Consumer Lending Revolution

The more I look at what is happening with consumer lending today, the more I believe we are in the midst of a true revolution. This is not a slow evolution, although some of these changes have been happening over the past few years, this is a substantial change in the lending environment. In my opinion, there are three main areas driving this consumer lending revolution:

Regulatory Changes

• The CFPB’s proposal for changes in small dollar credit will have a dramatic impact on short and longer term loans. No matter what the final rules say, you can be assured they will dramatically change consumer’s access to credit and lender’s approach to offering credit.  Good or bad, it will be a significant change.
• The Department of Justice’s “Operation Chokepoint” initiative to pressure financial institutions to cut off access to “risky” businesses illustrates the federal government’s willingness to take an unorthodox approach to affect their change – even as it negatively impacts law-abiding business owners.

Technology & Data

• There is increasing consumer comfort with initiating financial transactions outside of a branch. While there is still a group of consumers that prefers a face-to-face experience, that group is shrinking. Smartphones are now mainstream and this will continue to drive transactions from the storefront to a mobile device. Not only do you need to be online, your site needs to be responsive and very user-friendly.
• More companies are implementing data analytics to improve their marketing efforts, risk management, and product offerings. In fact, there will soon be a time when consumers expect an offering that is tailored specifically to them.

Consumer Habits

• Soon the Millennials will outnumber the Baby Boomers.  According to Nielsen, Millennials and Baby Boomers each number approximately 77 million in population.
• Also according to Nielsen, over 70% of the U.S. population owns a smartphone with the Millennial segment owning over 85%
• Barkley reports that Millennials expect to be able to interact with brands on social media and gather product information from their social circles before making a decision

Currently, there is a lot of focus on the impending regulatory changes, but we shouldn’t overlook the impact that technology and consumer habit changes are having on the landscape. By themselves, the Millennials are forcing businesses to rework how they look at customer interaction. Companies that don’t recognize their buying power will have a hard time catching up.

How is your organization handling this revolution? Here are four steps for your organization to complete to effectively prepare for this revolution.

Understand your current situation

• Do a thorough analysis of how the proposed CFPB rules will financially affect each of your branches.  You may have to look at multiple scenarios, but take the time to fully understand what may happen. Something will happen and it will be dramatic.
• Review all of your current processes and systems to understand how they could handle the changes in technology and consumer habits.  How adaptable are they?
• Do you have the best resources available to help you? Whether it is your organization’s team or your vendor relationships, do you have the best team to handle this revolution?  How adaptable and willing to change are they? How up-to-speed are they on these three areas?
• Grab your smartphone and pull up your customer-facing website.  Is this the experience that will attract consumers in the future? How are you currently interacting with your customers on social media? Are you providing the experience Millennials expect? If not, they will go to someone that does.

Identify all of your options and gaps

• What changes or additions to your current product mix can you make to improve it? Are there products you can add to attract more customers? How will your existing pool of customers respond to a new product? You should model how this will affect your financial results. Revisit opportunities you may have turned down in the past. They may look more attractive to your customers now.
• Poll your current customers to learn what they would like to see from you. Poll customers that recently left to find out why.
• Look at your team and determine who will have the passion and capacity to champion your organization to the next level. Identify any gaps you may have to handle this transformation.
• Are you using data to make marketing decisions or helping with your risk management?
• Examine all of your vendor relationships to help position you for the future. Are their positions missing? Do you have a solution for gathering and analyzing data? Sometimes you need to rent expertise.

Understand your timeline

• This revolution is happening now. If you wait, you should understand that others are not.
• How long does it take to add functionality to your current systems? If you want to add a new product, how long will it take?
• If you are not online (desktop or mobile), how long will it take?
• How long would it take to add a new product and make it work correctly? If you need to get licensed in a state for a new product, that by itself may take multiple months. If you are thinking of adding a longer-term installment loan, it may take 6-18 months to test and make changes to the program to keep losses within your tolerance level.
• The short answer is you need to start now!

Create your plan and start

• Don’t wait for absolute clarity on everything to start. Regulations, technology, & customer behaviors are changing – some very quickly. You need to create a plan and begin working towards your strategic solution to handle this revolution.
• At a minimum, you should do a complete review of your entire organization. You will find opportunities to make improvements and get a better understanding of what you need to do to come out a winner.
• There are experts that are ready to help you work through this process. You can get a fresh, unbiased perspective on your business and assist you in identifying the resources you need to succeed.

I think it is fitting to wrap this up with two quotes from Sun Tzu that are very appropriate:

“Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.” 

“In the midst of chaos, there is also opportunity”

I would love the opportunity to discuss this more with you and identify areas that our group can assist you. Please don’t wait to work on these four steps.