Consumer Lending – A Growth Opportunity for Banks and Credit Unions with a Plan

Posted by Simon Rose on Jan 9, 2024 11:05:00 AM


Growth-focused companies rarely get excited about sectors with slow compound annual growth rates.

When it comes to consumer lending, we still believe that financial institutions should take a hard look despite a projected 2% CAGR and tempered expectations given the market’s overall size.

With $32 billion of volume in 2023, consumer lending still offers plenty of opportunity to work with new and existing customers. This important segment of the financial services proposition set is poised for more growth in the next few years.

Now is an ideal time for banks and credit unions to take a close look at their consumer lending strategies by defining and refining the target market and channel access and by developing value propositions that align with the market’s needs and expectations.

Here’s a look at what you should be doing now to prepare for growth opportunities just around the corner.

Switching or Fine-Tuning Channels

The biggest change in recent years has been consumers’ increased reliance on social media and other digital channels to identify potential lenders. This has opened the playing field to non-traditional lenders and, in many cases, put banks and credit unions on the defensive. Yet, said institutions have the benefit of history and a strong sense of consumer trust on their side: opportunity exists to capitalize on this.

It’s safe to assume that originations made through cloud- and digital-based solutions – whether at a financial institution’s website or another digital channel – will continue to grow at above-average rates. Banks and credit unions, however, need a compelling offer in this space – retaining market share has equal importance with attracting new customers, though opportunity also exists to improve retention and provide ongoing value for existing customers.

Specific lending categories are expected to provide a significant boost. Key among these is the ongoing increase in spending on electric vehicles, as the US emulates a trend established in other countries. The timing of this opportunity will likely vary by market, but it serves as an example of various local niches that forward-thinking lenders should explore. Moreover, given recent challenges with the economic environment, customers may be more likely to renovate their homes and consolidate existing lending, offering greater opportunities for innovative products and customer retention.

The last decade has seen growth in digital channels that is yet to be fully leveraged by many lenders. Often this is driven by a reactionary or competitive need to keep pace with newer fintechs and Banking-as-a-Service (BaaS) providers, who offer agility and slick processes. Challenges with legacy technology are one such impediment for financial institutions. Arguably, a desire exists to pursue a competitive, robust digital edge for banks and credit unions. What has been lacking is effective actions and outcomes.

Strategically, an emerging platform is beginning to materialize. Customers retain a strong bond to their incumbent financial institution, but they gravitate toward simpler, easier solutions for consumer lending – often through cellphone and tablet apps.

Much of this, though, can be put down to a fundamental lack of understanding your customer – who they are, their life stage, when and how they interact, and the likelihood of things changing.

Walking in the Customer’s Footsteps

The term “customer journey” may sound like a consulting buzzword, but it points to an essential component of any effective strategy. When was the last time you truly “walked” the customer’s path in navigating your product flow from research and discovery, decision-making to application, and on through loan execution? Was it consistent with the experience you’d expect for yourself if you weren’t intimately familiar with the process? Are you aware of the bottlenecks, multiple handoffs, and other inefficiencies users may experience along their journey? And what actions do you take when you see application abandonment rates?

Few financial institutions spend sufficient time engaging with customers (and prospects) to understand what they truly want from the banking experience. Knowing why they chose to bank with you – and whether they would do so again – can provide invaluable competitive intelligence and critical input for crafting an effective strategy. Furthermore, when was the last time you ‘mystery shopped’ your nearest competition?

Every organization stands to benefit from process improvement. I’ve yet to see a compelling reason for maintaining the status quo. In making changes, though, it’s essential to build business processes around the customer – not internal convenience or legacy habits.

The Bottom Line

Possessing a modern, customer-focused strategy, that demonstrates a fundamental understanding of your customer and target markets is a critical foundational layer to success. This will help launch a robust and relevant approach to taking advantage of market recovery to increase market share for consumer lending (as well as other key products), shaping your organization for future growth and success, while improving customer loyalty outcomes.

We’ll expand on these concepts in future blogs, offering greater detail on the key components for setting an effective strategy and realizing operational efficiencies in the process. Regulation naturally plays an unavoidable role in financial services planning, so we’ll also discuss the importance of having the right compliance mindset while making a clear-eyed assessment of one’s target market alignment.

Virtually every bank and credit union have opportunities to add revenue and manage expenses in their consumer lending strategies. We look forward to sharing more observations in the coming months.

Topics: Consumer Lending, Strategy, Distribution Channel, Product Proposition, Consumer Banking

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