In our latest edition of Metyis' Observatorio de Financiación al Consumo en España (Observatory of Consumer Financing in Spain), we reviewed the main business metrics and trends in the Spanish consumer financing sector - a sector that has defied odds during this economic cycle since the war in Ukraine.
This article highlights key insights from our comprehensive report. Those interested in accessing the full analysis can contact our Partner Julio Alonso-Rodríguez for more details on the challenges, opportunities and future outlook we identified for financial institutions in the consumer financing space.
Rising inflation and interest rates predicted a decline in consumption and an economic slowdown but Spanish households have defied expectations with robust consumption growth and record employment rate. The banking sector emerged as one of the main beneficiaries, concluding 2023 with record profits, improved revenues, and reduced bad debts. As a result, dividends to shareholders increased, as shown in graphic 1, and their market capitalisation surged by almost 50%.
Graphic 1 - IBEX 35 Banks (IBEXIB), Investing.com
The banking tax introduced by the government and the political and economic instability in Europe did not stop them. At the end of the first quarter of 2024, it seems that the good times will continue and the figures will outperforming those of the previous year. However, financial institutions specialising in consumer credit are living in a parallel but much darker reality. The difficulties in finding cheap financing and the pressure on prices have affected them considerably.
Graphic 2 - Metyis Analysis of Spanish EFC Profit
Overall, according to Metyis analysis shown in graphic 2, financial institutions have seen a 19% drop in profits compared to the previous year. However, as with all storms, some have lost their boat, while others have taken the opportunity to make exceptional profits by relying on sound strategies.
A chess game in which the pieces are transformed
The challenge of measuring consumer credit is well known in the Spanish financial sector. The fluctuation of figures resulting from the integrations of the last decade and the changes in the interpretation of accounting has raised doubts among the experts of the major financial institutions. At Metyis, we have taken up the challenge of measuring consumer credit on a regular basis, creating a unique indicator that allows us to understand market trends.
Using this indicator, we can confirm from graphic 3 that after a flat trend between 2020 and 2022, the consumer finance market has grown strongly again, by almost 3%. This is a far cry from the 9% annual growth seen from 2016 to 2019, but growth above GDP and close to inflation is certainly positive.
Graph 3 - Consumer finance market according to the Bank of Spain
However, the growth comes from the block that is suffering the most: the credit financial institutions which have reduced their profits. Metyis analysis shows that these institutions have increased their market share and are now over 50%. The banks that are in their sweet spot have reduced their exposure by 5%.
They have decided to focus on their core mortgage and corporate business, where they generate significant margins, leaving the consumer lending business to the independent and subsidiary credit finance institutions.
Credit institutions linked to the automotive sector have had the opportunity to grow. Despite the price war in this segment, these institutions were able to save the year thanks to low defaults and high demand. However, those involved in other products such as direct loans, prescription loans or credit cards have suffered. From significant losses to going out of business or reasonable doubt about the years ahead, the smartest companies will find growth opportunities where others are losing ground. A solid mix is also a solid strategy.
Credit cards: from star product to fallen star?
Credit cards, once a strong margin-generating product, have been among the hardest hit. With this product, independent companies were able to fully incorporate their margins into the profit and loss account. Consumers are using more credit cards every day, but that hasn't saved all financial institutions.
Higher costs have left some institutions struggling. Credit cards are products with high technological investments and a slow pace of change. The rapid change in the business equation has eroded margins, making it impossible to adjust operating expenses and rendering business models obsolete. A new challenge lies ahead for the new cycle, offering scope for a game changer.
Credit cards have become a mass product. The reduction in interchange fees and the problems in generating margins have led banks to offer undifferentiated products. Only affinity cards, which are distributed through retailers and where loyalty programs are the main value proposition, stand out. In most cases, the more often a customer uses the card, the greater the discount or reward — a clear loyalty strategy to drive retail spending. Nevertheless, consumers still want the main benefits of credit cards. In a consumer survey by Metyis, most respondents valued credit cards for two reasons: the ability to split payments and receive discounts and cashback on purchases.
Some digital banks, neobanks and fintechs are offering more advanced solutions in this battle, differentiating the way the card is contracted and used. In this regard, the use of data, analytics and open technology is gaining significant traction.
Time is also worth its weight in gold when it comes to acquiring new customers. The requirement to present and analyse documents made the traditional onboarding process a major obstacle to customer acquisition. With platforms utilising PSD2 regulations (which allow access to customer information from other banks), the process has been simplified. The customer authorises the bank to access and verify accounts at other banks. During this process, quality data is obtained that makes it possible to know the customer (KYC) and analyse their economic situation in detail (scoring). These technologies shorten the traditional onboarding process to less than five minutes and facilitate access to credit.
A data mine: incentivising card use through behavioural analysis
The Pareto principle is a mantra in banking and the world of credit cards. Eighty percent of revenue comes from 20% of customers, and in many cases, the ratio reaches 90/10. Analysing customer behaviour can uncover segments and clusters with statistically significant preferences. This allows for highly targeted marketing strategies, linking increased card use and revenue generation to customer consumption behaviour. Exploiting and using data is key to maximising business.
Looking ahead, consumer financing and credit cards face several challenges. The cost of capital, risk cost, and transformation ability will be key. Financial institutions will need to equip themselves with digital capabilities and analytics in an environment where costs quickly eat into the profit and loss account. However, these are crucial for improving customer experience and operational efficiency.
About the authors behind the article:
Julio Alonso-Rodriguez is a Partner and Oriol Colomer is a Principal, both based at our Barcelona office.