consumer loans slip away from traditional banks
consumer loans slip away from traditional banks
Picture of Frederrick Hamann
Frederrick Hamann

Consumer loans slip away from traditional banks

Non-traditional lenders have shaken up the consumer loan market. As digital maturity advances, these new players are expected to grab more and more of the market.

23% was the consumer loan market share of non-traditional lenders in Sweden in 2003, according to McKinsey. This number grew to 58% by 2016, meaning that traditional banks no longer had the majority market share. Sweden is regarded as a microcosm showing what will happen in the rest of Europe. So, banks have to react now unless they want to face severe consequences.

Sweden foreshadows the future

In the years following 2003, technological change paved the way for the rise of non-traditional consumer lending in Sweden. At the same time, traditional banks continued operating unchanged with manual and branch-based processes. This was in stark contrast to the approach of new players. They leveraged data analytics and streamlined customer journeys. New players also had an overall operating model focusing on providing high-quality digital services. Therefore, it became increasingly inconvenient for customers not to go digital.

These changes led to a shift in the consumer loan market. Today, Sweden is one of the countries in Europe where non-traditional banks have the largest market share. Additionally, this means that traditional banks no longer issue the majority of consumer loans. This is important as other major European economies show similar trends. Non-traditional banks also have a significant market share in the UK and Spain. In the UK, new players and specialists provide approximately 30% of the total outstanding volume of consumer loans. At the same time, this figure is 23% in Spain, according to McKinsey. The consultancy forecasts that these figures are only expected to rise as time passes, and there is a reason why.

Digital maturity helps new players

The reason why new players account for 58% of outstanding consumer loans in Sweden is related to digital maturity, explains McKinsey. The consultancy assessed that new players have a much larger market share of outstanding consumer loans in Sweden than in other European countries. Because Sweden is more digitally mature than most European countries.

An example mentioned is the simplified sign-up process using BankID that launched country-wide in Sweden in 2003. Digitally mature solutions like this helped new players build a significant market share that eventually eclipsed traditional banks’ market share in Sweden. Overall, McKinsey suggests that by countries becoming more digitally mature, new players will have an easier time implementing new solutions on a large scale. This means that other European countries could become similar to Sweden. This could cause traditional banks to lose market share to new players.

Lending at the point of sale

New players such as Klarna take a new approach to consumer loans. They stand out from the competition with advanced data analytics and streamlined consumer journeys. For example, Klarna put its BNPL service in the interface of e-commerce platforms. It is integrated into e-commerce merchants’ checkout processes. This makes its offers visible at the precise time consumers need a loan. Streamlining the consumer journey allows Klarna to lend at the point of sale while making it easy for consumers to get a loan.

New players’ customer journeys are in stark contrast with traditional banks’ lending processes. Specifically, 65% of global banks do not provide an end-to-end digital journey for getting a consumer loan, according to Deloitte. The consultancy highlights the widening gap between banks with advanced digital offerings and other banks. Deloitte assesses that banks who do not provide an end-to-end digital journey for getting a consumer loan seem to fall behind the competition with other digital offerings as well. This should make traditional banks worried about their interface. New players seem to have a more modern platform and communicate with customers via their preferred channel. This is not the case with traditional banks. In this sense, traditional banks could fear becoming a commodity. If they are only pushing money from A to B, traditional banks could lose their interface and the ability to utilise their data.

The hidden revenue stream

Traditional banks need to react to digitalisation. One of the most significant opportunities for traditional banks is that they handle data that could be utilised to generate revenue. Because they have access to their customers’ payment details and to the data from customers’ other bank accounts using PSD2 open banking data. Thus, this would allow them to detect if one of their consumers had a loan from a non-traditional lender.

However, traditional banks do not detect these loans. For example, if a traditional banks’ customer buys a washing machine online taking a loan with a high interest rate, the traditional bank would not detect this; hence, it would not be able to help with a better loan. All of this is about to change. As traditional banks discover the hidden revenue stream within detecting competitors’ consumer loans, more and more of them will implement a service that provides them with actionable insights. Such a service uncovers:

  • which competitor provided the loan
  • the loan’s start date
  • the size of monthly instalments

This service providing actionable insights will help traditional banks offer personalised loans that are more likely to convert. For instance, they will be able to give a loan with a lower interest rate or longer runtime than the high-interest loan from a non-traditional player. Or pool different smaller loans into one loan. This way, actionable insights will help banks activate a hidden revenue stream.

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