Credit Management January February 2024

CONSUMER CREDIT
WHERE
NEXT FOR THE
CONSUMER
As the lending industry looks ahead to the new year, what trends
to practice, technology and regulation should you be aware of ?
BY STEPHEN KIELY
I
am very sorry to say it, but there are reasons to
consider that it is not starting well. In this case, I
mean the fate of the consumer lending industry.
After all, one of the major industry stories from
2023 was the collapse of the Morses Club and its
sister-company Shelby Finance. The doorstep
lender’s failure sees 101 members of staff looking
for a new job.
Analyst, Anna Anthony, UK Financial Services Managing
Partner at EY, did not seek to cover up the concerns: “The
series of economic shocks in recent years and the current
cost of living pressures are having a significant impact on
both households and businesses. Those most affected are
the vulnerable in society and small businesses which may
have limited financial cushions of support to fall back on.
Stretched affordability will affect loan demand across all
fronts and banks should be preparing for low and, in some
cases, negative lending growth rates.” She concludes: “Banks
also face the prospect of the number of loan defaults rising
amid the economic downturn.”
However, she also sees grounds for cautious optimism. Default
rates are expected to be much lower than recorded after the
financial crisis and given the sector’s much higher relative
level of capitalisation, banks are in a strong position to help
consumers and businesses through this difficult period.
Technology
Meanwhile, away from the fate of individual lenders,
proliferation of new technologies is opening banks
to risks they may have never had to grapple with before. Open
Banking and the increase in partnerships with technology
partners, for example, can expose banks’ infrastructure to
new vulnerabilities and cyberattacks. Fourth-party risks
are also becoming more of a threat as banks engage in more
partnerships with service providers that have their own
vendors.
The speed with which such threats take shape is also
accelerating. Generative AI has gained the sophistication
needed to create ‘deepfakes’, which makes it more challenging
for financial institutions to differentiate human customers
from digital media imitating their likenesses. Collectively,
this fast-moving risk environment is proving to be a huge
obstacle to maintaining customer trust.
Looking ahead to 2024 and beyond, UK Finance, in
collaboration with Oliver Wyman, has undertaken a study
of the state of AI adoption. UK financial institutions see a
substantial opportunity in artificial intelligence (AI), with 90
percent of lenders surveyed already leveraging Predictive AI
in back-office functions, yielding tangible benefits.
Although Generative AI is relatively new, more than 60
percent believed it has the potential to deliver significant cost
savings and improvements to operational effectiveness. There
is an appetite within institutions to harness the potential of
this transformative technology, which will necessitate a reevaluation
of business processes, employee skills, and staffing
considerations.
In addition, organisations will need to address the potential
impact of compute-intensive AI systems, which consume
significant resources and take up a large amount of space on
sustainability targets for supply chains.
As a highly regulated sector, financial institutions are
proceeding carefully with their adoption of AI. For now,
more than 70 percent of Generative AI use cases are in the
proof of concept or pilot phase.
Brave | Curious | Resilient / www.cicm.com / January & February 2024 / PAGE 14