Here’s a tip as we kick off another New Year. If you’re reading an annual predictions piece, you should only take it seriously under one of two conditions:
- It’s the author’s first such piece – or –
- It starts with a lengthy recap of last year’s predictions and how accurate (or not) they turned out to be.
I work for an analytics company. Validating the performance of a predictive model against recent performance data is absolutely essential!
In that spirit, let’s start by grading my four predictions for 2019.
Prediction #1: Banks Will Get Smarter in the War for Deposits
- What I said: top 100 banks will invest in an area that has been neglected for too long — deposit pricing strategy. Sophisticated analytics tools, like optimization, and the ability to rapidly deploy the models developed by those tools will give banks the ability to deliver smarter, more granular pricing, enabling them to compete effectively in this increasingly frenetic environment.
- What happened: Well, I think we were all a bit shocked that rates went the direction they did, with most everyone predicting an increase at the start of the year. Regardless of the movement on rates, FICO (and our fellow solution providers in this space) have all seen a considerable investment in price simulation, sometimes going into optimization, and a lot of investment in deposit price execution where banks get more precise with each customer offer.
- Grade: A
Prediction #2: Digital Transformers Will Realize They Have a Silos Problem
- What I said: Banks will increasingly…work to ameliorate the negative effects of silos as they shift from product-centric to customer-centric business strategies.
- What happened: While some banks have decided that they will simply outsource this to a fintech (not realizing that this will need to be a core competency), others remain firmly structured with fraud in one silo, credit in another, and customer experience in yet another. I keep hoping this will change…but I’m afraid I was tilting at windmills.
- Grade: C
Prediction #3: Emerging Payment Solutions Will Grow Up
- What I said: Emerging payment solutions will become more mature in 2019 as payments executives focus on educating their customers and adapting their fraud controls to compensate for this growing threat.
- What happened: I think awareness is starting to grow, particularly with enhanced notifications from the banks on phone number changes. Certainly identity verification and multifactor authentication is starting to make this harder for the scammers. Institutions that have not upgraded to more sophisticated authentication controls (biometrics, RBA, software tokens) will be at a distinct disadvantage in defending against emerging identity based threats. Social engineering continues to be an effective attack mechanism, it only takes a quick search for “Venmo fraud scams” or “Zelle fraud scams” to see the creativity of our fellow human beings. An interesting development is the ‘pay apps’ (i.e. Google Pay) offering their own checking accounts. Sometimes you think you are the dog and someone comes along and you realize you are really the tail.
- Grade: B+
Prediction #4: Payday Lenders Will Face More Robust Competition
- What I said: We began to see a resurgence in small-dollar lending in 2018 with new regulatory guidance from the OCC and FDIC encouraging banks to compete with payday lenders. This regulatory green light will embolden bank product managers to think creatively in 2019 about how they can carve out a slice of the estimated $90 billion U.S. small-dollar lending market.
- What happened: My prediction here was the banks would do it themselves, but instead the big changes are coming from employers working with banks or fintechs. Good examples are Walmart with Even and TrueConnect working with a variety of bank/employer combinations. That should have been a bit more obvious to me as the employer is the one who knows the borrower the best.
- Grade: C+
Predictions for 2020
With that out of the way, let’s toss out a few predictions for 2020.
Prediction #1: To continue to grow, the personal loan business will become the retail installment space…everywhere. This will work well and expand as long as the economy stays strong. The value proposition here is simple—point-of-sale loans for expensive purchases (elective medical procedures, home repairs/upgrades, etc.) can provide a lower cost to a certain type of consumer than a credit card (needs liquidity, but doesn’t want the temptation of a revolving line) and the lender can bring a better understanding of the borrower (based on the context of the point-of-sale interaction) to bear.
Prediction #2: The automotive lending industry as a whole will continue to do more and more negative equity loans despite the risk. According to Edmunds, currently 33% of buyers roll negative equity over and the average negative equity borrower gets into a $33,000 car (before it leaves the lot) for the low, low price of $39,000. The root of the issue here is that borrowers prefer the immediate gratification of a new car, despite the long-term consequences of borrowing on negative equity. On the lending side, let’s just hope that our models have the residual values and loss rates priced right.
Prediction #3: As for market structure, I predict more big consolidations. 2019 was the year of M&A within the processor space, with TSYS and Global Payments, World Pay and FIS, and Fiserv and First Data all pairing up. This trend towards consolidation will pick up steam with banks and credit unions in 2020. BB&T and SunTrust were the big one this year, but more will come after years of quiet. The technology required to grow portfolios and enable a great customer experience isn’t getting any cheaper and scale matters. On the credit union side, sophisticated national credit unions (with robust digital capabilities) will become formidable threats and will snap up smaller credit unions as overall loan growth slows. And, proving that dogs and cats can occasionally work together, some credit unions will even snap up banks (as Suncoast Credit Union in Florida did with Apollo Bank this year).rofessional money launderers have a 99% success rate when running their illicit profits through the global banking infrastructure. That means that banks responsible for AML compliance have a 99% failure rate. Following the massive AML scandals in Europe and Australia in 2019, I predict that in 2020 global regulators will strongly encourage banks to experiment with cutting-edge analytic technologies and techniques to better identify and prevent money laundering.
Expect the Unexpected
As evidenced by my (far from perfect) grades on my 2019 predictions, we can expect plenty of unexpected developments in 2020. If you think there’s something obvious I missed, please chime in with a comment!
About the author: Tim VanTassel is VP of FICO’s Solutions, Advisory, and Specialty Sales Group.