Consumer lending 2017: Bold bets and strategic exits
December 13, 2017 10:00 PM
In some ways, 2017 was the year of the consumer. The year began with high hopes for business borrowing, as the new presidential administration promised to pump up the economy with tax reform and a health care overhaul. As the year wore on, bankers had to adjust their expectations, and those of shareholders, as commercial clients waited to see how taxes and health care would shake out before they took on more debt.
Consumers, though, are spending more than ever.
With the economy continuing to improve and household wealth growing, total consumer debt has increased in 12 consecutive quarters and hit a record $12.8 trillion in the second quarter, according to the Federal Reserve Bank of New York. And, for the most part, consumers are staying on top of their bills. The American Bankers Association said recently thatthe midyear consumer delinquency rate held steady around 1.56%, which is below the 15-year average of 2.16%.
Banks searching for growth pushed and pulled ona variety of consumer lending levers this year. Personal loans, particularly those offered through digital channels, were especially popular as banks aimed to emulate online lenders’ speed and efficiency. Meanwhile, smaller banks that often lack the resources to beat fintechs are, in some cases, joining them.
There is some cause for concern in consumer lending. Credit card delinquencies, while coming off of historic lows, have been trending upward. Late payments and defaults on auto loans rising as well, and some banks have responded by scaling back their exposure to the auto sector or, in the case of TCF Financial, exiting the business entirely in search of better returns elsewhere.
Here’s a look at some of the recent moves banks have made into and out of consumer lending:
Consumers, though, are spending more than ever.
With the economy continuing to improve and household wealth growing, total consumer debt has increased in 12 consecutive quarters and hit a record $12.8 trillion in the second quarter, according to the Federal Reserve Bank of New York. And, for the most part, consumers are staying on top of their bills. The American Bankers Association said recently that
Banks searching for growth pushed and pulled on
There is some cause for concern in consumer lending. Credit card delinquencies, while coming off of historic lows, have been trending upward. Late payments and defaults on auto loans rising as well, and some banks have responded by scaling back their exposure to the auto sector or, in the case of TCF Financial, exiting the business entirely in search of better returns elsewhere.
Here’s a look at some of the recent moves banks have made into and out of consumer lending:
Barclays: Moving beyond credit cards
British banking giant Barclays is seeking to expand its U.S. consumer business and has been testing an unsecured personal loan product that it plans to launch to a broader customer base in 2018.
Barclays has $33.1 billion of assets the U.S., mainly concentrated in credit card loans to prime and super-prime consumers. The company also has about $12 billion in U.S. consumer deposits through its online bank. Its personal loans, which it is offering through its digital channels, range between $5,000 and $35,000 and can be repaid in three, four or five years. The interest rates range from 4.99% to 18.99% and the loans carry no origination fees or prepayment penalties.
“It’s a growing market and one that we find attractive,” said Curt Hess, the CEO of Barclaycard U.S., in an interview with American Banker. “It’s really a natural extension away from being more of a monoline card business.”
Barclays has currently tested its digital personal loan with about 15,000 consumers and plans to market the product to individuals with pristine credit.
Barclays has $33.1 billion of assets the U.S., mainly concentrated in credit card loans to prime and super-prime consumers. The company also has about $12 billion in U.S. consumer deposits through its online bank. Its personal loans, which it is offering through its digital channels, range between $5,000 and $35,000 and can be repaid in three, four or five years. The interest rates range from 4.99% to 18.99% and the loans carry no origination fees or prepayment penalties.
“It’s a growing market and one that we find attractive,” said Curt Hess, the CEO of Barclaycard U.S., in an interview with American Banker. “It’s really a natural extension away from being more of a monoline card business.”
Barclays has currently tested its digital personal loan with about 15,000 consumers and plans to market the product to individuals with pristine credit.
Andrew Harrer/Bloomberg
PNC: 'Banking the clients we want to bank'
PNC Financial Services Group in Pittsburgh also recently announced its own plans to begin offering consumer loans online.
The $375 billion-asset PNC plans to promote the loans nationwide through its mobile app and in new branches where it currently has no retail presence. It will be PNC’s first attempt at building a national consumer-lending platform, according to Chairman and CEO William Demchak.
“We're going there to be there with our full-service capabilities, patiently banking the clients that we ultimately want to bank,” Demchak said at a recent investor conference.
The $375 billion-asset PNC plans to promote the loans nationwide through its mobile app and in new branches where it currently has no retail presence. It will be PNC’s first attempt at building a national consumer-lending platform, according to Chairman and CEO William Demchak.
“We're going there to be there with our full-service capabilities, patiently banking the clients that we ultimately want to bank,” Demchak said at a recent investor conference.
Michael Nagle/Bloomberg
Capital One: Closing the book on mortgage lending
Capital One is getting out of the mortgage business .
In an internal memo, the company cited competition as its reason for winding down its residential mortgage and home equity lending. According to Bloomberg, Capital One had around $20.6 billion of residential loans on its books in mid-2017, making it the country's 12th-largest bank mortgage lender.
“These businesses are in a structurally disadvantaged position, given the challenging rate environment and marketplace,” Sanjiv Yajnik, president of financial services at Capital One, said in a memo to employees. “These factors do not allow us to be both competitive and profitable for the foreseeable future.”
The $361 billion-asset company is eliminating 905 jobs in offices in Plano, Texas, St. Cloud, Minn. and Melville, N.Y. It said it would continue to finance multifamily and affordable housing properties for real estate investors and developers.
In an internal memo, the company cited competition as its reason for winding down its residential mortgage and home equity lending. According to Bloomberg, Capital One had around $20.6 billion of residential loans on its books in mid-2017, making it the country's 12th-largest bank mortgage lender.
“These businesses are in a structurally disadvantaged position, given the challenging rate environment and marketplace,” Sanjiv Yajnik, president of financial services at Capital One, said in a memo to employees. “These factors do not allow us to be both competitive and profitable for the foreseeable future.”
The $361 billion-asset company is eliminating 905 jobs in offices in Plano, Texas, St. Cloud, Minn. and Melville, N.Y. It said it would continue to finance multifamily and affordable housing properties for real estate investors and developers.
TCF: Putting the brakes on auto lending
While a number of banks, including Fifth Third in Cincinnati and BB&T in Winston-Salem, N.C., continued to reduce their exposure to auto lending, TCF Financial in Wayzata, Minn., took the bold step of exiting the business of indirect auto lending entirely .
“After a thorough review of our businesses by our executive management team and board of directors, we determined that the financial outlook of the indirect auto loan origination business was less favorable compared to alternative uses of capital,” Chairman and CEO Craig Dahl said in November.
The $23 billion-asset TCF first entered the auto lending business in 2011 when it bought the Anaheim, Calif.-based Gateway One Lending & Finance. At Sept. 30 this year, the company had $3.2 billion in auto loans on its books.
“After a thorough review of our businesses by our executive management team and board of directors, we determined that the financial outlook of the indirect auto loan origination business was less favorable compared to alternative uses of capital,” Chairman and CEO Craig Dahl said in November.
The $23 billion-asset TCF first entered the auto lending business in 2011 when it bought the Anaheim, Calif.-based Gateway One Lending & Finance. At Sept. 30 this year, the company had $3.2 billion in auto loans on its books.
Regions: Targeting the underbanked
Over the summer, Regions Financial in Birmingham, Ala., launched a new secured credit card aimed at consumers who want to build or rebuild their credit history.
Like most other secured credit cards, Regions’ new Explore Visa card requires borrowers to deposit between $250 and $5,000 into a linked savings account. The deposit functions as both a credit limit and as collateral against potential defaults. The $123 billion-asset Regions said that it already had a suite of products aimed at underbanked consumers and had them in mind when it decided to launch the card.
“Unfortunately, the way lending credit works, it takes a while for people to get to a situation where they have good credit if it’s already damaged or if they didn’t have credit already,” Rajive Chadha, the head of retail products and payments, said in an interview at the time. “This product we really see as a bridge to bring them into traditional products at some point in time. Strategically, that’s our intent.”
Like most other secured credit cards, Regions’ new Explore Visa card requires borrowers to deposit between $250 and $5,000 into a linked savings account. The deposit functions as both a credit limit and as collateral against potential defaults. The $123 billion-asset Regions said that it already had a suite of products aimed at underbanked consumers and had them in mind when it decided to launch the card.
“Unfortunately, the way lending credit works, it takes a while for people to get to a situation where they have good credit if it’s already damaged or if they didn’t have credit already,” Rajive Chadha, the head of retail products and payments, said in an interview at the time. “This product we really see as a bridge to bring them into traditional products at some point in time. Strategically, that’s our intent.”
Kelvin Ma/Bloomberg
Citizens Bank: Partnering with third parties
A number of banks have seen recent success partnering with third-parties to diversify their consumer loan books through financing offered at the point-of-sale. Regions Financial and Synovus, for instance, have partnered with GreenSky to offer point-of-sale financing in home improvement stores. Citizens Financial Group in Providence, R.I. is no exception.
The $151.4 billion-asset Citizens added two new third-party consumer lending relationships early this year, with electronics’ companies Vivint and HP. Through those relationships, Citizens offers 0% interest financing at the point of sale when customers purchase “smart home” products, like thermostats, and doorbell cameras, or consumer electronics.
Citizens first waded into this territory in mid-2015when it partnered with Apple to launch an iPhone upgrade lending program. The bank booked 60,000 loans through the program on its first day.
Citizens would not break out precisely how much growth those partnerships had generated, but it did say at a recent investor conference that its unsecured consumer portfolio stood at more than $1.5 billion around mid-year. A little more than half of that came from its merchant partnerships.
The $151.4 billion-asset Citizens added two new third-party consumer lending relationships early this year, with electronics’ companies Vivint and HP. Through those relationships, Citizens offers 0% interest financing at the point of sale when customers purchase “smart home” products, like thermostats, and doorbell cameras, or consumer electronics.
Citizens first waded into this territory in mid-2015
Citizens would not break out precisely how much growth those partnerships had generated, but it did say at a recent investor conference that its unsecured consumer portfolio stood at more than $1.5 billion around mid-year. A little more than half of that came from its merchant partnerships.
Tashatuvango/tashatuvango - stock.adobe.com
Community banks: Teaming with fintechs
Not to be left out, smaller financial institutions also pursued some innovative strategies in consumer lending, often by partnering with fintech firms.
For instance, the $200 million-asset Bank of Lake Mills in Wisconsinpartnered with the fintech firm MPOWER to offer education financing to foreign students at U.S. universities. MPOWER previously had a lending license in 14 states, but the partnership enabled it to take the business nationwide.
Meanwhile, the $125 million-asset Capitol Credit Union in Austin, Texas, paired up with a locally-based fintech firm, Kasasa,to offer its borrowers greater flexibility in making payments on their loans. That new product, Kasasa Loans, allows borrowers to make greater than their minimum monthly payments, but gives them the option to “take back” the extra if they need it later on down the road.
“The main reason people don’t usually pay more than the minimum payment on a loan is because they’re afraid they may need that money later,” Pierre Cardenas, Capitol Credit's CEO, said at the time. “We want to give them more control over their money.”
For instance, the $200 million-asset Bank of Lake Mills in Wisconsin
Meanwhile, the $125 million-asset Capitol Credit Union in Austin, Texas, paired up with a locally-based fintech firm, Kasasa,
“The main reason people don’t usually pay more than the minimum payment on a loan is because they’re afraid they may need that money later,” Pierre Cardenas, Capitol Credit's CEO, said at the time. “We want to give them more control over their money.”
PayPal: Offloading risk to its bank partner
In an effort to minimize its losses during a potential credit cycle downturn, PayPal Holdings sold its consumer loan business , PayPal Credit, to Synchrony Financial in Stamford, Conn.
Synchrony Financial had already been issuing PayPal-branded credit cards for 13 years. Under the terms of the deal, announced in November, Synchrony will acquire $6.8 billion worth of loan receivables and will become the exclusive issuer of PayPal Credit for the next 10 years. PayPal Credit is typically used to finance big online transactions by consumers who have already maxed out their credit cards.
PayPal said at the time that it expected to receive $6 billion in the transaction, which is anticipated to close in the third quarter of 2018. The San Jose, Calif.-based PayPal will continue to offer PayPal Credit, but said that it wanted a partner to take on some of the risk of those loans going bad.
Synchrony Financial had already been issuing PayPal-branded credit cards for 13 years. Under the terms of the deal, announced in November, Synchrony will acquire $6.8 billion worth of loan receivables and will become the exclusive issuer of PayPal Credit for the next 10 years. PayPal Credit is typically used to finance big online transactions by consumers who have already maxed out their credit cards.
PayPal said at the time that it expected to receive $6 billion in the transaction, which is anticipated to close in the third quarter of 2018. The San Jose, Calif.-based PayPal will continue to offer PayPal Credit, but said that it wanted a partner to take on some of the risk of those loans going bad.
