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Insight:

Consumer lending still going strong

Summary
  • During the Pandemic, consumer lending in Sweden remains on a high level and credit losses are stable.

    However, there are shifts in what is being financed, e.g. from travel and hospitality to used car financing.

  • Looking ahead, we foresee trends in embedded/invisible banking and companies that offer consumer lending should look for ways to differentiate, using their digital strategy and investigate how their solutions can meet higher requirements on security.

    CEO's need to work with change and agility on a strategic- and operational level to seucure the ablity to adapt their solutions and ways of working to stay competitive in this ever-evolving market - and they need to act now.

The Corona Pandemic has impacted most industries, in one way or another. One area that has been affected is online shopping which has increased significantly. This insight sheds light on how the pandemic has impacted the financing industry and more specifically consumer lending, trends that can be expected looking ahead, and what financers should focus on to stay competitive long-term. The insight is based on interviews with several industry experts and thorough market analysis.

Covid-19 impact on the consumer loans market
A deep dive into the financial institutions’ Q2 reports reveal that financial institutions have increased their credit reserves due to the uncertainties connected to Covid-19. However, the main conclusion from our interviews was not only clear and consistent, but also surprisingly positive; the negative impact from the Pandemic on lending volumes and credit quality is far more limited than expected. E-commerce has created new demands for consumer loan services, and a fast shift in consumer behavior enables new financing opportunities.
In retrospect, credit reserves may have seemed excessive. Still, future uncertainty remains as industry experts predict that the impact of increased unemployment is lagging and will begin to show early 2021. In support of this prediction, the Swedish Enforcement Authority has started to notice a considerable increase in incidents of debt collection; potentially because it is nowadays as easy to finance a purchase as paying with cash.
E-commerce is also the strongest driver in the evolution of consumer lending and its position has grown even stronger during the Pandemic. The increase in demand is mainly defined by a threshold where customers are resistant to taking the first step to shop online. 

Data available to our industry experts shows the pandemic has reduced the resistance for people to shop online, especially regarding the older population. 

Goods and services that is often bought with financing is nowadays available on-line, e.g. car dealers whose products usually are tightly connected to a physical purchase are moving fast to offering their customers the opportunity to purchase a car online. This movement is not new since the Pandemic, nor is it temporary. But it has undoubtfully accelerated. 
The pandemic has clearly shifted what the consumers purchase and thus what they need to finance. For example, financing in the hospitality sector has drastically decreased whilst we see a clear increase related to home renovations and used car financing.

The industry experts about the future
We asked the industry experts to predict what would be the key focus areas to stay competitive post-Pandemic and we got a variety of answers that can be consolidated into three main take-aways: 

  • differentiate in the pool of digital solutions,
  • higher requirements on security, and
  • the power of agility
1 Differentiate in the pool of digital solutions

The digital channel is a vital part of the business model for institutions offering consumer loans. The digital channel carries not only the possibility to directly reach a larger crowd but also indirectly package the financing products into third parties’ value propositions (e.g. aggregators and retailers) in a seamless way. Embedded and invisible banking where the end-customers never get in contact with the financial service provider behind the product is a prominent trend and close relations to key merchants and third parties are going to be crucial. Financial institutions should revisit their digital strategy to secure it helps them differentiate their digital solutions, e.g. by analyzing the complete customer journey with the help of Service Design techniques.

2 Higher requirements on security

Usability, simplicity, and personalization are key concepts in software development and understanding customer needs is essential for financial services as software has become a foundation in their business. While providers of financial services race to innovate solutions that enhance the financing concepts, the growing share of software also opens new holes in the wall of security. Since financial services are mainly dependent on trust, a small breach or fraud can heavily damage the trust between the consumer and the provider, making security an unavoidable subject.

3 The power of agility

The incumbent banks are lagging behind and the FinTechs are aggressive. The large organizations have a strong and trustworthy brand to rely on but are not agile enough to follow the tight turns in the rapidly changing and complex environment. They need an approach and proper tools to keep up with the fast-changing surrounding world. The small businesses have quick feet but need to keep their heads cold, by implementing supporting processes and mind-sets, in order to not jeopardize their gained trust. Regardless of size, management should implement agile company-wide ways of working supported by agile strategies that include a fair share of scenario planning. 

Whether you are a large organization who needs to build agile capabilities, a small organization who needs to implement safer and more efficient processes or just want to discuss how to set up an agile strategic agenda – we at Influence can give you the cutting edge industry experience and broad competence to support you. We have a unique way of running projects based on Collective Intelligence – where project management skills are combined with research-based methodologies on team performance, the ultimate differentiator when addressing the topics in this Insight.

Note: Data is gathered from SCB, the Swedish authority for statistics. In 2002 they started to categorize consumer loans as a separate kind of loan. The data is updated on a monthly basis with one-month lag.

The data is publicly available via their website. https://www.scb.se/hitta-statistik/statistik-efter-amne/finansmarknad/finansmarknadsstatistik/finansmarknadsstatistik/

Didrik Dahlström
Sam Saghafi