Operating amidst economic uncertainty is no easy feat. Most middle market companies are reevaluating their business costs and priorities as they shift their focus to sustain growth, create efficiency and retain talent to help prepare for a potential recessionary environment.
Although the possibility of a recession poses challenges to many industries, it uniquely affects the financial services industry. Financial services institutions are the gateway to our economic world and a recession can cause damage through credit and investment losses and reductions in business. When this happens, it directly affects the cost of securing credit and doing business, which for some impacts their ability to meet payroll or secure a loan or mortgage.
To learn how middle market companies across industries are navigating these uncertain times, we surveyed 500 middle market professionals in August 2022 to find out how they’re preparing for a potential recession (if at all) and what their priorities are over the next 12 months.
Let’s take a look at what they told us and also dive deeper to better understand how a potential recession is impacting the financial services industry, their concerns and priorities and how they are leaning on technology to help navigate economic uncertainty.
Can history guide financial institutions out of a recession?
Previous economic disruptions, including the financial crisis of 2008, seriously impacted financial institutions and resulted in an onslaught of new compliance and capital requirements. The disruptions also contributed to an intense inspection of their balance sheets.
With another recession threatening to rear its head, financial institutions are understandably concerned and there are mixed sentiments about what’s going to happen next.
“Our current situation was induced by the Federal Reserve, so in some ways, history can guide us, but in a lot of ways we’re dealing with a new type of economic rebalancing and tremendous uncertainty,” said Boyce Adams, AvidXchange’s Senior VP of Growth.
He adds: “We’re playing a game of cat and mouse with interest rates and inflation, and no one knows what will happen. The overriding sentiment is both bullish and uncertain.”
While consumer spending remains relatively strong and many financial institutions are well capitalized following 2008, Adams points to some troubling signs for financial institutions. Rising inflation and a 20-year low on new mortgage applications are likely to impact the financial industry and potentially lead to industry consolidation.
While inflation has a lesser impact on financial institutions, higher interest rates could lead to lower consumer demand and fewer business opportunities for financial organizations.
“Institutions, like consumers, are looking to tighten their belts and thinking about how they are going to navigate a recession if it happens,” said Adams. “It starts with identifying their priorities.”
Financial institutions are getting their priorities in order
While financial organizations are inherently stable organizations, they’re looking long and hard at the numbers and the opportunities as they prepare their 2023 budget in anticipation of a possible recession.
Here are their priorities:
1. Saving money and creating efficiencies
Sixty percent of survey respondents said finding ways to reduce costs is top of mind. Adams said some financial institutions may be looking to consolidate vendors and do more with less.
Two-thirds (66%) of respondents said creating efficiencies is a high priority for their business, helping to increase productivity and improve profit margins.
Thirty percent of survey respondents said they are preparing for the forecasted recession by reducing or eliminating office space and a third (34%) said their company is decreasing the budget for overhead costs like rent, utilities and office supplies.
2. Attracting and retaining talent
Thanks to a relentless labor shortage across industries and a need for skilled workers to guide and support digital transformation efforts, it’s not surprising that nearly two-thirds (62%) of survey respondents said retaining talent is a high priority for their business over the next 12 months.
In the financial services industry, staffing burnout has been a continuous concern. COVID-19 was stressful for the industry’s staff as they were on the front lines handling Paycheck Protection Program (PPP) loans. Now, organizations are investing in technology to help streamline processes and create efficiencies.
“When it comes to talent, organizations need to ensure they’re set up for efficiency to attract employees and enable retention."
While there’s uncertainty around what will happen with the labor market, Adams said “preparing for the worst and having the right processes and technology in place is going to be crucial for financial institutions.”
3. Enhancing compliance and risk management
Charged with keeping money safe and moving it in a highly regulated environment, it goes without saying that improving compliance and risk controls is a top priority for financial institutions.
Financial institutions are continuously looking for new and better ways to decrease risks and increase compliance in response to existing and new threats, including those from cybersecurity and fraud, as well as operational risks. And many are turning to technology to help reduce fraud risk.
Automated technology helps financial services navigate economic uncertainty and prepare for the future
When asked how middle market companies will tackle their priorities in anticipation of a recession, nearly half (48%) of those surveyed said they’ll continue to invest in technology and 40% said they are increasing their tech budget.
Why?
Companies are largely looking for technology solutions to increase business efficiencies, cut costs, enable growth and aid with retention efforts. In fact, 36% of survey respondents are focusing their technology investment on automation.
Investing in automation technology, such as accounts payable (AP) software, helps AP staff reduce manual tasks like invoice processing and bill pay. AP automation also allows professionals to focus on more strategic work like analyzing data, reducing errors and identifying growth opportunities.
Financial institutions that have already adopted finance automation technology are reaping valuable benefits as their AP staff can make more informed decisions and identify opportunities to grow the business while catching errors like duplicate payments and protecting against fraud risk.
Automation can also help with another important priority — talent.
Adams said investing in AP automation has become a must-have in the finance world: “Really qualified and capable finance and accounting professionals don’t want to be saddled with rudimentary work. Institutions need to be set up for efficiency, utilizing automation and keeping an eye toward innovation to retain the talent they have and attract the new hires they need.”
The importance of automation technology was also uncovered in AvidXchange’s 2022 AP Professional Career Satisfaction Survey conducted in partnership with The Institute of Finance & Management (IOFM). The survey found finance professionals are more satisfied with their roles when their company has more automation. Finance professionals that are equipped with automation tools agree with the statement: “My job utilizes my skills and abilities as much as it could.”
Adams adds, “If an institution can invest in technology that will allow someone to have a fulfilling career in a job where they can strategically contribute to the organization, that’s a win for all parties involved.”
What’s more — automation enables remote work and reduces overhead needs by eliminating paper.
Are you ready to help your financial institution prepare for the future?
While no company, financial institutions included, can predict whether a recession is imminent, organizations can prepare for a potential recessionary environment by learning from the past, understanding priorities and investing in technology to modernize and protect their business.
For more information about how automation can fortify your business, download our white paper: “How Middle Market Finance Teams are Preparing for a Recession.”