If the big banks won’t help when times are tough, customers will turn to smaller, simpler providers. And once they’ve switched, banks will struggle to win them back.
I’ve written before about how banks are an essential part of the UK’s social fabric. Our economy depends on the availability of credit, and if banks stop lending, the whole UK machine gradually grinds to a halt.
The standard example is commercial lending. Without access to credit, it’s very difficult to start a small business, expand an existing one, or survive a series of unexpected setbacks—as many small shops and restaurants have discovered over the past year. And if a shortage of credit starts putting companies out of business, the whole economy suffers.
What might be less obvious is that lending to retail banking customers is equally critical for a strong and resilient economy. If a family can’t get a mortgage, they may be stuck indefinitely in rented accommodation, where they pay more and get less. If they can’t get a loan to buy a car, it may limit their job prospects. If a lack of credit restricts the prosperity of these families, they will contribute less in taxes, have less disposable income to spend, and rely more on government support—and the whole economy will stagnate.
Fear, uncertainty and doubt
The difficulty for our banks is that over the past few years, the UK has become a highly leveraged society. The economy has faltered under the strain of COVID, and there is still a lot of uncertainty about how Brexit will impact trade and the price we pay for goods and services.
As a result, banks are worried about how much bad debt they already have on their books. They are much less willing to offer credit to anyone, especially customers who currently find themselves in a precarious financial position.
Credit abhors a vacuum
However, by battening down the hatches and leaving vulnerable customers to weather the storm, the banks are storing up trouble for the future. When banks won’t lend, it creates a vacuum for less-regulated lenders to enter the market, offering short-term high-interest loans that tend to escalate customers’ financial problems, rather than solve them.
That’s where credit unions come in. As financial co-operatives, credit unions are owned and controlled by their members and run for their members’ benefit. This means they’re a much more socially and financially responsible source of credit for people who are under-served by traditional banks. Moreover, since credit unions don’t have shareholders to pay, they can frequently offer very competitive interest rates for savings accounts too.
Will they take you back?
So here’s the danger for the big banks: when you’ve turned millions of customers away in their hour of need, and they’ve gone to the credit unions for help, why should they come back to you when the economy improves and they’re back on their feet?
Of course, you can market to them, offer them incentives—but the whole industry knows that the cost of acquiring a new customer is many times higher than the cost of retaining an existing one.
And no matter how good the incentives you offer, ex-customers will not forgive you for treating them shabbily when they needed your support. Even if they do decide to switch back from a credit union to a mainstream bank, they’re likely to choose one of your competitors.
Focus on good fundamentals
So, if banks are battening down the hatches right now, their top priority should be to ensure that their existing customers are snug in their cabins, not left out in the cold. A change, of course, is needed. Instead of competing to build the shiniest mobile app or the cleverest budget-tracking online banking tool, banks should be focusing on good fundamentals. How much bad debt do we have on our books, and how can we manage it? What can we afford to lend, and to whom? How can we help our most vulnerable customers keep their finances shipshape until we’re back in calmer waters?
Getting the right balance for lending is just like pharmaceutical companies developing the right vaccine dosage: too little and it’s ineffective, too much and it causes harm, but the right amount benefits society as a whole.
To do that, banks need to get smarter about their use of data. Instead of a broad-brush approach that sweeps whole tranches of customers into the same bucket, our industry must adopt more modern analytical techniques and model credit risk at the level of the individual customer.
This micro-segmentation approach helps banks to sell the right products to the right customers—and ensure that those customers remain loyal. And that’s a win-win, because it not only protects the customer, it protects the bank too.
Find out more about how customer analytics can help us build a safer, fairer banking system that’s fit for the future.