Garnet Capital Advisors Blog

In order for banks to boost the profitability of their loan portfolios, they need to start looking at beefing up their consumer loans.

Traditional banking seems to have met its match with a more digitally- and convenience-centered consumer base that financial institutions are servicing today.

After regulations tightened following the economic crisis of 2007/8, and alternative online lenders surfacing by the minute, banks across the US need to find other means of turning a profit.

Luckily, there are plenty of ways to do just that; it's just a matter of spotting the opportunities and teaming up with the right people to make it happen. And make no mistake: opportunities abound in 2016 for banks across the US.

Consumer Lending Needs to Be Put Back on the Radar

It's understandable that since the financial crisis eight years ago, financial institutions have backed off from consumer lending. From small personal loans to student loans, to first and second mortgages, banks have spent the past few years withdrawing from these sectors of banking.

But perhaps it's time for banks to start embracing consumer lending again, and fill their loan portfolios with the likes of smaller-scale loans that they've recently been avoiding.

Sure, US consumers have (hopefully) learned their lesson about excessive leveraging to finance homes, and are focusing more on scaling down on their outstanding debt. Such behavior is attributing to the evacuation in consumer lending among US banks over the recent past.

At the same time, many American businesses were recently booming, which peaked the interest of banks across the nation. With skyrocketing stock prices and huge profits, businesses had benefited from the attention that banks have been giving them in terms of commercial credit and real estate loans. A slowing of the business economy and regulatory focus on potential over-lending in this sector have caused banks to look elsewhere for loans.

Despite this activity, a trend appears to be emerging in favor of a shift in focus. US banks are increasingly transferring their attention away from such commercial banking, and are increasingly looking to consumer lending, or so they perhaps should be.

Astute banks are starting to see the opportunity in consumer lending, and are adjusting their activities accordingly. Rather than seeing it as meager money, banks are looking at consumer lending activity as more of a core opportunity. And with the past few months not looking so hot for the corporate world with heightened alarm in the numbers, consumer lending is even more attractive.

While far from a catastrophe, commercial revenues don't appear to be as strong as they have been post-crisis. Even though we've recently experienced major weakness in sectors such as oil, employment and wage growth has realized a healthy spike, and inflation has seen downward pressure. Consumer confidence is growing, which leads to more power in purchasing and more confidence in borrowing funds for everything from real estate, to automobiles, and everything in between.

In fact, US consumer opinion increased in December 2015 to its highest level in 5 months thanks to these factors. According to the University of Michigan, the US consumer sentiment index jumped to 92.6, the highest annual average in 11 years.

The financial elements are aligned for healthy consumer spending in 2016. Numerous positive factors are encouraging many lower- and middle-income US households to spend more liberally. Consumers are said to be more open to purchasing pricey household components, automobiles, and other expensive items. And the more they spend, the more likely they'll be to take out a loan to cover such purchases.

Auto loans are a great example of the types of consumer loans that banks might want to start beefing up on their balance sheets. With oil prices at the low point right now, combined with growing demand and an improving labor market, auto sales in the US clocked in at approximately 17.5 million vehicles in 2015.

With such demand, there's a direct need for auto financing. And these types of loans are particularly attractive to banks as they are collateralized and feature short duration.

Auto loans can be great assets to accumulate for banks to boost their balance sheets.

There's no question that banks should be paying attention to consumer lending. But precisely how they should be taking action is the real question. Regulations are still extremely stringent for banks when it comes to loans, which can stand in the way of real profits if loan portfolios are not handled properly.

Digital Lenders - Both a Competitor and a Source of Opportunity for Traditional Banks

Today's consumer is both technologically-wise and convenience-oriented. More and more, today's average consumer is taking to the internet to do all their banking, including taking out loans of all sorts. With the advent of the internet and mobile devices, Americans are increasingly seeking out faster and more convenient ways to deal with their finances and take out loans. As such, they're using mobile platforms to do just that. And financial technology start-ups - or FinTech - is taking notice.

In fact, non-banking lenders accounted for 37.5 percent of loan originations in 2014, among the top 40 lenders in the US.

To meet this demand, alternative online and other non-bank lenders are increasingly offering today's consumer faster, easier ways to apply for loans and deal with their bank accounts.

Rather than seeing these FinTech startups and other lenders as a threat, banks would be well-advised to view them as another opportunity to remain relevant and profitable. These alternative financial firms are certainly filling a void that consumers appreciate, and banks can take a page out of their books and learn a thing or two about it.

While still retaining their traditional banking foundation, banks can also work in tandem with FinTech and other origination firms to serve their clients in a way they want to be serviced, and continue to keep loan portfolios strong.

Working together allows banks and FinTech firms to offer clients added services and conveniences.

One way to do this is simply to join forces. Consider that the likes of JPMorgan Chase and Citibank have already hopped aboard this train, and have recently joined forces with innovative lenders like On Deck and Lending Club, respectively. By working with alternative originators, these banks - and others like them - can improve their loan portfolios by purchasing profitable loans that produce hefty yields thanks to more affordable servicing and digitally-focused underwriting.

Banks need to continue to add social media and mobile pathways in order to experience growth.

Adding a number of interactive banking channels and embracing mobile banking platforms can help banks realize great success and profits in our digitally-enhanced environment. Establishing the right strategy to tackle these endeavors head-on will help banks to take full advantage of these opportunities and gain a competitive edge in today's banking world.

Such actions - when done right - can exponentially increase revenues and slash the cost of service.

Partner With Garnet Capital to Capitalize on the Opportunities That Await

Traditional financial institutions can jump on a number of opportunities in 2016, but they need to approach them in highly strategic ways. It can be tough for banks to make profitable loans or venture off into waters they've never navigated before. But with financial loan sale and valuation services from Garnet Capital, high-quality loan portfolios that have been originated by other lenders and banks can be reviewed in great detail by the most experienced professionals in the industry.

Garnet Capital has plenty of profitable consumer loan portfolios available, from super-prime to near-prime borrowers. We can assist banks of all sizes to choose the right partners as we understand the digital space and possess 30+ years' experience in banking. We can extract from the vast sea of partners and narrow it down to the key few that would be appropriate partners for a bank like yours. Sign up for our newsletter today to help you understand in full-depth how we can help your bank tap into the opportunities on the horizon.