The aftermath of the 2008-2009 financial crisis led to a dramatic reduction in consumer loans. Defaults and deleveraging by consumers, coupled with stricter underwriting criteria from banks, resulted in a dramatically different post-crisis lending landscape.
In the decade since, consumers have regained their confidence, unemployment has decreased, and the economy has continued to grow. Total outstanding household debt has risen back to the pre-crisis levels. Balance sheets, of course, aren’t the only thing that has changed in the consumer-lending landscape since the crisis.
The rise of the smartphone gave us an ever-present camera to take selfies and apps that let us do just about anything we desire from the comfort of our own palm. Check deposits via banking apps cut down on the need to regularly enter a bank branch. Apple Pay, Venmo and other payment apps allow smartphone users to do other banking tasks via their phones as well.
Tech has also changed other consumer behavior. The rise of Amazon has made it possible to shop online for almost anything. With Prime’s two-day shipping, and more recently “Prime Now” which promises delivery within two hours, consumers get immediate gratification and satisfaction. This represents a monumental change in the customer shopping journey, shrinking the acceptable amount of time that consumers feel is acceptable to wait for something.
This new mindset of instant gratification and delivery of goods and services (such as on-demand Netflix, rather than waiting for DVDs by mail) opened Pandora’s Box. In the financial sector Fintechs began evaluating the old ways of delivering services (cumbersome and slow) and developing easier and faster solutions. The result: online lenders like LendingClub and SoFi. Not only did the new, easier and faster approach present a strong contrast to the traditional banking product and service model, but it also provided a path for consumers to refinance higher rate (credit card) debt.
Initially, most bankers were dismissive of these new Fintech players. They predicted that they would run out of money, fall apart, or not survive the next credit cycle. Instead, some former bankers are joining the Fintechs and new challengers like Upgrade and Figure are launching. In addition to the Fintech startups, well-capitalized banks like Goldman Sachs have entered the unsecured lending market.
As a result, the consumer lending space has changed from distinct lending silos (credit card, unsecured, student, auto, home equity) to a lending continuum where consumers are crossing over from one silo to the next. Silos benefited the banking industry, but consumers simply want to borrow money when and where they need it. The shift also illustrates that what consumers value is vastly different from what most traditional bankers once thought. In this new world of Prime Now, speed and instant gratification have become increasingly important. Consumers refuse to spend energy on options that they perceive as too slow or cumbersome and will even pay higher interest rates in exchange for faster and easier loans.
Still, consumers will shop around for loans if they can do so as quickly and easily as they can compare prices on Amazon. That desire for streamlined comparison shopping has led to the rise of aggregator web sites, even as few people would take time out of their busy lives to visit several brick-and-mortar bank branches unless they are conveniently located in the same high street or strip mall.
With silos broken down, lending product owners now need to look to both the right and the left of them on the lending continuum to understand their new competition. Many future home renovators, for example, traditionally the exclusive territory for home equity lenders, might now consider other loan or home investment options. Consumers who carry a credit card balance are more likely to consider alternatives at lower interest rates by Fintech lenders. As more consumers begin their shopping journey for anything online, traditional financing mechanisms are up for reconsideration. Consumers will look for the highest value product that offers both convenience and a low price.
There are multiple challenges on the horizon. First, based on historical patterns, we are due for a recession (or at a minimum an economic slowdown), which typically brings increased losses for lenders. The housing market is cooling down, which results in slower growth of available equity in homes to borrow against and a reduction in consumer confidence and perception of overall wealth.
Second, there must be a limit to how much the household debt can grow. Millennials with high student debt, for example, have a hard time qualifying for a mortgage or saving for the down payment for their first home. This increases the incentive for consumers to look for lower cost ways to service their debt, such as refinancing revolving credit card balances.
Third, tech companies like Google, Apple, Facebook and Amazon have become household names and have won the trust of consumers over the last decade. They are each tech companies without the “Fin”, but they have all begun to enter the already crowded market for financial services. Unlike the Fintechs, who had to work hard on building a brand and a seamless process to win over consumers, the Techfins already have the consumers’ trust and some have even more convenient processes to leverage.
The clearest example of this trend was the news that Goldman Sachs is partnering with Apple to provide a special credit card as part of the iPhone experience. The question is no longer “What is in your wallet?”, but, “What is on your phone?”
Finally, there is an increase in point-of-sale financing, potentially the ultimate change in the customer journey. Integrating financing into the purchasing process removes the additional step of searching for a lender when the need for credit arises.
These challenges have forced traditional banks to evaluate their existing customer journey by rethinking products, processes, and systems. Citibank, for example, recently launched its Flex Loan product, based on a consumer’s existing credit card limit. Flex Loan eliminates the need for a cumbersome approval process and allows for access to funds in minutes. Another option is for banks to choose to partner with a Fintech who has already figured out the new products, processes, and systems.
All these changes mean that it’s more important than ever to closely monitor the changing market to see how your offerings compare to your competition, and how consumers perceive and value your offering in this dynamically changing landscape. The winners will be those lenders who can adapt to the changing customer needs and meet them where they are with the most valuable proposition.