This blog first appeared in Credit Union Times.
In a 2019 National Association for Business Economics survey of economists, 72% of respondents predicted a recession would occur by the end of 2021. More than half said they think one will strike before 2020 ends. The economists surveyed cited increased trade protectionism, financial market strains, and a global growth slowdown as factors leading them to this conclusion.[1]
If the market does take a downward turn, consumer, auto, and mortgage loans will face a higher risk of default and deposit and card activity will significantly decline. To make matters even worse, instances of theft and fraud often spike during economic slumps due to growing unemployment and poverty.
Aside from a potentially looming recession, other market factors already weigh heavily on business, including:
- High loan-to-share ratios and tighter balance sheet liquidity;[2]
- Expanding competition;
- Regulatory concerns; and
- Evolving consumer banking wants, expectations, and habits.
Despite these factors’ business implications, financial institutions can continue to grow, protect, and evolve their business. Organizations today have far more options at their disposal than they did during 2008’s Great Recession. With the right tools and strategies, financial institutions can continue to grow their accounts, loans, and deposit business in a competitive, sustainable, and risk-conscious way.
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Non-Traditional Loan Offerings
Regulations, competition, and liquidity all play major roles in a financial institution's loan strategy. Today, consumers are receiving loan offers from various organizations (through various channels) promising to give them a loan perfectly suited to meet their needs. For this reason, consumers are no longer looking for traditional loans as their only option.
Expanding loan portfolios beyond traditional offerings will enable financial institutions to meet market demands while continuing to bring in safe, profitable loans. They can offer a variety of non-traditional loan types to differentiate themselves from other lenders, grow loan profitability, and diversify their portfolios.
Student loans offer a huge opportunity to establish long-lasting, profitable relationships, early in a consumer's credit journeys. A 2019 Cornerstone study found 6 in 10 consumers who applied for a student loan opened another account at that financial institution.[3] While there is risk associated with student loans, private student loans carry much less risk than federal student loans, which make up 92% of the total national student loan debt.[4]
There are many other non-traditional loan options financial institutions can adopt to diversify and strengthen their loan portfolios, including, but certainly not limited to:
- Auto and consumer loans with flexible payment structures;
- Home refinancing and home improvement loans;
- Auto lending and leasing alternatives, like residual based financing;
- Commercial loans;
- Indirect loans; and
- Tech-based tools that drive loan interest and traffic (e.g., TrueCar).
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Implementing these cutting-edge solutions can help you pursue more loan opportunities while offering desirable loan characteristics, like shorter terms and lower monthly payments, to a wider variety of borrowers.
Expanded Borrower Pool
The outdated FICO model does not paint a complete picture of where the risks and opportunities lie with potential borrowers. Depending on this score alone will leave many valuable lending and refinancing opportunities on the table. There exists alternative types of borrowers that could be very lucrative for a financial institution, such as near-prime Millennials and Gen Zers still building their credit profiles.
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Looking at alternative accountholder data like bill pay history, checking or deposit account patterns, and savings account usage can offer a more well-rounded view of a prospective borrower’s predicted risk level. This information, along with traditional credit profiles, can be used to extend loan offers to more borrowers while still remaining risk-conscious.
Reinvigorated Deposit Growth Strategies
The fight for deposits has been a steadily increasing concern for financial institutions recently. The latter part of 2019 continuing to see deposit rates lowering and demand for certificates of deposit.[5] Many institutions have traditionally relied on high-rate savings accounts and CDs to pull in long-term deposit activity. However, these methods are no longer working. Many consumers are moving their money to investment alternatives that offer higher returns.[6] To build deposits, financial institutions need to reinvigorate their approaches to drawing in new activity.
Account loyalty and rewards programs are a great way to draw in new depositors. These accounts incentivize accountholders to make regular deposits by offering monetary and retail rewards for transactions. Loan-related benefits like APR discounts or cash towards loan payments could be used to incentivize deposit activity and simultaneously drive loan opportunities. These accounts can also deliver new revenue by charging a fee or up-front cost for higher-level rewards account types.
Offering more than one type of deposit account will enable individual consumers to choose the right account for them and help institutions continue pulling in various types of depositors, by offering multiple options that address different individuals' wants and needs. Consider assembling an account portfolio that contains savings accounts with competitive interest rates, while balancing these payouts with money markets, CDs, commercial deposit accounts, and retail deposit account programs. Fees from the rewards programs can offset savings account interest rates.
Financial institutions could also reconsider the traditional pricing structures to protect current deposit accounts and continue attracting new accounts. There are two common options for changing up the pricing structure, and these can go hand in hand: pricing segmentation and dynamic pricing.
Read More About Deposit Growth Solutions
Pricing segmentation results in cutting rates for some accounts, so that only accounts less likely to be impacted by a rate cut will receive the change. This approach is a win-win for consumers and the organization alike: The financial institution pays out less money and accountholders remain satisfied with their deposit account. Assessing which accountholders would not be affected by the change can be a challenging process, but data on financials can be very helpful in making this decision.
In a dynamic pricing structure, new accountholders receive a custom rate up front, based on their financial situations. This too can be a bit tricky, but if financial institutions establish clear guidelines for their staff, this payment structure can succeed for both organizations and their accountholders.
Community Education Programs
Community financial institutions have the unique advantage of offering attractive, affordable loans and products targeted to the unique needs of their community. Education programs are a great way to showcase these solutions to a larger portion of the community, while also helping to build trust and loyalty with current account relationships.
Consumers – Millennials and Gen Zers, especially – want to understand a product’s functionality and how it helps them. Offering an opportunity for them to receive answers to these and other questions can drive trust with current accountholders, while pulling in new accountholders. Home buying and selling workshops, product-specific Q&A sessions, and talks on loan or fraud risk prevention can be fairly easy for institutions to host, and with the right marketing, can have a huge impact on loan volume, account openings, and sales revenue – especially in younger age groups.
Enhanced Experiences
Delivering a positive experience has never been more important in ensuring long-term success. Consumers have more options for lending and banking than they ever have before, and many consumers are moving away from traditional banking entirely.[7] Continuing to attract and build new business requires meeting consumers where they are.
No matter their age, consumers want a service experience that is simple, pleasant, and relevant to their needs. Sales and service experiences should be as easy as possible, while still delivering the same positive, personalized service they would receive in face-to-face interactions. Leveraging online and mobile technology is the best way to offer these experiences.
Financial institutions that prioritize their digital strategy to make mobile and online services a reality (e.g., bill pay, account inquiries, loan applications, and mobile payment options) will be far more successful in sustaining and driving business.
Data & Marketing Approach
If service is one side of the digital strategy triangle, data and marketing make up the other two sides. Institutions have consumer data on hand they can use to glean insights about each individual’s unique preferences, stage in life, and financial circumstances – from purchase history, to forms with demographic information, to social and ad interaction.
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These insights can be used to deliver personalized, targeted offers to address identified needs. The more relevant the offer, the more likely it will garner a positive response. When properly executed, data-driven marketing strategies can result in enhanced trust, satisfaction, loyalty, and sales.
Even if a recession does come by 2021, institutions that offer their consumers desirable solutions in desirable ways will see desirable results.
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[1] https://www.nabe.com/NABE/Surveys/Outlook_Surveys/June_2019_Outlook_Survey_Summary.aspx
[2] https://www.nafcu.org/sites/default/files/data-research/2019-NAFCU-Report-On-Credit-Unions.pdf
[3] https://www.crnrstone.com/publications/the-lifetime-value-of-a-student-loan-relationship/
[4] https://www.nerdwallet.com/blog/loans/student-loans/student-loan-debt/
[5] https://thefinancialbrand.com/90716/financial-marketers-deposit-account-savings-interest-rate-fintech/
[6] www.wsj.com/articles/banks-golden-deposits-are-heading-out-the-door-1540200600