The key to weathering a recession: address fundamental economic issues

By Burak Kilicoglu, Director of Global Markets at Creditinfo Group

 

From an economic perspective, the last year has certainly been challenging. With the Russian invasion of Ukraine and the economic issues that have stemmed from it, financial institutions and other lenders across the globe have been trying to find some form of stability to ensure operations continue as normal.

Across Europe, and other established economies, inflation has been unprecedently high, reaching 8.4% in 2022. With rising inflation and an increasingly unstable financial landscape, financial institutions will be looking at their portfolios to ensure they are making the most effective choices possible. However, to successfully weather a recession, financial institutions should look to increase the amount of data available to them or tap into alternative data sources to help them make better decisions and ultimately strengthen the global economy.

KYC to prevent fraud

KYC provides reassurance that their customers are who they say they are and acts as a safety net against financial crime. KYC provides banks with insights on the identity and background of their customers, their daily business activity, origins of funds and the kinds of risks a customer might possess.

As a recession looms, financial institutions need to ensure their fraud prevention strategies are as robust as possible. It is crucial that financial institutions can ensure they have accurate and updated information and data which proves business affiliates and customers are in line with recent sanctions or legal changes. By gaining greater insights from local state registries and other data sources, it makes KYC checks more effective and flexible.

Open banking platforms can also provide these wider insights. These services grant access to a wide range of consumers’ personal and financial data. With permission, this data can be used by lenders to drive insights around things such as regular payments and spending habits. This enables healthy competition and innovation in financial services, leading to better choice of products and services for consumers.

Burak Kilicoglu

If financial institutions and lenders can gain access to more, alternative data, KYC processes can be better harnessed to prevent fraud and create a more secure financial environment for financial institutions to work in, especially in the wake of an impending recession.

Weathering a recession in emerging markets

As attention is turned to portfolios and making more effective investments, it is important, that countries with high ‘unbanked’ populations are not overlooked, even when the impact of the recession is not as apparent in these markets.

A robust economy requires high levels of participation to stimulate business development and growth. But with over two billion people worldwide with little to no access to financial services, many countries in emerging markets struggle to achieve the base level of financial participation needed to ensure a healthy economy.

For example, the strict banking rate (TBS) in the UEMOA (Western Africa Monetary Union) stood at 21.8% in 2021, meaning rising inflation will have a greater impact, given the low level of economic interactions which occur. So, credit bureaus and financial institutions need to consider new methods that facilitate access to finance and loans for investment in new businesses. In recent years, venture backed fintechs have been expected to lead this work and make it easier for people to access finance in emerging markets.

However, it has become increasingly clear that traditional banks and financial institutions have a role to play. There is simply less capital out there for fintechs, with the significant decrease in venture capital funds over recent years (42% decrease in 2022 compared to 2021). As a result of the Silicon Valley Bank collapse, the 2$ trillion venture capital industry could see portfolio reduction by at least $500 billion. So, it will be more challenging for fintechs to bear the load alone. Financial institutions and banks therefore will need to fill the void. This is where data can play another crucial role.

Using data to support financial inclusion

People who can’t provide traditional data used to calculate credit scores, are effectively invisible in the eyes of financial institutions. As a result, many economies will struggle with a lack of businesses with enough capital or supporting capital to support growth. The data used to check someone’s credit score, how it is stored and who analyses it can all be reassessed to provide easier access to loans for individuals and businesses, and thus support economic growth.

There is an abundance of alternative data available to lenders which could help them to make informed lending decisions, without, or in addition to the use of traditional credit scores. For example, mobile phone networks can be harnessed to assess someone’s suitability for loans. In the Philippines, while only 34.5% of the population have access to a bank accounts, there are roughly 1.59 mobile phones per every person in the country, mostly on pre-paid plans. Data can be drawn from these payments to develop market level risk scores which can provide a route in for individuals who cannot access loans. Many phones are used for money transfers and mobile wallets, as financial data this can be an even stronger indication of credit risk than mobile usage history alone.

It is crucial that the right organisations have access to this data. In order to bridge the gap between alternative data and credit bureaus, financial institutions in emerging markets need to ensure they are sharing this data with third parties and using the appropriate technology to interpret it.

Across the globe, financial institutions will be assessing how they can best handle an impending recession. Whilst many might look introspectively, it is important that established economies do not forget the unbanked, and we keep the momentum that has grown over recent years in these economies in increasing access to finance. The best way to start making changes is through data. If a high percentage of the economy has good credit scores and low credit utilisation, this not only encourages higher participation in the economy but also helps to tackle financial inclusion on a regional basis and create a more resilient global economy.

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