Sadly, it won’t be dull: 2023 predictions in Retail Banking and Consumer Finance

At a recent lunch we hosted with several bank leaders the general feeling was that after the rollercoaster ride of recent times, a year of “dull” economy-related news would be welcome. However, that is not what leaders in the sector are forecasting.

Last year businesses in the Consumer Finance sector moved away from the mindset of managing through the pandemic and started to look to the future. But the war in Ukraine, political turmoil and economic headwinds combined to make 2022 a bumpy year.

Will 2023 be the year in which businesses can stabilise and move forward again? And what key challenges will they face? Here is what the bank leaders we spoke with believe:

Economy

The health of the economy will remain a dominant issue for the early part of the year. The big question is whether the UK will enter recession or not. Most commentators say we already have. However, a growing group believes we might avoid a recession.

There is still a view that interest rates will go up over the first few months of 2023 before stabilising later in the year when inflation is predicted to fall as the cost rises caused by the war in Ukraine and gas price hikes work their way out of the system. From a bank and lender perspective, the increase in interest rates will have a positive impact on profits. Although this will be counterbalanced by the impact of increased borrowing costs on customers and the level of defaults that might arise.

In 2022, many investors made the decision to hold onto their capital rather than investing, which meant that a number of start-up banks and fintechs were unable to secure the investment they needed to continue. The hope is that with more economic stability and company valuations remaining stable (rather than being in freefall), investment volumes will increase again. Investors will have the opportunity for some early wins as businesses struggle to survive and valuations are low.

ESG

ESG has been a hot topic for several years now and covers a huge range of issues for organisations, while DEI continues to have a big influence on businesses and their hiring strategies. It is time for organisations to take even more notice of Environmental and Sustainability issues given the growing pressure from shareholders, customers and employees for businesses to be transparent and open about activities and impacts in this area. ESG is also increasing in importance from a regulatory perspective. We will see the introduction of anti-greenwashing regulation and more rigorous reporting will be called for.

As well as looking internally, lenders will continue to grow product lines with a focus on addressing Environmental issues. This will become an increasingly competitive market across both consumer and business lending.

Digital/Tech/Data

Unsurprisingly, technology will continue to be important, particularly where digital solutions can be brought in to provide greater transparency. For example, in creating openness around the Environmental agenda.

There will be a continuing focus on improving the customer journey and experience. AI and machine learning will increasingly be used to speed up the responses customers receive when using phones or computers to manage their banking activities and there will be greater use of Chatbots. However, some businesses (such as Building Societies) will maintain their presence on the High Street as they continue to promote a “local” business model.

Talent

Talent acquisition will continue to be a key challenge for many businesses. Throughout last year, many companies struggled to bring in the right people to support their growth and development plans. Among the various reasons behind this are people deciding to move out of the job market after reviewing their priorities during COVID; and the return to their home countries of many European workers previously based in the UK as a result of Brexit.

The view prevalent during lockdown that home working led to increased productivity is being questioned and many companies are starting to require their people to spend more time in the office. Yet if businesses are unable to build their leadership teams and achieve the overall headcount they want, this will have an impact on growth, entry into new markets and transformation. Therefore, an attractive employee value proposition is key to recruiting and retaining talent. In many Financial Services organisations, the hybrid working question seems likely to be settled in favour of 2-3 day mix, mandating that employees spend either two or three days a week in the office, with freedom to choose where they work for the rest of the time.