While the inflation rate has been steadily slowing down heading into 2024, Canada is still working its way out of an unprecedented housing crisis as Canadians feel the sting of higher rents, mortgage payments and property taxes.
While better economic news is on the horizon, there are indicators that financial service providers need to pay close attention to in order to better serve their customers in turbulent times.
As Country Manager for Canada, Cheryl manages all Canadian operations as Provenir responds to the record-breaking growth the company is experiencing in North America.
What economic headwinds will Canadian financial services providers be grappling with in 2024?
CW: Heading into 2024, the inflation rate has been steadily slowing down, dropping from a high of 6.8 percent in January 2023 to 3.1 percent in November of the same year. While this is good news for Canadians, there are economic indicators that financial service providers need to play close attention to better serve their customers. The country is still trying to work its way out of an unprecedented housing crisis as Canadians feel the sting of higher rents, mortgage interest costs up by more than 30 percent from last year, and property tax increases.
Rising cost of living and credit card debt is also a concern. According to the Q3 2023 Equifax Canada Market Pulse Consumer Quarterly Credit Trends report, “total consumer debt in Canada stood at $2.4 trillion in Q3 2023, an increase of $80.9 billion from the same period last year.” The report also revealed total card balances reached $113.4 billion in the third quarter of 2023, which was an all-time high.
Ensuring Canadians can manage their debt loads, pay down credit on time, and access the credit they need is a tall order for Canadian lenders.
What’s the outlook for the Canadian mortgage industry?
CW: During the COVID pandemic, a significant number of Canadians prioritized larger homes and properties which meant securing sizeable mortgages, chiefly to accommodate the new work-from-home reality and remote learning for their children while schools were closed.
According to Statistics Canada, “cumulative January-to-December resales were 12.6% higher in 2020 than over the same period a year earlier.” Some of these mortgages involved fixed payment variable rates which are now in negative amortization territory due to the large and rapid rise in interest rates throughout the last 18 months.
According to the Bank of Canada, approximately 75% of mortgages with variable rates have fixed payments. Fixed fee mortgages opened during 2020 and 2021 will also be adversely impacted as their rates are 2-3% below current market rates. In fact, overall, mortgage payments at time of renewal are expected to rise anywhere from 30-75% by the end of 2026, according to the Bank of Montreal.
Canada’s largest banks are already preparing for a tepid economy in 2024, reserving more money for their provisions for credit losses (PLC) to cover potential loan defaults. A recent RBC Capital Markets report advised “payment shocks” from mortgages renewing at higher interest rates over the next three years may pose a substantial risk to Canadian banks. The report also noted that credit losses will rise in 2025 and beyond due to this mortgage payment shock trend.
Given this scenario, it’s imperative that lenders stay one step ahead of potential customer delinquencies. Dealing with this cohort of mortgages while keeping people in their homes will require a delicate balance that demands sophisticated risk decisioning and easy access to data. Decisioning fueled by AI and alternative data enables lenders to better serve their customers through restructured loans and manage risk before it reaches a critical point.
Immigration to Canada is expected to continue to rise in 2024, which translates to thousands of new-to-credit customers. How do lenders ensure access to credit for those with no credit histories?
CW: The most underserved segment continues to be New-to-Credit (NTC) consumers, representing significant opportunities for lenders that are willing to ensure access to credit to this demographic. According to the TransUnion Q1 2023 Credit Industry Insights Report (CIIR), origination volumes increased 6.2% YoY, primarily driven by a surge in credit card originations to NTC consumers (a combination of Gen Z consumers entering the credit market and new Canadians) which grew by 85% YoY in 2022.
In 2022, over a million new Canadians for the first time ever split about 60/40 between non-permanent and permanent residences, making Canada the fastest growing G7 country. This growth isn’t slowing down; according to Canada’s 2023-2025 Immigration Levels Plan, the government is expecting to welcome 485,000 permanent residents in 2024 and 500,000 in 2025.
Being able to accurately assess creditworthiness, even in NTC consumers, is critical to driving growth while bringing costs down. With 37 percent of this largest growth segment having to apply multiple times before receiving their first Canadian credit product, lenders must find ways to offer them a better customer experience while making good risk decisions even with a lack of traditional data.
Using alternative data, such as leveraging social media and email data to help with KYC and fraud prevention; open banking data to assess cash flow; and income and employment data can result in improved accuracy in risk models and higher approval rates for NTC consumers, which typically have thin or no credit profiles. It also ensures a better customer experience and a reduction in fraud losses.
Bringing multiple diverse data points together and being able to easily integrate this robust information into decisioning eliminates siloed environments – and siloed decision making. This enables lenders to not only easily onboard new clients but to maximize the value of their customer relationships more effectively across the full lifecycle.
What trends are you seeing in financial fraud?
CW: Fraud is ever increasing and changing. It comes in multiple forms, including first-party fraud where loan applicants artificially inflate their income and employment details in hopes of securing the loan. Third-party fraud examples include identification theft where bad actors pull together disparate personal information data points to create a false identification and then use that profile to apply for credit or a loan. Or synthetic ID fraud, where fraudsters are leveraging the dark web and AI to create entirely new identities that are so sophisticated that they are very difficult to distinguish from authentic ones.
Research shows there has been an increase in fraudulent activities in Canada, specifically in the automotive, credit card, and mortgage markets. According to a recent report on Canadian fraud trends, fraudulent automotive applications have risen by 28 percent in the past year, fraudulent credit card applications rose 37.9 percent, and fraudulent mortgage applications increased 18.8 percent year-over-year.
The ongoing housing crisis in Canada has also impacted behaviors consumers feel are acceptable in terms of applying for a home loan. One survey reported 17 percent of respondents believe that artificially inflating income is acceptable to obtain a mortgage.
This puts a lot of pressure on lenders. How can they validate identity quickly and without putting undue friction on consumers? How can they verify income and employment? How can they tackle the various types of fraud without having poor customer experience? The answer is automating the risk decisioning that will highlight areas of concern and at the same time, having orchestrated access to the right data at the right time and advanced analytics, such as AI, to enable early fraud detection.
What technologies are fintechs and financial institutions deploying to better serve customers in 2024?
CW: Fintech and financial institutions are keenly aware that consumers expect quick, convenient, and secure lending solutions, but recognize that meeting customer expectations for a frictionless consumer experience while mitigating risk and balancing security and regulatory requirements can be a challenge.
That is why we are seeing lenders deploy a unified credit risk offering that enables easy access to traditional and alternative data sources to improve not only onboarding decisions, but also the accuracy and efficacy of the decisions beyond onboarding, and across the entire customer lifecycle – including fraud, compliance, upsell and cross-sell opportunities, collections management strategies and beyond.
Simplifying access to alternative data and integrating data into a lender’s decisioning in real-time is the key to making more accurate, more inclusive credit decisions, and preventing fraud, without sacrificing the risk strategy.
Applying advanced analytic tools such as AI and machine learning, to analyze vast amounts of data quickly, reduces the time needed to determine risk and allows lenders to provide the fast, frictionless experience customers expect.
How is Provenir working to equip financial institutions to succeed by mitigate risk management challenges and realize newfound opportunities?
CW: Data and AI-driven decisioning is crucial to accurately predict potential defaults before they happen and identify the best treatment strategies and most effective communication channels for customers struggling to make on-time payments.
Provenir brings together decisioning, data and intelligence to drive instant decisions via its AI-Powered Risk Decisioning Platform. This unique offering gives organizations the ability to power decisioning innovation across the full customer lifecycle, driving improvements in the customer experience and ensuring access to financial services while helping ensure the highest levels of orchestration for fraud protection and risk management.
The platform unifies all a financial institution’s risk decisioning, data, and intelligence through a centralized user interface. It’s a holistic, end-to-end solution that works together seamlessly to enable financial institutions to shorten the development lifecycle and get products to market faster.
With the unique combination of real-time, on-demand data access, embedded intelligence, decisioning technology, and case management capabilities, Provenir provides a cohesive risk ecosystem to enable smarter decisions across identity, fraud, and credit – offering diverse data for deeper insights, auto-optimized decisions, and a continuous feedback loop for constant improvement both at onboarding and beyond.