The United States' economy is currently grappling with a sustained period of inflationary pressure, and concurrently, financial institutions (FIs) are being challenged to.
In this paper, we explore the key trends that will define the economic landscape in the rest of 2023 and beyond. We also look at how FIs are adopting anti-money laundering (AML) technology and discuss how technology can potentially aid US FIs as they tackle the ongoing economic challenges.
The State of the Nation: The Biggest Macroeconomic Trends Impacting the US in 2023
The US economy has experienced several headwinds in recent years, from the COVID-19 pandemic to the war in Ukraine and a trade war with China. Despite these challenges, the US dollar remains strong, and the country has so far avoided recession since the COVID shock in 2020.
However, this may yet change as the ongoing inflationary environment remains a concern and FIs face numerous challenges from the macroeconomic conditions. With several recent rate hikes from the Federal Reserve (‘the Fed’) – Wall Street is watching to see how further contractionary policy will shake out.
In the second half of 2023, Fenergo sees several microeconomic trends occurring in the US. The leading three that concern us most include:
1. Slowing GDP growth
The US may experience a shallow recession in 2023, triggered by a combination of rate hikes from the Federal Reserve and weak growth abroad. Weak domestic demand and investment have also impacted Gross Domestic Product (GDP) growth. Rate hikes from the Federal Reserve could lead to higher unemployment, although inflation could slow down.
2. Continued inflation difficulties
Ongoing inflation has pushed up bond yields, crushing equities and fixed incomes. Production has been constrained, which in turn has fuelled inflation and macro volatility. The Federal Reserve recently implemented a quarter-point increase in interest rates, making it the eleventh such hike in twelve recent meetings. Federal Reserve Chair, Jerome Powell, emphasized that in order for inflation to "credibly" reach the central bank's 2% target, the economy needs to slow down and the labor market needs to weaken.
3. General economic slowdown
In July 2023, Goldman Sachs said the risk of the US entering recession in the next year was lower than previously thought. However, there is still a chance of recession and general economic activity remains suppressed. Any anticipated rise in interest rates will make the cost of borrowing even higher for consumers and businesses alike, and lead to less activity. FIs tend to be cautious- looking at costs, securing current revenue streams- and so are generally less focused on risky growth.
The 5 Biggest Impacts of Macroeconomic Trends on US Banking
These macroeconomic trends have impacted the banking sector across the US. Let’s focus on five key trends that are having a profound effect on US financial institutions as a result:
1. Decreasing net income
After the shock of the pandemic, US banks are still very much in recovery mode. The banking industry reported that its full-year net income for 2022 was above the pre-pandemic average, but net income in this period was $263 billion, 5.8% lower than 2021’s full-year net income [Source: FDIC]. On the positive side, banks are making progress on eliminating capital deficits, with rising Common Equity Tier 1 (CET1) ratios and ample liquidity, and the sector is rebuilding excess capital levels [Sources: FDIC, Goldman Sachs].
2. Enhanced user experience
US banks continue their digital transformation journeys, enabling customers to interact with the bank how they prefer, be it online or via mobile app. Payments continue to digitalize and diversify, giving customers more choice, flexibility, and ease around how they pay for products and services. This omnichannel user experience simplifies business processes and can be a key differentiator between competing financial institutions.
3. Limited operating leverage
Analysts expect Net Interest Income (NII) to increase year-on-year in 2023, but market-watchers also expect 4% core expense growth as the rates of staff pay and business costs rise.
4. Continuing consolidation
We have seen a continued decline in the number of Federal Deposit Insurance Corp. (FDIC)-insured institutions in the last decade, from more than 7,000 commercial banks and savings institutions in 2012 to 4,706 at the end of 2022 [Source: FDIC]. We expect to see continued further consolidation and scaling of banking businesses in the coming year. Meanwhile, financial institutions will continue to make financial technology (fintech) acquisitions to attract and access new customers and expand their offerings.
5. Decrease in deposits
Total insured deposits declined by $143.3 billion (0.7%) between Q3 and Q4 2022. However, deposits in Q4 2022 were well above the pre-pandemic average, and analysts expect NII to grow in 2023.
These economic headwinds are limiting banks’ top-line growth in 2023. As such, executives have turned to expense management to combat margin degradation. A critical area where FIs can address this challenge is in the AML/KYC (Know Your Customer) and customer onboarding space, as digitalizing and creating efficiencies in this space can lead to decreased cost, speed to revenue, and a better client experience. This is where technology plays a key role, not just for improving efficiencies, but also to help FIs to avoid potential regulatory fines.
How AML Compliance Helps Banks to Weather Challenging Economic Conditions
Cash is king: how much capital a bank has, and how they’re investing it, dictates how successfully it’s able to endure downturns and volatility in the market. In trying times, it’s more important than ever that banks work to mitigate the risks of distressed clients and strike the right capital adequacy ratios by growing cash deposits in a frictionless manner.
AML compliance has historically been viewed as something that drags out the onboarding process, slowing down time-to-revenue for banks. That’s no longer the case. AML compliance solutions drive modern innovation in the financial sector, they can minimize friction and cut down the number of touchpoints for a client during onboarding, reducing the amount of time and money banks must invest to expand their client base. By increasing operational efficiencies, AML compliance solutions provide and support opportunities for revenue generation by enabling cross-selling and upselling opportunities for banks and allowing for the provisioning of new products and markets without the need for costly additional operational overhead.
Tech Investments are Pivotal to Meeting Economic Challenges
Globally, FIs spend on AML technology exceeded more than $16 billion to meet evolving regulation requirements around topics such as beneficial ownership and to tackle fraud.
Banks account for more than two-thirds (68%) of AML technology spend, but increased regulatory scrutiny is widening in scope, leading to other sectors investing in AML technology, including wealth and asset management (14%), broker dealers (11%) and insurers (6%).
Larger ‘Tier 1’ financial institutions account for half (50%) of global AML tech spend. However, technology investment at these larger institutions is now more focussed on artificial intelligence (AI) and other next-generation technologies.
The share of AML tech spend among Tier 2 (19%) and Tier 3 (31%) FIs is increasing, driven by the increasing use of AML technology at smaller FIs in North America and Europe. We are also seeing the widespread adoption of AML technology for the first time in Asia and much of the world to meet evolving regulatory requirements, which is also driving up AML tech spend.
How AML Technology Enables FIs to Meet Challenging Market Conditions
FIs are investing in technology to address many of the challenges they face. With the rise of online banking and digital-first neobanks, FIs must innovate to compete by delivering an engaging, omnichannel customer experience. They also need to keep up with a shifting regulatory environment across all the jurisdictions in which they operate. At the same time, FIs are under pressure to make sure they have the IT and digital strategy talent they need to realize their goals- and these people are in high demand.
Technology that automates processes for AML compliance is key to increasing operational efficiencies and improving the client experience, especially during onboarding. Procedures for Know Your Customer (KYC) requirements involve the collection of a wide range of data and documentation, which adds friction and frustration to the client experience if done manually.
Interestingly, Fenergo’s research finds that over half of financial institutions are still manually completing between 31-60% of their KYC review tasks. This means that KYC costs alone can run into the millions – up to $35 million for a bank onboarding 10,000 new clients each year. For more than half (52%) of FIs, completing just one KYC review takes them between 61 and 150 days.
In an age where much of our day-to-day life is increasingly digitalized, clients want a seamless and smooth onboarding process. Client Lifecycle Management (CLM) technology can remove much of the friction and time involved during onboarding and throughout the client life cycle, improving customer experience by creating API-integrated workflows that automate data capture for AML and KYC compliance, from external screening and data providers to provide a 360 client view. As well as making the process faster and more efficient, CLM technology provides service quality and transparency, which helps build trust between the client and their bank at the crucial early stage of their relationship and increases time to revenue.
FIs leveraging CLM solutions to orchestrate client journeys are awarded the added confidence of being future-proofed against evolving AML and KYC regulations in the various jurisdictions where they operate. By reducing the cost and time spent per customer at onboarding, investors can start putting their money to work much faster than they would with an FI that still relied on manual processes. FIs can also enable digital self-service and registration for clients, vastly improving the customer experience at onboarding and during the lifecycle of their custom.
Innovators Will Emerge from the Economic Gloom Stronger and More Resilient
While the US is currently going through a challenging period of economic turmoil, conditions will improve. Financial institutions that invest in technology to automate and streamline their client lifecycle management processes now will come out stronger and will enjoy a competitive advantage when investor confidence returns and deposits and account activity increases.
Fenergo’s CLM technology can help you address the challenges posed by current US market conditions and future-proof you for regulatory change and growth through increased competitive edge.
Automate your CLM processes and create stronger journeys. Request a demo today.