The credit meltdown is sending shock waves throughout the U.S. financial system and into the general economy, and consumers are reacting with behavior never seen before.
Banks are operating in uncharted territory, and the natural reaction for many is to pull back. They are getting out of certain lines of business, like home equity, or they are simply cutting back on approvals across the board to cut costs, reduce exposure to risk, and prevent losses.
This tentative approach is like closing the barn door after the cows have gotten out. In fact, it may do more long-term harm than good. By and large, the exotic products and relaxed credit policies that started this problem are behind us. Now lenders need to get back to the business of providing sound financial services.
Banks exist to take deposits and make loans — that's what they do. Without this source of income, they cannot recoup losses or build capital reserves back to acceptable levels. The reality is there are still many opportunities to make good loans. They need to rebuild customers' confidence and give them a reason to keep their money and their business with their financial institution. Banks must get back to the business of lending and do it better than they've ever done it before.
There is tremendous pressure to show Wall Street that banks are reacting to the market and making changes to support their stock price. To quickly reduce costs, many are cutting jobs, leaving them with bare-bones lending operations.
This strategy may produce some short-term relief, but executives that can see past the panicked haze of the current credit environment are positioned for long-term success and growth.
They will see the opportunities that come from implementing the necessary tools and strategies to drive their bank's lending business forward once the post-crisis dust settles. These forward-thinking banks will emerge as the industry's success stories.
For example, when a bank cuts back on its analytics staff, the benefits are felt immediately, but the negative effects are still months, if not years, away. The bank can assume additional credit risk if models and strategies are not kept up to date as consumer behavior changes, or the bank can tighten its credit to the point that lending volume dries up. Neither of these strategies will make the bank successful in the long run.
Undoubtedly, the storm that has hit the financial markets has done tremendous damage. You only have to look at the growing list of companies that no longer exist to see the extent. However, this storm will also bring unprecedented opportunities to those institutions that can adapt to the post-crisis market.
The reckless lending from 5 to 10 years ago has doomed some banks, no matter what actions they have taken over the past year. Similarly, a financial institution's actions now will define its fate for the next 5 to 10 years. Banks that are well positioned for new opportunities and growth will succeed. Those that are frozen may not.
These opportunities exist at many levels, but the most profound and powerful ones may be the opportunities for change within financial institutions themselves. Innovative technology has been available for some time to help national ones radically change the level of service they provide to their customers.
Through intelligent, automated pre-screening and cross-selling, institutions can focus on putting additional products in the hands of their best customers, thereby increasing wallet share without adding risk.
Banks that have not been hit as hard in the credit crisis should view the current market as a tremendous opportunity, because there is reduced competition. By ceasing certain lines of business or tightening credit standards to the point of impossibility, banks can drive loyal, good-standing customers straight into the arms of their more flexible, better-positioned competitors.
In addition, banks must take the lessons learned over the past year and apply them to the decisioning logic they use.
The days of "one size fits all" lending are over. Changes in consumer behavior unlike anything the market has ever seen are occurring. Many consumers are walking away from their homes but are keeping their credit cards active — something unheard of previously.
Treating everyone the same is no longer smart credit policy, and banks need better, more indicative decisioning logic that provides a much more thorough analysis of credit applications to determine which potential borrowers are actually a bad risk and which are good customers to retain.
Also, banks have to fine tune their credit policy to take advantage of shorter, more specific opportunities. In the past banks extended credit by looking at broad overall trends in the market. Those kinds of opportunities no longer exist. Banks must be able to provide extremely tailored and timely offers to consumers if they hope to survive.
To do this, they must rely on more than a consumer's credit file and score to make a decision on creditworthiness. Banks must use additional data sources and gather personal information on the consumer before making an offer.
Make no mistake — there are numerous opportunities for lenders out there right now. Parts of the country are being underserved, and banks are being more critical on risk in certain locations than the conditions warrant. By incorporating additional factors, like regional housing performance, into their decisioning systems, banks can take advantage of these opportunities as they arise.
The current market is more of a gamble today. Banks need more data, more analysis of the data, more segmentation, more intelligent automation, and more flexibility to prosper in the new economy.
Ten years from today we will be reading a profile of the amazing successes in the financial industry that started in the tough climate of 2008.
Those that succeed will be the institutions that show the courage and foresight to see the difficulties of today as the opportunities of tomorrow.
