#United States #Scottsdale #community banks #Consumer Lending #Teslar Software

Community Banks Risk Missing Out on a $106 Billion Opportunity

Recent research conducted by Cornerstone Advisors reveals a significant trend alarming the landscape of community banking: a staggering $106 billion in consumer lending opportunities is increasingly being surrendered to larger financial institutions and fintech competitors. This shocking data highlights a critical warning for community banks that underestimate the importance of consumer lending as a viable revenue stream.

Understanding the Landscape

The report, titled "The Most Valuable Loan Community Banks Don't Make: The Hidden Value of Consumer Lending," emphasizes that consumer lending is not just a supplementary product for community banks but a strategic asset that can help maintain crucial relationships with business owners and safeguard deposits. With approximately 5.5 million employer small businesses in the U.S. poised to generate a substantial demand for consumer loans over the next two years, the need for community banks to react decisively has never been more urgent.

Community banks have traditionally approached consumer lending as a low-margin product. The study found, however, that nearly 60% of small business owners have chosen to bank with one of the five largest U.S. banks instead, where consumer lending accounts for up to 24% of the total loan portfolio. This shift reflects a detrimental loss of business for community institutions, which need to rethink their strategies.

Key Statistics and Findings

• - Demand for Loans: A notable 72% of surveyed business owners believe they will require a consumer loan within three years. Yet, only 46% of those who sought personal loans in the past three years utilized their primary business bank; the remaining 54% sought better terms or rates elsewhere.
• - Reasons for Seeking Alternatives: The reasons behind this trend are revealing: rates or terms (41%), slow loan approval processes (35%), and lack of product awareness (14%) are primary factors driving borrowers to larger banks or alternative lenders.
• - Profitability Concerns: It’s common for banks to question whether consumer loans yield sufficient profits to justify investment; however, the real concern lies in understanding what’s at stake when business owners seek loans from competitors. Losing even a single loan can strengthen a competitor's position, opening opportunities for them to cultivate deeper relationships with those customers.

The Growth Opportunity

The implications of these findings extend beyond immediate profit margins. Consumer lending should be reframed as a relationship-retention strategy. The study underscores that banks excelling in consumer lending witnessed a median return on assets (ROA) of 1.44%, contrasting with 1.15% for those lagging behind in this crucial sector. Furthermore, banks with robust consumer loan offerings experienced higher growth rates in deposits compared to their counterparts.

Joe Ehrhardt, CEO of Teslar Software, encapsulates the essence of this opportunity: "Consumer lending is about more than the loan itself; it’s a chance to strengthen existing relationships and build new ones." By modernizing the loan origination process and leveraging technology, community banks can enhance efficiency and profitability while nurturing long-term growth.

Conclusion

Cornerstone Advisors’ research paints a sobering picture for community banks that neglect consumer lending. While these loans may seem unprofitable on a transactional basis, they hold invaluable worth in maintaining customer relationships and resisting competition from larger institutions. The strategic pivot towards consumer lending could be the key to navigating an evolving financial landscape, preserving clientele, and facilitating sustainable growth. Community banks can no longer afford to view consumer loans as mere transactions; they must embrace them as integral components of their long-term strategies. For full insights, the complete report is available for download at Cornerstone Advisors’ official site.