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Understanding Increased Risk During A Recession

April 26, 2022
Key takeaways:
  • When the economic landscape changes for the worse, your new and existing customers pose unknown risks to your business.
  • Don't wait for a recession to happen before implementing risk safeguards.
  • Automated risk assessment with an assigned score can help you mitigate financial losses down the road.
  • When it comes to the business of money, they say you should be extra careful during turbulent times. Naturally, you should already have a robust risk assessment policy in any case. But when the state of the world becomes uncertain and you're in the midst of an economic recession, it's valuable to have that extra line of security to protect your business.

    Financial service providers have to be extra cautious with onboarding clients during an economic recession because, when you think about it, the landscape of the relationship has changed. That also means you've got to be wary of existing customers and the threats they may suddenly pose. To truly understand what new risks you might be exposed to, here's why risk assessment plays such a critical role during hard times.

    What is an Economic Recession?

    Simply put, a recession is when there is a significant decline in general economic activity. If you want to get into the nitty-gritty of it, it more specifically refers to a period when the gross domestic product (GDP) declines for two consecutive quarters. However, in modern times it's measured by anything from falling retail sales, slowed manufacturing growth, a rise in unemployment, or a decline in personal income. During these periods, you'll often find a shift in spending habits as people become warier of their finances.

    This can be caused by several factors, including natural disasters or terrorism, high-interest rates, deflation, or asset bubbles bursting, like the infamous dot com bubble. There are even occurrences where a recession happens because people worry about the state of the economy, so they stop spending. While all of these are considered natural occurrences that are bound to happen, it can be daunting as their rippling effects can be unpredictable. It can't be determined how long a recession will actually last.

    A man holding credit card
    Economic recession may be a time of increased fraudsters activity, hence a thorough risk assessment during onboarding is vital.

    Why Risk Assessment is Even More Crucial During an Economic Recession

    Financial service providers need to be extra careful with onboarding clients during an economic recession because it can lead to a significant loss of finances. In turbulent times, a seemingly risky client can be all the more dangerous. There is also the added risk of fraudsters trying to dupe you during a period when they feel financial institutes may have their guard down and are desperate for new customers. In these cases, it's best to air on the side of caution!

    Businesses that focus on loans, mortgages, and investments are particularly at risk during a recession. People may begin to default on loans or feel their money is no longer safe within the system. This is why it's not only imperative to be extra stringent with new customers but also to review relationships with existing customers! In both cases, getting an indication of a customers' creditworthiness, prediction of customer behavior, and propensity to default is vital.

    This is where a good risk management tool can come in handy, one that can assist you during more ordinary circumstances and ramp-up should the economy suddenly turn for the worse. HelloFlow's Risk Engine is the solution that helps businesses evaluate the risk of their clients during or after onboarding to make sure they're only doing business with trustworthy clients who can prove, for instance, reliable payments.

    Without this security check, you could overestimate a client's assets or credit risk, it can create financial problems that exacerbate the issues your company may already face. But with HelloFlow, you get a clear picture of who you're going into business with, and an assigned risk score based on answers provided during onboarding. Risk assessment tools provide you with more comprehensive KYC monitoring, and best of all, it unfolds seamlessly behind the scenes so that you can review the data internally and make a more informed decision.

    One tool to assess them all…

    HelloFlow's risk assessment tools are exclusively online, which can help save cost, time, and management. In any case, it's essential to choose a reliable service provider that will not expose your business to any additional risks. We often see it; companies opt for super-cheap solutions to cut costs to the bone, particularly during an economic recession; however, using poor-quality tools can cause more issues.

    Recession or not, don't leave it to the last minute to prepare your risk strategy. It's essential to have a system that can kick in the moment you smell trouble so that your business can stay ahead of the curve and mitigate risk. Embrace risk management as an everyday tool when onboarding for better KYC and customer insights. Use HelloFlow’s no-code platform to onboard faster and create internal safeguards with a series of AI and automated functions. Book a demo now to see it in action or try it yourself and sign up for a 14-day free trial!

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