Through Inflation and A Recession: Navigating The Banking Industry in 2022
The Financial Brand
The world’s leading retail digital banking and financial marketing publication, and host of The Financial Brand Forum.
Inflation has had everyone concerned for well over a year. Bank of America's Bryan Moynihan said back in January that the U.S. economy, already bigger than it was in 2019 on nominal terms, is predicted to grow at twice the rate.
"Of course we have to worry about inflation and that's why [the Fed has to] raise rates."
With the return of significant levels of inflation, even financially healthy consumers are starting to feel the impact of higher prices in multiple ways.
While banks can't control inflation, wages or food and gas prices, they can prove to be a valuable partner in trying times by offering financial wellness content and advice to help consumers.
Several surveys indicate consumers want financial advice from their banks and are willing to switch to another financial institution for better money management features.
"The past few years have been tough on consumers in general, and many of the financial pressures they face may not subside all that quickly," says Jennifer White, senior director for banking and payments intelligence at J.D. Power.
"If banks don't begin making progress in making advice content resonate, they could be facing significant attrition risk."
Jamie Dimon, at the helm of JPMorgan, saw it all happening back in April.
"We are facing challenges at every turn," wrote Dimon in his own 46-page manifesto. "A pandemic, unprecedented government actions, a strong recovery after a sharp and deep global recession, a highly polarized U.S. election, mounting inflation, a war in Ukraine and dramatic economic sanctions against Russia."
As Dimon describes it — not every institution in banking is going to survive it.
"You should expect to see some winners and lots of casualties — it's just not possible for everyone to perform well."
It seems this prediction will ring true, even as 2023 sits on the horizon.
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A Crumbling Housing Market
Rising mortgage rates and decreasing affordability of houses in the U.S. have already slammed many parts of the home lending business, prompting major layoffs.
Goldman Sachs predicts things will grow worse going into 2023 as the housing downturn declines further.
"Higher mortgage rates and reduced affordability are not the only drag on housing," Goldman Sachs stated in a report. "Existing home sales and building permits have fallen more sharply this year in regions where they increased the most in the earlier part of the pandemic, suggesting that the recent declines have also reflected the partial retreat of a pandemic-related boost to housing demand."
Goldman Sachs analysts believe home prices will trend down in 2022, into 2023, and that they will flatten out, as demand falls off.
But the housing market is just part of the puzzle.
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Customer Spending Behavior Takes A Turn For the Worse
Americans hit record levels in the use of credit cards and unsecured personal loans as high inflation is driving many prices up and making salaries worth less in August.
Survey data indicate that one in three Americans who have opened unsecured personal loan relationships have done so to address a shortfall in take-home pay.
Additional data shows a significant minority of U.S. consumers is drawing down their savings accounts at the same time that a larger portion of Americans is adding to their savings.
"Greater financial health declines appear to be on the horizon as inflation shows no signs of letting up, debt levels rise, and loan delinquencies grow," a FHN financial health report says.
"Amid high inflation, Americans have begun to turn to credit cards to help shoulder their monthly burden," J.D. Power stated in an article about financial health trends.
"Unfortunately, it seems that some banking customers have chosen to carry higher credit card balances without knowing the extent to which that will affect their credit score — a sign that the after-effects of inflation may be felt by Americans for years to come."
"We've started to see consumer balances come back in a big way on credit cards, because inflation is driving a lot of wallet stretch."
— Charlie Wise, TransUnion
Many people are borrowing, some — especially Generation Zers with new credit cards — for the first time of significance in their adult lives. The growth in credit cards and unsecured personal loans in part comes from lenders more frequently making such credit available to non-prime consumers.
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The "classic" use of personal loans today has been consolidation of debt, notably credit card bills, in order to bring down the overall interest rate. Research by J.D. Power found that one in five consumers surveyed have applied for personal loans in the last year. Out of that, 34% said that they did so to supplement lost wages.
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How It Affects Bank Marketers????????
Steve Cocheo spoke to bank and credit union marketers across the industry to learn exactly just hard they've been hit.
"With the mortgage market seemingly screeching to a halt as rates rise, we are refocusing our ad dollars on our commercial lending and retail products such as CDs," says Mary Anne Clancy, SVP/Marketing and Communications, at Institution for Savings.
At Patelco Credit Union, Vice President of Marketing Rina Johnson says some budget categories have been increased in areas where management feels customers need additional support.
A Case for Upping Marketing:
Some institutions have trimmed marketing spending or are striving to contain it. Others see current circumstances as an opportunity to stand out.
Patelco has increased paid-search digital advertising because consumers are spending more time Googling for products and services that can help them lower their costs and put aside more savings.
"We have seen double-digit increases in engagement on our social channels and with our online content since the end of 2021," says Johnson. People are anxious not only to find savings but to find more protections against online fraud.
It has changed how marketers speak to and address their customers. Something that has surprised Bella Broccolo (Associate Research Analyst at Mintel Comperemedia) about banking promotions for deposits is how many strictly promote rates.
"Most are heavily numbers-focused," she explains. "It may be a consequence of rates changing quickly and institutions just trying to keep up with that. But some sort of differentiation would be interesting and unexpected."
The Path Forward for Banks Through Inflation Woes
"People are crying out for their bank to help them through the greatest financial shock of a generation as inflation and household bills hit record levels," said David Sosna, CEO of Personetics in a statement.
He noted that banks are well suited to be a part of the solution and shouldn't sit on the sidelines.
The top five methods, according to Craig Guillot:?
Building out efficient and comprehensive technology solutions can provide supple support when loan portfolios feel as if they're crumbling.
For now, the outlook for mortgage lending doesn't look pretty. In fact, banks and credit unions could struggle for the foreseeable future to grow their loan portfolios — especially if their processes are slower or less efficient than other institutions.
Already there have been major layoffs among mortgage lenders.
t's a cliché to recommend that bankers 'think outside the box'. But, sometimes, the best method for seeing where banking is broken is to compare it to other industries. What lessons can be pulled from leaders in other sectors?
Kris Frantzen, VP of Product Strategy at Temenos, says he thinks of lending as akin to purchasing an airplane ticket: the purpose isn't the flight itself, but the destination. Obviously, the customer is most concerned with their end goal. They know they want to go somewhere, and the quickest way to get to their destination is to take a plane.
Simplifying Matters:
If you want to picture how frustrated customers get with bank technology, picture dealing with arduous airport processes.
It's the same with a loan. People want a house (or a car, etc.), and they often turn first to their bank or credit union.
It's a great opportunity — until it is executed poorly. In the airline business it only takes one bad flight attendant, one canceled flight handled poorly, or even a slow website load time when finalizing the purchase for a customer to 'feel off' about the entire experience.
Similarly, a customer will look elsewhere for a loan if the hiccups in the digital loan application are greater than from a competitor, such as a digital bank or a nonbank provider like Rocket. Such companies spend a great deal of time and resources mastering loan technologies.
The aim of a loan applicant is not to complete the mortgage application, but rather to buy a new house, Frantzen explains. "For many consumers caught between the bumpy economic recovery from the pandemic and rising prices, access to loans can have even higher stakes."
Speed Is The Name Of The Game:
Customers don't want to wait up to a week (or longer) for loan approvals. They want instant notice.
Charlie Wise, SVP and Head of Global Research and Consulting at TransUnion discussed the issues at hand with Steve Cocheo in May, noting that even in a time when the nation faces inflation higher than that seen since the 1980s, banks and other consumer lenders must still pursue growth.
"The worst thing you can do as a lender is stop originating," says Wise. "I can promise you that your delinquencies will start to increase pretty significantly if you stop lending, because your denominator doesn't grow. So then you get additional delinquencies on top of a stagnant or declining base."