Worldwide there continues to be increasing signs of economic uncertainty – layoffs in multiple sectors, stock market fluctuations, rising interest rates, and escalating inflation.
Here in Canada, The Bank of Canada recently announced its eighth interest rate hike of a quarter of a percentage point, bringing it to 4.5 percent, the highest it’s been since 2007. One survey revealed that more than 70 percent of Canadians cited being impacted by escalating interest rates, especially homeowners who have a mortgage or loan on their residence. The survey also showed that 35 percent of Canadian homeowners with a mortgage or loan did not think they would be able to ride out the latest rate for more than nine months.
Insolvencies have also risen. According to data from Innovation, Science and Economic Development Canada (ISED ), the total number of insolvencies in Canada increased by 11.9 percent in 2022 compared to 2021.
This economic uncertainty has a noticeable impact on the way financial institutions make decisions and offer products and services to their customers. While consumers may pull back on discretionary spending, on the flipside, they also require more access to credit – which financial institutions may be reluctant to give, thanks to more conservative risk appetites.
Whether we’re entering a full recession or not continues to be a subject of much debate, however a recession or economic downturn can cause tightening credit access, and increased loan defaults and bankruptcies, among other issues.
Embracing Alternative Data to Accurately Assess Risk of Growing Canadian Population
Canada finished out 2022 with an unemployment rate of 5.0 percent in December, which remained unchanged in January 2023 — its lowest point since June 2022 when the rate was at 4.9 percent. However, also in 2022, the country gained more than 437,000 new permanent residents — the largest annual intake of people in Canadian history. Coupled together, this translates to thousands of people eligible for lending products. These are positive factors to offset the challenges of rising inflation and the increasing cost of goods.
In response, lenders are still looking for ways to grow given the current widespread economic uncertainty, while also cutting capital spending. Lenders are using alternative data for more accurate risk assessments, especially with newcomers to the country who may not have robust credit histories. With alternative data, lenders can assemble a more holistic, comprehensive view of an individual’s risk. This can include income and employment information, social media, utilities/telecom payment history and rental payments, and more.
How Financial Institutions Support Their Customers Through Innovative Technology
Lenders need to understand their customers’ historical, current, and near-term financial positions, and know how to support their customers by ensuring payment plans are reasonable (i.e., proper debt servicing). Financial institutions also need to invest in technology that enables greater visibility, such as integrating alternative data sources.
Some fintech and banks have already deployed new innovations and lending products to support their customers with product roadmaps advancing 5 to 10 years in a very short period of time. New innovations include using predictive analytics through alternative data, machine learning (ML) and artificial intelligence (AI). Alternative data can help encourage more financial inclusion, and technology such as AI and ML take into account real-time attributes that inform how customers are going to behave – almost before they do.
Meanwhile, in the payment sector, we will see offerings to support greater flexibility, with partnerships between larger financial institutions and fintechs such as Buy Now Pay Later (BNPL) providers, or banks offering post-purchase conversion of credit card purchases into installment payments.
What to Expect in 2023
This year we anticipate record lows in terms of Canadian unemployment rates, but we will see the housing market continue to slow down and Canada’s collections activity spiking upward as consumers start to struggle with debt servicing.
Some of the most predictable outcomes of every economic downturn are increases in fraud, as well as collections and defaults. It’s with this understanding, that we need to create an operational environment that enables smart decisions with AI running to predict consumer movements and get to them before they default. Whether that means a reduced credit limit, a restructuring, or early collections process, this is where we need to turn to the power of behavioral modelling and AI and analytics to see how customers behave over time.
It’s no secret we as a nation and as an industry, are facing challenges in a challenging economic environment. However, with innovative technology such as AI/ML, and with a focus on real-time, data-driven risk decisioning, the financial services industry can continue to support its customers effectively – and see growth as a result.
Cheryl Woodburn serves as Country Manager for Canada at Provenir, a global leader in data and AI-powered risk decisioning software. She manages all operations as Provenir responds to the record-breaking growth the company is experiencing in North America. Cheryl has more than 25 years of experience in global software, analytics, data and technology markets, Prior to joining Provenir, she served as Vice President, Sales at Equifax. Cheryl also served in senior leadership roles at FICO and IBM, overseeing sales and customer success teams, sales enablement, and business operations.