5 lending predictions for 2022

Doug Craddock
Senior Principal Consultant in FICO Advisors Lifecycle practice

During 2019, growing uncertainty around Brexit led to a number of vehicle manufacturers announcing the movement of production to mainland Europe. This was at the same time as customers were already cautious when buying cars because of the evolving electrification of vehicles and concerns around the diesel emissions scandals. Compounding this during early 2020 was the impact of the pandemic, and according to the Society of Motor Manufacturers and Traders (SMMT), new car registrations between 2019 and 2020 fell by 29%.

The impact of this downturn in vehicle sales on the automotive supply chain was in part mitigated by the raft of government support schemes, not least the ability to furlough employees, the various government loan schemes and the VAT deferral scheme.

As different countries emerged from lockdown at different times, the uncertainty of demand and fluctuating availability of parts supply led manufacturers to rationalize their number of vehicle programs to focus on producing core models. This served to create capacity in factories that, as demand improves going into 2022, is being used to accelerate electric vehicle production.

Recent statistics from the SMMT suggest that there will be more electric vehicles registered in 2021 than were registered between the whole of 2010 through to 2019. In fact, in the year to October 2021, new car registrations have only grown by 2.8%, behind this number is a reduction in petrol and diesel cars (which for now make up the majority of vehicles) of 22.1%, which is offset only by the significant growth in electric vehicles and hybrids of 65.4% and 82.5%, respectively.

What this shift from internal combustion engines to electric vehicles means is that significant investment is expected in both research and development of the new electric technologies but also into capital expenditure (capex), particularly powertrain suppliers, at a time when businesses are already struggling. Furthermore, both original equipment manufacturer (OEMs) and lenders are putting heavy emphasis on environmental, social and governance (ESG) and sustainability matters, which potentially brings a whole new layer of cost into the supply chain.

The landscape for large vehicle manufacturers themselves is also increasingly competitive and this is also creating significant downward pressure on the supply chain to deliver price efficiencies.

As economic activity rebounds, people are facing elevated levels of inflation with potential increases in interest rates forecast in early 2022, as well as higher energy prices. These factors are putting pressure on consumers’ financial positions, which in turn is putting pressure on lenders to demonstrate that both new and existing credit facilities are sustainable for their customers.

This may prove problematic. Borrowing remains at high levels despite some households choosing to use excess income to deleverage during lockdown. In addition, a significant proportion of the adult population have never experienced rising interest rates or rising inflation, and have based their borrowing decisions on more benign economic environments.

Today, assessment of affordability within financial institutions is fragmented, and there are different systems and approaches for each product and each stage of the credit. In order to meet the increasing regulatory requirements and to ensure good customer outcomes, we expect to see a shift in 2022 towards more customer-centric affordability assessment with consistent modelling for income and outgoings across all areas of the business. This centralised approach will give lenders increased control, consistency and agility to react to regulatory changes. It also will enable the simulation of multiple outcomes, which is crucial in a rapidly changing environment.

BNPL (buy now, pay later) will continue its rapid expansion in 2022 from its current position, where transactions values are expected to exceed £6 billion in 2021 in the UK alone. This growth is driven by the attractiveness of BNPL to both merchants and consumers; it has a positive NPS of 30, which compares favourably to other banking products (credit cards, for example, typically have an NPS in the single digits). There is also continued investment in the sector, with Klarna’s recent capital raising of $639 million being an example.

This growth is just one of several threats (others include P2P payments, Open Banking, and fintech expansion) to the traditional business models of financial organisations, both in terms of lost revenue streams and reduced customer insight from less transactional data. Despite the increased regulatory scrutiny, we anticipate that in 2022 there will be more mainstream lenders who introduce BNPL-type products in an attempt to compete and reduce customer attrition. This could take the form of product innovation or partnering with existing providers; however, the focus will need to be on ensuring compliance with any new regulations that may be introduced (which could give banks an advantage, as they have more experience with regulations than fintechs).

The ESG (environmentally sustainable growth) agenda has grown rapidly in recent years and is forcing seismic shifts in some industries such as energy and transportation, as consumers, investors, employees and regulators raise their expectations of corporations. The recent COP26 Conference statement prescribed that in order to “power us towards net zero by the middle of the century every financial decision needs to take climate into account”. The COP went on to state in one of its four associated actions that “Banks, insurers, investors and other financial firms need to commit to ensuring their investments and lending is aligned with net zero.”

In financial institutions, much of the ESG agenda is delivered at the corporate level, but in 2022 we expect to see an increased focus on bringing ESG data into more granular lending and investment decisions. This will require increased innovation in the use of alternative data across all kinds of lending. One example would be the inclusion of property energy ratings data in mortgage valuation and decisioning, and CO2 emission data for small businesses.

As new data sources come on stream, such as IoT device data, there will be an increased focus on developing new data assets such as individual carbon profiles. Organisations will increasingly need flexible data and decisioning platforms that enable these new data sets to be ingested, assessed rapidly for their validity and then deployed into decision-making processes. Over the longer term, we expect that ESG and climate risk evaluations will become an integral element of credit risk and affordability assessments, and banks and financial institutions will increasingly seek to help consumers and businesses to improve their carbon footprint through provision of education, insights and incentives.