For financial institutions, 2022 has been a year of major changes; for the first time in the past decade, there has been a mix of macroeconomic elements that have inevitably led all central bankers to modify and adjust their monetary policies.
Taking, for example, the European landscape into consideration, the current year is characterized by inflation of nearly 10 per cent, a war that seems to be just beginning, and the spectre of recession around the corner; as a result, the ECB has had to adopt similarly drastic monetary policies, first with the announcement of the end of Quantitative Easing and then with an interest rate increase of more than 100 basis points in one year.
New financial scenarios, opportunities
This new scenario, for financial institutions, certainly could be an opportunity through the prospect of increased margins, but on the other hand, there could be a risk of a downturn in the mortgage market.
The consensus view is that with rising rates it is no more profitable to buy a property than in the past when the various financial institutions engaged in a price war to minimize rates and be competitive in the mortgage market.
In the current situation, we are faced with a very complex decision for institutions; while higher margins can be obtained, on the one hand, there is a real risk of a reduction in volumes on the other. Banks must study the price elasticity of their consumers to generate the best possible return.
New financial scenarios, artificial intelligence systems.
This challenge is certainly made more complex by the uncertain macroeconomic landscape; in fact, the probability of default is potentially much higher than in the past. Financial institutions, as a result, will need to develop an artificial intelligence system that starts with data to optimize responses to sudden changes in rates to ensure an overall increase in margins.
Going to look at the opposite side of a financial institution’s income statement, and therefore funding, it is possible to see that here too, with the new macroeconomic scenarios, there has been a differentiation in customer offerings.
During the last few years with the very low levels and yields, current and savings accounts, also called deposit accounts, aligned; in fact, only a residual portion of customers decoupled the main account with the deposit account, the latter having almost zero yields. Instead, as rates rise, financial institutions will be driven by a need to improve the offering to their customers by providing additional services, through an integrated offering with new features to make the experience absolutely in line with their needs.
New financial scenarios, digital adoption
An additional factor to take into account is the accelerating adoption of digital by customers, which has brought the need in banks to innovate processes. As a result, including concerning funding, it is crucial for institutions to increasingly improve customer relationships through strong personalization of offerings to increase loyalty.
In conclusion, a new era has opened in the past year for financial institutions, offering on the one hand a great opportunity with the increase in interest rates, but on the other hand the need to evolve further to find the right trade-off between volume growth and margins, personalizing as best as possible for customers. However, all these processes must be put in place based on data analysis with artificial intelligence models to identify recurring patterns among the data and ensure continuous maximization of objectives, readjusting to a changing environment.