The consumer finance sector is currently undergoing dynamic changes. Market players must face new regulations, political-economic uncertainties, and evolving economic conditions. Despite challenges such as increased supervision by the KNF (Polish Financial Supervision Authority) and rising financing costs, we also recognize new opportunities and growth prospects. Properly leveraged, these opportunities can provide companies with a competitive edge.
In this article, we have dissected the challenges and opportunities of today’s consumer finance sector. Keep reading if you want to better understand current market outlook and discover how to extract the maximum growth potential for your company.
The consumer finance sector is currently facing a range of challenges that significantly impact the strategies and operations of companies in this industry. Get to know some of them:
Starting from January 1, 2024, lending institutions are required to meet new supervision requirements imposed by the KNF) These requirements include conducting operations exclusively in the form of a joint-stock company or a limited liability company, as well as maintaining a minimum share capital of PLN 1 million.
Additionally, lending institutions are required to regularly submit reports to the KNF, encompassing information about granted loans, concluded agreements, clients, revenues, balance sheets, and individuals holding key positions within the institution. Failure to meet these requirements may result in financial penalties, suspension of activities for responsible individuals, and ultimately, removal from the registry.
The supervision of KNF over the consumer finance sector aims to ensure legal compliance and consumer protection. However, for lending companies, this introduces the need to adapt to new standards, posing challenges in operational, technical, and regulatory aspects. This adaptation leads to increased costs associated with new analytical, reporting, and corporate obligations.
Inflation, rising salaries, and additional reporting obligations contribute to the increase in operational costs for companies in the consumer finance sector. The natural response for businesses in such a situation is to raise the prices of their products. For loan companies, this maneuver is hindered by the currently enforced low and rigid limits on non-interest costs of loans.
The challenges in maintaining profitability prompt companies to explore various ways to cut costs or increase revenues. Unfortunately, this often has a negative impact on the transparency of offers, making products less understandable and, consequently, less attractive to customers. Imposed limits also result in reduced availability of loan products for some customers with increased or difficult to assess risk, leading to their financial exclusion and limiting the market size for loan companies.
The challenge for the consumer finance sector remains in maintaining competitiveness in the market by providing profitable yet still attractive offers for consumers that meet current legal requirements.
The increased level of interest rates since 2022 significantly raise the costs of raising capital in the market. Moreover, the outlook for the coming years does not appear optimistic, as substantial decreases in this area are not anticipated. Despite the forecasted reduction in the CPI price index, the WIBOR3M level, crucial for loan interest rates, remains relatively high. Estimates from the National Bank of Poland indicate the persistence of WIBOR3M at 6.57% by the end of 2023 and 5.95% in 2024 and 2025, signifying a lack of significant reduction in capital costs for consumer finance industry firms.
Additional challenges for loan institutions arise from legal changes enacted in the beginning of 2024. They increased the minimum value of share capital by 5 times (from 0.2M PLN to 1.0M PLN) and at the same time limited the forms of financing for lending activities. Companies can no longer finance themselves by accumulating funds from other individuals, such as through the issuance of bonds or other debt instruments.
The consumer finance sector is facing the challenge of finding the most efficient source of funding in the new legal conditions.
Poland’s GDP grew by only 0.2% in 2023, compared to a growth rate of 5.3% in 2022. The slowing pace of economic growth, coupled with a consistently high level of inflation, signals challenging conditions for conducting business.
The prospect of improvement in the coming years, though optimistic, remains moderate as the GDP growth rate is not expected to exceed 2.3% in 2024 and approximately 3.4% by 2028. For companies in the consumer finance industry, whose development is strongly correlated with economic conditions, this implies the need to adjust strategies, find new revenue sources, and implement innovative solutions to support effective customer portfolio management.
In summary, the current market demands from companies in the consumer finance sector primarily include:
While the Consumer Finance sector faces new challenges, it’s worth noting that they are just one side of the coin. The mentioned threats also open doors to new opportunities, which, if properly leveraged, can bring significant competitive advantages to companies in this sector.
Discover some of the opportunities currently shaping the development of the consumer finance sector:
The continuously rising cost of living, coupled with high interest rates limiting consumers’ creditworthiness, is driving the increased demand for non-bank loans. The year 2023 set a record in this area – the value of granted loans amounted to PLN 14.6 billion (+58% YoY, the highest growth among all segments of the credit market), and the number of individual customers utilizing this type of financing increased from 0.9 million to 1.2 million year over year.
Lending companies that craft the best response to the heightened demand by creating attractive offers and efficient sales processes have the opportunity to build a lasting competitive advantage.
The installment credit segment is another high-growth area in the credit market. In 2023, the number of granted installment loans increased by 84.9% YoY, with their value rising by 26.7% YoY. The widespread adoption of BNPL payments is a key driver of this market’s growth. By the end of 2023, 2 million individual customers had utilized BNPL services, with a significant portion — 1.2 million — doing so in the past year.
The growing popularity of BNPL payments is attributed to the convenient user experience. Deferred payments for purchases make the buying process quicker, more accessible, and comfortable. Moreover, BNPL credits boast a very high repayment rate – as much as 96.0% of customers settle them on time, with only 0.4% of customers having overdue payments exceeding 90 days.
BNPL is becoming an increasingly attractive alternative to traditional loans, both for customers and lenders. This, in turn, presents opportunities for companies in the consumer finance sector to spur additional business growth. Particularly intriguing in this regard is financing for entrepreneurs. While BNPL payments are already available for most popular e-commerce stores in Poland when it comes to individual customers, the BNPL market for businesses is still in its infancy and could yield substantial returns for businesses that tailor their offerings accordingly.
Source: https://media.bik.pl/informacje-prasowe/828055/bik-prognozuje-dalszy-wzrost-akcji-kredytowej-w-2024-roku-po-dwucyfrowych-zwyzkach-w-2023-roku, https://subiektywnieofinansach.pl/nasze-zadluzenie-wzroslo-dane-bik/
In recent months, there’s been a surge in advanced solutions leveraging machine learning and artificial intelligence (ML&AI). These innovations have the potential to transform the consumer finance sector, reshaping operations, decision-making, and overall customer experience.
Thanks to ML&AI solutions, loan companies can enhance crucial processes related to sales, risk management, and customer service. MLOps platforms enable full automation of the financing process, improving the accuracy of default risk assessment and fraud detection through in-depth analysis of each customer’s behavior and characteristics.
Similarly, in the case of marketing or sales, modern ML&AI algorithms can accurately forecast a customer’s likelihood to purchase a specific offer, prioritizing leads with the highest potential to boost the results of ongoing campaigns.
An important aspect of ML&AI solutions is their ability to continuously self-improve, enhancing the benefits over time and building a stronger competitive advantage for organizations.
Modern technologies are steering the consumer finance sector towards hyper-personalization of offers. This involves customizing communication, processes, and financial products to meet the specific needs of individual customers.
Hyper-personalization requires a deep understanding of customers, made possible through precise analysis of a wide range of data. Modern tools enable the development of a digital customer profile based on information from various sources. Factors considered include the customer’s interaction history with the company, website or app behavior, living situation characteristics, estimated income and creditworthiness. Such a rich profile facilitates the effective selection of the best offer for each customer, resulting in increased conversion and sales.
An essential aspect of a modern sales approach is also unified commerce, which involves the seamless integration of data flow and communication across every sales channel. It ensures that regardless of how a customer interacts with the company, they will receive the most tailored offer for them.
Hyper-personalization and unified commerce take on special significance in today’s environment of growing customer demands. As much as ¾ of customers expect financial institutions not only to understand their needs but also to tailor appropriate communication to them. For companies in the consumer finance sector, this represents a tremendous opportunity for development, and modern technologies facilitate this approach more than ever before.
In the face of a dynamically changing environment, companies in the consumer finance sector should continuously explore new paths of growth to consistently build their market position.
The main area that attracts attention is innovative technologies, especially those based on artificial intelligence and machine learning. This is where key opportunities lie for companies that want to be not only flexible in the face of changes but also effective in risk management, sales growth, and cost optimization.
At Algolytics, we provide a comprehensive Data Science platform focused on automating business processes and supporting data-driven decision-making. Our solution enables companies in the lending sector to:
Contact us, and together we will unfold the potential of your company by leveraging innovative ML&AI-based solutions.