks versus FinTechs, comparing their agility, innovation, and how well they serve the digital economy. Today, many banks are stepping up efforts to be on par, or even ahead of the curve compared to their digital counterparts, readying themselves for the challenges of banking in the modern context.
For banks and FinTechs, their challenge goes beyond providing an optimal user experience and digital-first services. It will involve dealing with the largest humanitarian crisis in recent history and helping struggling consumers and businesses on the road to recovery. With shared goals in aiding global economic recovery, a collaborative strategy between banks and FinTechs would bode well for the financial services industry and customers stand to benefit the most.
Banks and financial institutions are operating in uncharted waters as the world reels from the impact of a global pandemic. The clearest way forward is to adopt a long-term view and employ technological solutions to be future-ready for whatever challenges lie ahead. The future of banking will depend on financial organisations’ willingness to transform, having an openness to innovation, and with banks and FinTechs banding together to weather the Covid-19 storm and embark on the path to recovery.
Ben Elliott is CEO at Experian Asia Pacific