Fair Isaac Corporation

04/09/2024 | Press release | Distributed by Public on 04/09/2024 05:33

Banking and Risk Management Trends in the Eurozone for 2024

In recent months, the economic landscape for the banking industry in the Eurozone has grown notably more challenging and it's clear that consumers are feeling the impact. During the last two quarters of 2023, the Central European Bank (CEB) has revealed that, for the consumer credit portfolios, banks within the region decided to decrease their risk tolerance, leading to a visible tightening of the credit standards (the bank internal guidelines or loan approval criteria).

According to a survey carried out by CEB the main driver to explain the reduction of the risk tolerance in the Eurozone was a deterioration of the risk perceptions. As we can see in the table below, among the four largest countries in the Eurozone the most severe reduction of risk tolerance in 2023 happened in Spain, where a net 42% of the banks reported a tightening of the credit standards for Q3 and 25% for Q4. On the other hand, the lowest percentage of net reduction of risk tolerance was reported in Germany, where over the same period it was reported a net 7% and 4% of banks had tightened their credit standards.

Source: Central European Bank Euro area bank lending survey Q1 2024

In addition, the CEB have reported that high interest rates and low consumer confidence have been the major drivers to explain the decline in the credit demand for consumer credit. Net declines were observed across the Eurozone, although the net decrease was more moderate in Q4 than in the previous quarter. Across the four largest economies in the Eurozone, Germany reported the lowest net percentage of banks with a decrease in demand for loans. Spain had the largest percentage of financial entities reporting a percentage of net reduction of loan demand in Q3 and Italy in Q4, as we can see in the table above.

Strengthening Risk Management

As a result of that challenging economic environment, risk managers need to strengthen their tools and strategy to stay competitive over the quarters to come in 2024.

Areas where banks can be focused to emerge as more competitive are:

  • Incorporate the power of new analytic capabilities, including big data and machine learning analytic technology. These improvements offer new opportunities for managing risk but also introduce challenges, particularly around data privacy and regulation. Currently, according to Forrester only 0.5% of all generated data is analyzed. The potential to increasing additional value from unused data is enormous.
  • Take a customer-level view. The ability to achieve a 360-degree view of customers becomes a solid competitive advantage for making better decisions across the credit lifecycle and improving customer satisfaction. According to a study from McKinsey & Co., banks that use customer-level information in collections have a greater impact on customer experiences, reducing losses by around 14% compared to account-level collections.
  • Take more decisions using real-time data. For many banks the great majority of the decisions are taken in a batch process, which does not consider the latest consumer situation. Banks can gain a completive advantage by enhancing decisions using real-time data; this is particularly relevant when managing customer exposure as well as for digital communications.
  • Accelerate the digital transformation. Despite the challenges around implementing a digital strategy, the potential benefits for digital transformation are large, offering opportunities for substantial improvements and impacts on the bottom line. According to the Gartner Survey, the main goal for the banks when implementing a digital strategy is increasing revenue (51%), followed by reducing operational costs (25%) and better control of risk (23%).
  • Be prepared to manage an evolving risk environment. The deterioration of the macro-economic conditions expected in the following months, the intensification of competition coming from fintech and other new emerging players, the rise of fraud, cybersecurity threats, etc. demand a reinforcement of risk management capabilities. To effectively manage new risks, it requires the capability to quickly deploy new analytic models (using traditional and non-traditional data sources), as well as to use highly flexible decision engines that are able to swiftly address risks that are intensifying and evolving over time. In that context, Software as a Service (SaaS) technology such as FICO Platform provides the functionality to accomplish both strategic and operational goals.
  • Be focused on increasing customer expectations. Customers now demand seamless, hyper-personalized banking experiences, pushing traditional banks towards a significant evolution. According to a study from McKinsey & Co, 71% of consumers expect companies to deliver personalized interactions, and 76% get frustrated when this doesn't happen.
  • Reduce operational costs. In an environment of higher competition, banks are compelled to pursue a reduction of their efficiency ratios due to a higher automation across the lifecycle. The usage of SaaS cloud technology leads to a standardization of decision engines, driving down long-term structural costs. Gartner predicts that by 2024, organizations will lower some operational costs by 30% by combining hyper-automation technologies with redesigned operational processes.

The banking landscape is at a critical stage, facing the imperative to adapt and innovate in response to evolving trends and challenges. Success in this dynamic environment will depend on banks' ability to embrace change, leverage technology, and rethink organizational models to thrive in the digital age.

Looking ahead to 2024, the vision for risk management is to focus on using SaaS technology to gain flexibility and reduce operational costs; apply advanced analytic models; and implement strategies to accelerate the digital transformation - all in a context of deeper governance and regulation.

How FICO Can Help You Manage Risk More Effectively