Three trends that Liberty foresees driving transformational changes in the financial services industry throughout 2020.
Across our clients in our Financial Services practice, Liberty saw three major trends in the financial services sector in 2019, and forecast these to continue into 2020: increased consumer credit, end-to-end digitization, and conversational commerce.
Trend 1: Increasing Consumer Credit and Emerging Signs of Trouble
Even though the economy has been strong, with unemployment at historic lows, consumers continue to utilize credit to maintain or improve their lifestyles. Overall consumer debt outstanding grew to an all-time high of $13.95 trillion as of November 2019, surpassing the previous high of $12.68 trillion set in 3Q 2008. However, the overall quality of the aggregate credit outstanding appears to be good, with the total delinquency rate sitting at just 2.32% at the end of 3Q 2019.
However, the overall delinquency rate masks troubling trends in some portions of the consumer credit market. Auto loans, credit cards, and student loans have seen increasing delinquency over the past year. Perhaps the most worrisome is the student loan portfolio with a 90+ day delinquency rate of just under 10%. Even this high rate is potentially understated by half according to the New York Fed. In addition, severely derogatory delinquencies (defined here as more than 120 days past due) now make up half of all delinquent balances across credit types.
Bank and non-bank lenders cannot afford to be sanguine about the state of the credit markets. In the past three recessions, delinquency rates have increased by a low of roughly 3% (2001) to almost 30% (2008). Assuming that the next recession drives increased delinquencies somewhere between these two points, lenders will encounter serious pain in a downturn.
Trend 2: End-to-End Digitization
Much of the discussion around digital journeys centers on the experience of the financial services customer. However, the most successful digital transformations in financial services have addressed improvement opportunities throughout the organization. Key areas where organizations have brought digital innovation to bear include aspects of account onboarding, compliance and regulatory reporting, and account servicing.
In many cases, middle and back-office digitization has been accomplished through the use of robotic process automation (RPA) technologies. However, a number of financial services providers have partnered with fintech companies to replace or enhance elements of their core systems. Companies such as Zest AI in lending, nCino in core banking, and Salesforce in wealth management are offering cloud-based or on-premises solutions that deliver much greater flexibility and cost efficiency than legacy systems.
Look for this trend to accelerate as financial institutions continue to seek ways to provide better and more innovative services and products to their customers while driving the cost of delivery down.
Trend 3: Conversational Commerce
Conversational commerce – the use of AI-driven chatbots that utilize text and/or natural language recognition to simplify and enhance user experience in financial services – continued to grow substantially in 2019. Leading institutions are using advanced AI-driven capabilities to transform customer service. Virtual assistant offerings such as Erica from Bank of America and Eno from Capital One use natural language interfaces to deliver an intuitive interaction aimed at increasing customer satisfaction, retention, and ultimately the expansion of relationships with these institutions.
However, the use of conversational commerce is not limited to external client-facing applications. JP Morgan Chase is using COIN, a bot designed to rapidly analyze legal contracts, to speed analysis and save over 360,000 labor hours at the same time. In addition, the bank has implemented bots to automate some IT transactions such as granting systems access and reset passwords.
The dramatic economic and customer satisfaction impacts experienced by financial services providers utilizing AI-driven chat technology is expected to drive a sharp upward trajectory in its use. Juniper Research projects that in banking alone the operational cost savings from using chatbots will top $7.3 billion in 2023, up from an estimated $209 million in 2019, saving banks 862 million hours in 2023, equivalent to almost 0.5 million working years.
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