How Financial Institutions Can Fire Up Their Lending Engine

With consumer borrowing returning gradually to normal levels, banks and credit unions have a limited opportunity to rethink how they offer credit and build the systems to make new strategies possible.

As U.S. consumer lending climbs from the depths it fell to in 2020, signs are strong that banks and credit unions that want to regain, maintain, or even grow market share will have their work cut out for them.

Facing a combination of new competitors, new forms of consumer credit like “buy now, pay later” and increasing digital expectations from consumers, financial institutions will have to bolster their marketing, add distribution channels and partnerships, and consider new forms of credit.

These challenges will run through 2022 and at least into 2023 in some aspects of consumer credit.

The challenge for traditional lenders like banks and credit unions will be staying in the game as demand grows sufficiently to drive credit appetite. Andreas Kremer, a partner with McKinsey, warns that major e-commerce players like Amazon may represent a greater threat to consumer lending volumes than fintechs have, to date.

“The big players in e-commerce actually might just disintermediate the banks and bring customers not only the products but also the credit to buy it with,” says Kremer. “Remember, consumers don’t want to think about loans, they just want to buy something. If you can buy something and a loan comes with it, it’s just that much more convenient. And usually, it doesn’t have to be the cheapest option as long as it’s cheaper than most.”

Even traditional consumer loan rivals will present a growing source of competition. “The market will become twice as competitive as it was pre-pandemic — probably even more so — because banks have much more in deposits to put to work,” says Leo D’Acierno, Senior Advisor at Simon-Kucher and Partners.
Understanding Where We Are and Where We’re Going

Oxford Economics anticipates that consumers will begin tapping into the savings built up during the pandemic as 2022 approaches. That said, the firm’s research indicates that higher-income people hold most of the savings that remain from the Covid period. This suggests that many other people will need a healthy dose of credit.

“Many lenders are feeling good about the direction that things are going in and they think there is going to be growth ahead,” says Matt Komos, Vice-President of Research and Consulting at TransUnion.

“We are going through the valley of the credit cycle right now,” says McKinsey’s Kremer. He believes that after a few quarters of shakeout, during which usage will be growing, lenders will see a return to normal levels of consumer borrowing on most fronts. The trick will be getting their share of it as demand comes back.

Tomorrow: 

Strategies for Rebuilding Consumer Loans Post-Covid