If you're a soybean farmer caught in a tariff tug-of-war, only one thing is certain: you live in interesting times. How you adapt to these times of change is critical. That’s why experienced farmers didn’t miss a beat when the trade winds changed. They quickly assessed the risk ahead and sold their contracts in the spring. In 2018, this quick action may decide the fate of many farms. This agility in the face of change presents a good example for American retailers thinking about the future of consumer credit.
The persistence of financial cycles in the economy is rivaled only by the certainty of death and taxes. The top-level trend is clear: as the economy grows, credit become easier; during recessions, credit becomes scarcer. But how different creditors and lending tiers react is much more nuanced. As the current expansionary period matures and interest rates begin to rise, retailers may be witnessing a shift in the lending cycle. Retailers need to act with the same prescience of the quick moving soy bean farmers. Retailers must grab the consumer finance opportunity before their options narrow.
After a decade of easy access to money, consumer defaults and delinquencies are rising. Yet despite this riskier lending landscape, financial houses are doubling down on the consumer opportunity. Why? Despite the apparent risk and the potential of a slowing economy, lenders don’t want to be sidelined and want to put their cash to good use. That means the competition is about to kick into a new gear.
This growing competition will have a real impact on retailers. The large, established, and somewhat conservative lenders who have witnessed a full lending cycle before, will begin to retrench to safer risk profiles and industry verticals. On the other hand, those financial institutions that are more risk tolerant will move into this newly vacated space by increasing their loan portfolios. This decision is particularly true of those younger companies who are confident in their innovative underwriting analyses, machine learning, and market approach. Their more trenchant analytics give them a special edge in identifying customers whose loan performance will be better than their credit score would otherwise indicate. So, in economic cycle terms, as the economic cycle turns, expect a brief period of market repositioning. Those who predict the turn first, and react best, have an advantage later.
When the lending cycle shifts, the economy will falter and the performance of most if not all existing loan portfolio will decline rapidly. This financial erosion forces the major financial institutions to rush to quality so that metrics around the performance of their total loan portfolio improve. Lease-to-Own (LTOs) players react by tightening and refocusing as well. Both lender segments will retreat from certain high-risk consumer markets and flee high-risk industry verticals like automotive repair to consumer debt. Ultimately, some players will disappear. "Second-look" lenders, seeing the breach between primary and LTO lenders widen, will make their move for market share.
Like escalating trade tensions, a new lending cycle introduces an interesting time for retailers who have grown accustomed to a growing economy and easy credit. But no cycle is permanent. During this economic transition, retailers can find safe harbor with LendPro, a consumer finance solution that supports retailer at every stage of the lending shift.
In a stable, growing market with consumers willing to consider debt, LendPro provides merchants a simple, easy to use, and secure approach to offering customers the right loan for their situation. The focus is on a comfortable process that provides greater buying power for the customer, and consequently, improved revenue for the merchant.
During the chaotic period when the cycle begins to turn, the LendPro platform offers retailers an opportunity to reconfigure their lenders, seek quality, take advantage of innovators placing big bets, and generally reposition their portfolio of consumer finance partners in preparation for the next phase. This platform flexibility empowers merchants to invite risk-taking innovators and thereby keep their financing offers very competitive. We do the IT integration, the merchant enjoys the benefits.
And during periods of economic contraction and credit tightening, LendPro’s consumer financing solutions will help merchants take advantage of second-look lenders by putting these financial risk-takers in a natural position in Application WaterfallTM. This configurable Application Waterfall gives consumers access to multiple lenders with one application process and a strong incentive to continue purchasing.
In a time of constant change, retailers must position their brands to use every advantage to sustain and grow their sales. The LendPro platform delivers this leverage. Whether that’s driving traffic to stores through consumer pre-qualification applications or boosting sales through sales associate performance analytics, LendPro helps retailers anticipate what the next, best action should be. Retailers can do more than survive a new lending cycle. With this pre-sale and post-sale intelligence, they can thrive even in the most interesting of times.