03/26/2021 7:34 AM

Consumer Loans: Why are Traditional Banks Losing Their Power?

Statistics produced by the Bank of Lithuania show that consumer loan portfolios of traditional banks and credit unions decreased by 6.5% in 2020 and the flow of new loans contracted by 3.5%. According to some experts, this is a trend mainly driven by a lower demand for money. COVID-19 and a higher degree of uncertainty has had a negative impact on consumption, which reduced household borrowing overall.

Despite this, some analysts believe that the consumer loan portfolios of traditional banks decreased due to more competition, especially from non-banks such as consumer lending providers or P2P platforms. It's important to explore whether this opinion has any basis in fact.

Consumer lending providers became important competitors to traditional banks

At the end of 2020, the loan portfolios of consumer lending providers amounted to almost 633 million euro, i.e. only 77 million euro less than the consumer loan portfolios of traditional credit institutions. Moreover, new consumer loans provided by consumer lending companies amounted to 391 million euro, while banks approved 227 million euro of new loans during the same period.

These stats indicate several important points. First, it shows that companies providing consumer loans have become major market participants, while obtaining market share which is similar to traditional credit institutions. Secondly, during the COVID-19 pandemic consumer lending providers have been much more active and have approved significantly more new loans than banks.

Taking the above into consideration, it's reasonable to assume that more competition from the non-banking sector has had a negative impact on banks' performance.

A competitive advantage is created, which improves not only the process, but also the terms and conditions of the product

There are also a number of other indications that consumer lending providers are beginning to successfully compete with banks. It's widely believed that the non-banking sector has an advantage over more traditional banks due to the fact that they have embraced much more advanced IT tools and processes. These are faster and less bureaucratic when compared with the legacy tech and systems used by most traditional banks.

However, statistics reveal that non-bank lending providers' competitive advantage was bolstered further by trying to improve terms and conditions of the products they offer. For example, the average consumer loan granted by consumer lending providers increased from 1187 euro to 1402 euro over the year, while the average maturity increased from 37 to 42 months. In addition, the number of contracts per customer rose from 1.13 to 1.15. Pricing was also reduced. The average interest rate for new loans decreased from 14.6% to 13.7% and the annual percentage rate decreased from 27.5% to 24.8%.

Lower demand for consumer loans has a negative impact on all lenders

There are certain indications that the lower demand for consumer loans has negatively impacted the portfolios of traditional banks as well as consumer lending providers.

Despite the fact that consumer lending providers have recently become major competitors in the space, their portfolios are shrinking twice as fast as those of banks or credit unions. For example, the consumer loan portfolios of banks and credit unions decreased by 49 million euro over the course of the year, while consumer lending providers lost 83 million worth of business. A similar trend appears in relation to the flow of the new loans.

The number of loan agreements and customers has also decreased. In 2020, the number of the new consumer credit agreements made by consumer lending providers decreased by 160 thousand. Moreover, interest rates applied by consumer lending providers are still significantly higher when compared with traditional banks.

It's evident that traditional banks are struggling to keep their market share due to competition from new innovative lending companies. However, there are many signs that COVID-19 (and the resulting lower demand for loans) had a negative impact on consumption and therefore adversely affected both traditional banks and non-bank lending institutions.