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How will subscriptions challenge traditional consumer loans?

Let us begin with the current state. The consumer credit industry is flourishing, with a variety of players such as banks, niche banks, and sales financing companies ("buy now pay later") growing, this applies to both the absolute number of loans given and the average size of these loans.

In a report from the Swedish FSA, unsecured consumer credit is the fastest-growing credit product in the market. It is natural an increase in demand equals an increase in competition; the current market is no different. The rise in financial competition in general, in combination with the Covid-19 situation, means that many private individuals will experience a negative impact on their personal finances, impacting the neccessity for credit.

An interesting perspective on the credit and loan industry is that major banks are no longer the biggest lenders. Niche banks and sales financing companies are issue the majority of credit agreements, with traditional banks representing just over a third of the total volume.

Why the current state is temporary, and why a new reality is pending.

Major banks are losing market share within the consumer lending area, but consumer credit, in general, will most likely peak shortly. 

How do I know this?

The most common use-cases for consumer credit, relates to the consumption of durable goods, such as vehicles and electronics. The industry of durable goods are on the verge of moving to subscription-based business models as evidenced by Electrolux's new business model for electronics or Volvo's statement that 50% of their cars will be sold on a subscription model by 2025. Even companies like Coca-Cola, Adidas, and Nike are turning their retail products to subscriptions. There is a good chance with the disruption on Covid-19 people who would have ticked the traditional credit score may be a different proposition in the near term. 

A major retail bank ING also published a report on the topic, highlighting how customers are taking the "subscribe to music"-behaviour into new industries. Even companies like Apple with the iPhone upgrade program are achieving excellent traction, and this is nothing but a pure hardware subscription model.

To add some external flavour to my view-point, I borrowed a quote from Forbes. "The subscription e-commerce market has grown by more than 100% a year over the past five years, resulting in subscription businesses growing their revenues about five times faster than S&P company revenues."

Subscriptions will inevitably replace consumer credit, as consumers shift their buying behaviour towards cars, electronics, and clothing (amongst other categories) to the subscription rails. Meaning the demand for traditional credit will decrease, we have already seen early adopters in this global shift.

The million-dollar-question is when will the early and late majority adapt, and stop buying on credit?

How will your business adapt to this new environment?


Comments: (3)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 30 April, 2020, 13:40Be the first to give this comment the thumbs up 0 likes

Once upon a time, when banks gave loans for buying homes, homebuyers had to put up cash downpayment. Home prices went up, even downpayments became high. So came a time when banks started giving loans for downpayment as well.

I was jokingingly predicting the other day that, soon subscriptions will become so costly that banks will make a business out of giving loans for them!

Jokes apart, tech companies can afford the deferred payment model of subscriptions via VC funding. But, when it comes a refrigerator or car manufacturer, I doubt if they will qualify for VC funding. So, it's quite possible that they, rather than their consumers, will take bank loans to offer the subscription model. Effectively, a retail banking loan becomes a business banking loan. 

Hoss Atri
Hoss Atri - Elifinty LLC - London Ec1 17 May, 2020, 16:38Be the first to give this comment the thumbs up 0 likes

Sorry but a bit disappointed with this blog. With due respect, it lacks substance and has no relevance (in my view) to behavioural economics.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 10 July, 2020, 19:23Be the first to give this comment the thumbs up 0 likes

I never thought my joke will come true but it has. 

I read on Quora today that a certain electric company in Bombay, India, is offering loans for paying monthly electricity bills.

So, subscriptions are not going to challenge loans.

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This post is from a series of posts in the group:

Behavioral Economics in Banking

Banks can’t predict user behavior with absolute certainty, but they can help frame their financial decisions by understanding how choices are made, and designing solutions around them. This group is for all things behavioral economics in the banking industry.

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