CIB inroads in Consumer Finance are proving difficult
By Christophe ALBERTO, Manager Eurogroup Consulting
Goldman Sachs’ announcement to restrain the rapid expansion of its online lending platform in October led market experts to wonder about the relevance of the bank’s last venture into consumer finance, illustrating the challenges CIB players may face while entering adjacent markets without pulling the right levers.
Consumer finance remains a very attractive area for financial players, with a high rate of shareholder returns from 2012-17 (see Figure 1). Western European banks generated c. €60 billion of consumer-finance revenues (after risk costs) in 2017, equal to 18 percent of retail-lending revenues, compared with just €41 billion in 2012. This segment has outperformed almost all other Western European financial services segments and can be explained by consumer finance volume increase in line with GDP growth, improvement of net interest margins on loan books and a reduction in loan loss impairment (c.5% at Marcus).
We have identified 3 success factors for CIB players considering a consumer finance expansion
1. Leverage CIB capabilities
CIB entrants first need to explore and foster relevant synergies with core CIB businesses, meaning that selected interrelationships should positively impact experience curve, capacity usage and/or scale. Typically, CIBs are at the forefront in terms of analytics, risk management, infrastructure and access to capital, and should therefore use those incumbency benefits to create distinctive advantage in consumer finance. To ensure the success of this strategy, CIB entrants need to:
- Select only capabilities that will bring competitive advantage to the new venture
- Manage interfaces strategically (e.g. different set of rules, exchange teams)
- Arbitrate actively (e.g. C-suite level commitment and bias to protect consumer banking within pre-defined boundaries)
2. “Go big or go home”
There is a necessity to build volume in a commodity-based consumer finance environment. With the development of fully digital and low overhead banking services, CIB entrants need to build on this equation to quickly scale up and expand their product offering and markets to build up their customer base, looking at both attractivity (i.e. GDP/capita and digital maturity) and accessibility (i.e. market knowledge and existing local core operations). In this regard, Marcus by Goldman Sachs recently decided to pay its online savings customers 2.25 percent, an increase of 20 basis points versus the former setup. Simultaneously, the rate on its 1-year certificate of deposit rose 10 basis points to 2.75 percent and the firm now intends to replicate this approach in Japan. The intent is to contribute to maximizing scale effects, and requires therefore an optimal balance between number of adjacent products and overall complexity.
3. Buy customer and technology experience
With their BtoB background, CIB firms could experience difficulties in securing the ‘high quality’ consumer finance customers and offering the solutions that address their specific needs. Therefore, we believe inorganic growth is the best way to quickly secure talent, technology and a customer base to develop a successful consumer finance franchise. A purchase by a top-tier CIB in April 2018 of Clarity Money, which uses AI to analyze transactions and credit card information is an example of acquisition initiatives designed to target attractive customers and improve their experience.
With the right strategy definition and execution, CIB entrants would not only benefit from attractive consumer finance market returns, they would also increase diversification and bring in additional benefits to their legacy businesses, providing as an example new investment opportunities, such as personal loans, to institutional players.