“When will we be back to normal?” That’s a million-dollar question. The economy, and more importantly consumer behavior, has changed during Covid. There is a very simple matrix that forecasts what could happen in 2021 and how you should respond.
But first, you need to understand why the Covid economic challenges were so different from the Great Recession and what that earlier recession can still teach us.
Don’t Confuse The Pandemic With the Great Recession
The key difference is obvious: The Covid economy was not a failure of Wall Street or a real estate bubble. It was a global health crisis that changed behaviors. That impact hit much faster than the Great Recession.
One piece of evidence for this is the percentage of U.S. disposable income that was spent. From 2006 to 2012 (just prior to the Great Recession and the immediate period after), there was a general decline in the percentage of disposable income that was spent, but single-quarter change was never more than 1.5 percentage points off the rolling four-quarter average.
From December 2019 to December 2020, spending fell from 89.2% of disposable income to 81.1%, with a dip down to 71.3% in June of 2020. Practically overnight, consumers reduced spending. Meanwhile, personal income rose 4% over the same December 2019 to December 2020 time frame. The Great Recession began with a much flatter income curve, only 1.3% growth from March 2007 to March 2009.
What the Great Recession Recovery Can Teach Us About the Post-Covid Economy
Both eras saw steep unemployment and falling consumer sentiment. In the Great Recession and the Covid economy, the Consumer Confidence Index dropped quickly from well over 100 to below 99, and unemployment rose quickly from near 4% to nearly 10%. The similarities hopefully end there. The Covid impact on workforce and consumer psyche is primarily related to personal safety guidelines. Stimulus helped to curb impact to personal income and herd immunity holds the key to the return of normalcy.
So when did banks and credit unions “recover” during the Great Recession? Rising unemployment slowed in 2009 (and began improving in early 2010). Personal income levels steadily rose beginning in early 2009. As a result, consumer confidence stabilized in 2009-10 and began a steady upward trend in 2011. The rolling average quarterly change in consumer lending is a good proxy measurement.
True consumer lending at credit unions bounced back in late 2010, coinciding with economic improvements. That period of rising or above-average growth lasted until June 2019 — just prior to the impact of Covid.
2021 Is Giving Us Some Strong Signals About What’s Next
That brings us to the possibilities for 2021. Those same economic indicators that showed recovery for the Great Recession are moving in the right direction today. Employment is recovering and seems tied directly to Covid precautions. Personal income is buoyed by stimulus. Consumer confidence is rebounding. With those signs, we can build out a possibility matrix.
Possibilities of where consumer lending and deposits could go:
- Consumer lending expands and deposits expand (a scenario that is plausible and hopeful on the lending front).
- Consumer lending expands and deposits contract (unlikely, but would be beneficial for the balance sheets of financial institutions).
- Consumer lending contracts and deposits expand (a continuation of the current trend is a realistic outcome).
- Consumer lending contracts and deposits contract (relatively few indicators for this outcome).
Which is most likely? The conditions for deposit growth continuing are still in place. Commercial lending (with things like PPP) has been a source of growth. That really leaves the question between consumer lending expanding or continuing to be a challenge. For 2021, it will likely be a mixed result. Lending could expand, but perhaps not until Covid restrictions ease up. Thankfully, there will be pockets of strong improvement and overall recovery could happen sooner. Consumers are itching to spend.
Pre-Covid levels of lending may seem eons away, but they could be reached again if Covid restrictions continue to ease. Consumers want to spend.
Reasons to be hopeful lending will expand in 2021
- Vaccines, an open economy, and travel.
- Consumer confidence that continues to rise.
- A buildup in savings allows consumers more flexibility to spend/borrow.
Reasons to expect lending could be a challenge in 2021
- Covid restrictions aren’t eased with enough time to impact 2021.
- While income and savings are high, consumption is still well below historic levels.
Without Adaptability and Resilience, 2021 Is Going To Be Painful
Either scenario will present a challenge for almost everyone. Compressed margins revealed that many community banks and credit unions were overly reliant on interest revenue, and unprepared for the extreme change in consumer behavior.
And that change in consumer behavior is not going away. Community financial institutions must align with consumer expectations.
Challenges if lending expands in 2021
- Competition for the consumer (big tech, neobanks).
- Consumer expectations (consumer experience, social responsibility).
Challenges if lending is flat in 2021
Everything above, plus…
- How do you connect with consumers that are now more discerning?
- ALCO pressures: need to make up for 2020.
The 5 Strategies You Need For 2021 (and 2022, 2023, 2024…)
The best way to win is to attract, develop, and retain engaged consumers. These lead to deeper relationships, which lead to more profit. Here are five ways to up your game.
1. Embrace digital transformation: Consumers want to do business from a distance…let them! The branch is not obsolete, but your digital experience (website/app) might be. How long would it take a 25-year-old to research a product on your website or submit an application? If the answer is “I don’t know” or “they can’t,” then you have a challenge. You need a great digital experience, including:
- Digital account acquisition.
- A website that provides an effective sales funnel.
- Products that encourage adoption of non-branch transactions.
2. Dive into the deep end of relationships: Most institutions have an excess of liquidity. And you may not want deposit growth. Here’s the rub: What are consumers doing right now? In 2020, consumers retracted their borrowings in favor of refinancing and consolidation. How can you own a consumer’s borrowing relationship? Help them see you as their primary institution. You need to decouple deposit growth from relationship growth. Engaged consumers show higher levels of:
- Non-interest income
- A higher likelihood of cross-sell.
- A higher likelihood to increase loan relationships.
3. Employ lending strategies that offer transparency and control: Everybody wants more qualified borrowers. The bigger challenge is to align messaging and products with consumer sentiments. Consumers dislike one-sided offers and want products and partners that are clearly working for their benefit.
- Less focus on “new” loans.
- More focus on flexibility, transparency, and financial security.
4. Focus on “gateway” relationships: Retail deposits are booming. You might not like those dollars now, but they represent consumers and are a primary form of engagement. Pushing consumers away in 2021 might make sense on paper but could have negative impacts long-term. It’s better to prioritize those relationships and encourage engagement.
- Don’t chase rates with CDs and money market accounts. They’re an expensive way to compete for fickle consumers.
- Seek highly transactional “primary financial institution” accounts, as indicated by activity and openness to new offers.
5. Engage in data-driven marketing: As we approach the middle of 2021, many institutions are set to take action. The best will act based on a true understanding of the consumers they have now and the ones they can acquire.
- Existing account holders have a story to tell: Data mining for trends leads to conversations based on needs
- Where are they spending their money?
- Who do they pay on a monthly basis?
- What percentage of card holders aren’t using your card?
- Not all prospects are equally valuable to your balance sheet: narrow the spotlight to the consumers most likely to engage.
- Accurate segmentation analysis based on propensity models and channel consumption research.
- Are you certain that your marketing is reaching the people you do want?
If you could look ahead six months, what would you do differently? Here is some good news: We already know how the world is changing and are only waiting for the pace to pick up.
If You Only Focus On the Forest, You Miss the Trees (To Your Detriment)
For the majority of banking history, community financial institutions have grown using the strength of organic relationships, and when everyone is your neighbor, you’re in touch with their needs. More recently, marketing and technology have allowed institutions to scale faster and farther, leading some to neglect the work of connecting with individual account holders.
In the post-Covid economy, the best way to survive and thrive will be to work on strategies that have positive impacts now and create options in an uncertain future. Fortunately, there are partners, such as Kasasa, that can help you implement technology to connect with consumers one-to-one and offer products and services that create sustainable long-term relationships.