As recession anxieties and geopolitical tensions cloud the global economic horizon, the financial services sector is preparing for a rocky 2023. How will industry leaders wield their data and advanced analytics to weather the storm?

Some of SAS’ foremost industry experts predict what consumers, financial firms and the parties protecting them can anticipate in the year to come.

Predictability returns

“2023 won’t be the year of chaos. In fact, 2023 will mark the return of some degree of predictability,” says Anthony Mancuso, director,: risk solutions consulting at SAS. “The economic impacts of this once-in-a-lifetime pandemic were to be expected: pent-up demand, tight labour markets and supply chain struggles.

These factors in combination were bound to stoke inflation, prompting rate increases as an obvious policy response. Anticipate increased delinquencies in retail and commercial portfolios and high market volatility as the world continues to navigate the fallout. Robust scenario analysis, near real-time monitoring, and general organisational agility will rule the day.”

Customer-centric decision-making launches a new era of differentiated customer engagement

“The ability to make decisions across the entire customer lifecycle will become a significant differentiator in the race to gain and retain customers,” according to Stu Bradley, senior vice-president: fraud and security intelligence at SAS.

“Think holistic decisions across risk, fraud, and marketing, all on a single architecture, creating an exclusive customer experience that can set one apart from the competition.

“I predict that increasing fraud losses and a drive towards automation will motivate centralised governance over disparate solutions and consolidation of decisioning capabilities at onboarding and throughout the customer journey.”

‘Zombie firms’, flash crashes force an economic reckoning

Stas Melnikov, SAS’ head of risk portfolio, says: “Rising interest rates and the strengthening of the US dollar signal trouble in the face of historically high sovereign debt and ongoing geopolitical instability. 2023 could see a string of sovereign defaults, while liquidity challenges in treasury markets have the potential to spark flash crashes, exacerbating market fragility.

“These factors combined will force an economic reckoning, particularly among so-called ‘zombie firms’ – companies that don’t turn enough profit to cover their debts – as borrowing becomes more expensive and less abundant.

“Companies that lack strong balance sheets and ability to generate cashflows will be at high risk of default, while those that survive are apt to prioritize the quality of earnings and cashflow sustainability over their growth rates.”

Banks double down on ESG progress for greater resiliency

“Amid ongoing economic turbulence, one might expect financial institutions to pull back on environmental, social and governance (ESG) initiatives – but signs point to most banks staying the course or doubling down,” says Alex Kwiatkowski, director of global financial services at SAS.

“A recent survey of 500 banking executives revealed that three-quarters (76%) believe financial services has an obligation to address societal issues, and yet 64% of executives think banking lags behind other sectors in advancing ESG goals.

“Clearly, financial services leaders recognise the opportunity to shore up long-term resilience, even as they weather the coming storm. With ESG as a north star, banks could emerge from this recession more fiscally resolute – and those that lead in the ESG revolution will no doubt reap the added reward of having furthered customer trust and loyalty in the process.”

Cryptocurrency drives the search for criminals

“While recent events will certainly drive increased regulatory scrutiny, cryptocurrency is not dead,” is the opinion of Dan Barta, principal enterprise fraud and financial crimes consultant at SAS.

“Crooks will continue to use crypto to mask their nefarious activities and launder their ill-gotten gains. In turn, law enforcement and regulators will better hone their ability to understand the movement and exchange of illicit funds, improving the industry’s ability to triangulate human trafficking, drug dealing, money laundering and other criminal activities with speed and precision.”

The rise of APIs and cloud computing

Martin Zorn, MD of risk research and quantitative solutions at SAS, comments: “As changing relationships across risk factors expose the limits and weaknesses of legacy risk management systems, financial institutions will turn to APIs and other tools to patch or replace weak links as they are found.

“Cloud computing and speed-to-market of targeted solutions will grow significantly more important as institutions first seek to ‘plug the leaks in the dam’ before tackling large-scale replacement of legacy systems.”

Climate change risk comes for consumers

“As financial risks from climate change are better understood, banks will begin pricing it into mortgages and commercial loans. Prepare to pay higher prices if you live in active hurricane, flood and fire zones,” says Naeem Siddiqi, SAS’ senior advisor for risk research and quantitative solutions.

Government regulators spark an anti-money laundering modernisation wave

“Financial intelligence units (FIUs) are in for quite a year,” says Shaun Barry, global director: fraud and security intelligence at SAS. “Criminals and tax evaders have emerged as among the cryptocurrency boom’s greatest ‘innovators,’ leaving a big gap in the effectiveness of suspicious activity reports.

“As global conflicts continue to fuel substantially increased sanctions against bad actors, FIUs will rethink how they operate – from their legal authority to the IT systems that support their missions. My eyes are on Singapore, Germany and Canada as likely forerunners to spark the first wave of modernisations that spurs broader anti-money laundering innovation focused on AI and real-time capabilities.”

In efforts to improve South Africa’s anti-money laundering, corruption, and terrorism regulation and keep the country from being grey listed, in late December President Cyril Ramaphosa signed two key pieces of legislation that were earlier passed by Parliament into law. As National Treasury continues to prepare for its upcoming meeting with the global corruption watchdog – the Financial Action Task Force (FATF) – it is reportedly confident that it has been able to address 15 of 20 legal deficiencies previously cited by the FATF – and that the remaining five deficiencies are expected to be addressed through non-statutory initiatives.

“Despite these recent steps and reports, it may not be enough – at least in the short-term – and there is still a very strong possibility of South Africa being grey listed, pending the final assessment and recommendations expected from the FATF’s plenary towards end of February,” according to Stephan Wessels, SAS head of customer sdvisory for South Africa SAS.

“But whether the country is grey listed or not, the public and private sectors should view this process as an opportunity to audit and strengthen anti-money laundering (AML) regulations and initiatives and adopting advanced AML solutions purposely built for detecting and combating financial crimes.”

Retreat from globalisation spells opportunity for fintech upstarts

Norman Black, director: EMEA insurance solutions at SAS, says: “Amid ongoing supply chain contraction and mounting political and social pressures, we’ll see a massive retreat from the globalisation that has driven the world for the last 30-years.

“As business ecosystems shift to operating more regionally, global financial services firms will adjust their strategies and operations rapidly and pragmatically. This could present new opportunities for geographically aligned fintechs and insurtechs to integrate with traditional industry players, boosting agility and innovation for all.

“As the business climate grows less hospitable, such partnerships would represent a valuable lifeline for tech upstarts. Those who go it alone will struggle to survive.”

Financial services will see a scenario analysis renaissance

“Swirling uncertainty around climate change, geopolitical instability, energy crises and other factors will inspire a scenario management and analysis renaissance,” says Christian Macaro, principal risk solutions advisor at SAS.

“Far from being a static output, scenario will become a dynamic output of dedicated risk models. Topics like scenario creation, scenario perturbation, risk analysis associated with a given scenario and reverse-engineering of a scenario will be able to answer questions left unanswered by traditional approaches,”.