Fenergo has recently argued that the economic downturn in the US market underlines a strong business case for CLM technology.
The US economic landscape has navigated through turbulent times in recent years. Challenges such as the COVID-19 pandemic, the conflict in Ukraine, and trade tensions with China have taken a toll.
Yet, the resilience of the US economy shines through as the US dollar continues to hold its ground, with no recessions since the initial shock of the pandemic in 2020.
However, concerns loom on the horizon. The persisting inflationary environment is an alarming sign. Financial institutions (FIs) grapple with these macroeconomic scenarios, and Wall Street’s eyes are fixated on the Federal Reserve’s next move. The recent series of rate hikes are a testament to these challenges, raising questions about the implications of further contractionary policies.
Fenergo, in its analysis for H2 2023, identifies key microeconomic trends in the US. The top three are:
- The potential onset of a shallow recession in 2023. Factors like rate hikes by the Federal Reserve and global economic slowdowns are significant contributors. Domestically, decreased demand and investments are hampering GDP growth, leading to worries of escalated unemployment. However, the silver lining may be a decline in inflation.
- Inflation continues to be a thorn in the side. It’s adversely affecting bond yields, squeezing equity markets, and causing macroeconomic volatility. The Federal Reserve’s actions, including the recent quarter-point rate increase – the eleventh in the last twelve meetings, underscores their intent. Jerome Powell, the Federal Reserve Chair, remarked that to “credibly” achieve the bank’s 2% inflation target, an economic slowdown and weakening of the labour market are prerequisites.
- Despite Goldman Sachs’ assertion in July 2023 about a lowered risk of a recession, the broader economic activities remain subdued. Rising interest rates are set to further burden consumers and businesses, discouraging economic activity. Financial institutions thus seem to adopt a cautious stance, focusing more on consolidating existing revenue streams than aggressive expansion.
Banking in the US feels the ripple effects of these macroeconomic shifts. Five pivotal impacts on US banks include:
- The industry’s net income for 2022 stood at $263bn, marking a 5.8% dip from the previous year, albeit surpassing pre-pandemic levels. Positively, the banking realm is making strides in redressing capital shortfalls and rebuilding reserves.
- The digital transformation journey marches on. Banks are enriching user experiences by facilitating diverse payment modes and enhancing online and mobile interactions.
- Limited operational leverage remains a concern as rising business expenses offset the projected Net Interest Income (NII) growth for 2023.
- The trend of consolidation continues. The dwindling numbers of FDIC-insured entities is evidence, dropping from over 7,000 in 2012 to 4,706 by the end of 2022. Meanwhile, acquisitions in the FinTech space by financial institutions are on the rise.
- Deposits have seen a decrease, with a $143.3bn dip between Q3 and Q4 2022. Yet, there’s optimism around NII’s growth in 2023.
Faced with these economic hurdles, banking executives are delving into expense management to counteract diminishing margins. CLM (Contract Lifecycle Management) technology, particularly in the realms of AML/KYC and client onboarding, emerges as a beacon. Leveraging technology can yield efficiencies, quicker revenue, enhanced client experiences, and a safeguard against potential regulatory penalties.
Furthermore, the significance of AML compliance cannot be understated. Once perceived as a bottleneck in the onboarding process, modern AML solutions are now innovation drivers. These tools reduce onboarding frictions, curtail costs, and empower banks to broaden their client base efficiently.
On a global scale, the investment in AML technology has surpassed $16bn to adhere to evolving regulations and counter fraud. While banks represent 68% of the AML tech expenditure, other sectors, including WealthTech and InsurTech, are also joining the fray. The spotlight on AI and next-gen technologies at larger financial institutions is noteworthy. Interestingly, the AML tech adoption wave is also catching on in regions like Asia, propelling the global AML tech expenditure further.
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