The end of the zero-low interest rate era in the US and Canada led to a significant cooling in both the secured and unsecured lending markets. However, the lending market is now poised for a quick revival as the Fed's target rate sits at 4.25%-4.50% after several cuts in late 2024 - with a projected 50-bps cut coming in 2025. Meanwhile, the Bank of Canada has dropped its rate to 3.25% as of December 2024. These measures are expected to stimulate lending activity - and financial institutions will soon find themselves in a pre-2008-esque competitive environment with challenges from a post-2023 world!
Thinking beyond rates
Thanks to the advent of fintechs and disruptive products, customers see frictionless digital service as a basic expectation. They are increasingly drawn to institutions offering a comprehensive suite of financial services – tailored to the needs of the individual. Moreover, banking has now evolved to a low-involvement industry – fundamentally challenging how customers are acquired and retained.
In this challenging environment, and while banks get ready to run the rat-race to lower rates, focusing on the following factors could serve as a critical differentiator and lead to optimal outcomes:
Enhanced customer experience: Seamless, intuitive interactions across all touchpoints
Innovative products: Tailored financial solutions addressing specific needs and market niches
Improving customers’ financial health: Tools and guidance for customers’ long-term financial wellbeing
Value-added services: Complementary services that enhance the core-banking relationships
Personalization: Tailored experiences based on individual profiles and preferences
Rewards for loyalty: Tiered benefits to recognize and incentivize customers’ continued patronage
To thrive in this new landscape, financial institutions must shift from focusing solely on interest rates to adopting a holistic approach that infuses innovation throughout the customer experience.
Leading with innovation
Innovation in lending spans the entire value chain – from meeting customer demands with targeted products to streamlining processes and fostering long-term relationships. Both disruptors and forward-thinking traditional banks have made significant strides in these areas:
Product innovations: Meeting evolving needs
SoFi's unemployment protection program: Allows payment pauses during job transition – illustrating customer centric approach in a challenging job market
PowerPay’s loans: Provides unsecured term loans for home improvement projects while connecting consumers, contractors and lenders together Process innovations: Streamlining customer journeys
Process innovations: Streamlining customer journeys
Rocket mortgage: Provides an end-to-end digital mortgage application and approval process that is highly transparent for the customers
Embedded finance tools: Many fintech providers allow embedded finance tools, but providers like Stripe are enabling businesses to offer banking services
Plaid’s API: Enables seamless verification and data aggregation – streamlining connection of users’ financial accounts to other applications/services Experience innovations: Fostering long-term relationships
Experience innovations: Fostering long-term relationships
American express’s experiential rewards: Offers access to exclusive events and services – as a customer loyalty tool[8]
Early wage features: Many fintechs like Chime and SoFi give up to 2-day early access to paychecks – promoting better financial management for users
In-app budgeting and financial health tracking: Many traditional banks, and fintechs use in-app budgeting, bill-splitting and financial health tracking features to increase engagement
Lessons from market leaders
While these innovations are impressive, the challenge lies in selecting and implementing the most relevant and suitable options for your institution and then moving them to become a market leader in innovation. Prioritization and execution require a strategic approach – which can be easily defined by the following three key phases:
- Gap identification: Conduct a thorough analysis of your current offerings against market leaders and customer expectations. Identify key areas where your institution lags or where significant opportunities exist.
- Strategy: Develop a comprehensive roadmap aligned with your institution's strengths, market position, and long-term objectives. Prioritize initiatives based on potential impact, feasibility, and alignment with core competencies.
- Business case and integration: For each prioritized innovation, develop a robust business case detailing expected ROI, resource requirements, and implementation timelines. Create a detailed integration plan to ensure seamless adoption within existing systems and processes
Conclusion and next steps
The lending landscape is evolving rapidly, driven by changing customer expectations and technological advancements. Success in this new era demands more than competitive rates; it requires a commitment to continuous innovation across products, processes, and experiences.
Financial institutions embracing a holistic approach to innovation are best positioned to capture market share, foster customer loyalty, and drive sustainable growth. This strategy reduces dependence on undercutting interest rates, which often compromises margins. PowerPay exemplifies this approach: while not the lowest-cost home improvement financing option, their fast and convenient process proves that homeowners will pay a premium for superior service and user experience. By learning from such market leaders and strategically implementing targeted innovations, banks can transform challenges into opportunities, setting the stage for long-term success in an increasingly competitive industry.
At Simon-Kucher, we have experience in guiding banks through strategic initiatives and innovative process that led to concrete, desirable outcomes. Reach out to explore how we can help drive your institution forward in the dynamic landscape.
