July 2010

• Download Article

A Cautious Outlook for Household Credit Demand

By Annetta Cortez & Gaurav Gupta

As retail banks gear up for 2011, they are facing critical questions about consumer credit demand. While the lingering serious challenges with mortgages and credit cards are well known, institutions still have a pressing need for earnings growth, if it can be found.

It seems unlikely that household borrowing will begin to broadly climb in tandem with a reviving economy. Instead of a strong, widespread expansion, a scenario more hospitable to product push strategies, it will be an uneven market with scattered pockets of demand and lingering pockets of risk, a scenario requiring precise targeting and a far stronger relationship context.

Along with carefully considering the shape and scope of household credit demand, therefore, retail banks will have to adjust the marketing and sales context, both to reflect the importance of remaining viable borrowers, and also to provide the advisory expertise and reassurance that people are hungry for in the post-crisis economy.

Looking ahead, we believe that U.S. households will generally continue to de-leverage, perhaps through 2012. This includes working down revolving and installment debt, rebuilding cash cushions, and for many, working through defaults. Employment remains a challenge; the housing market remains a challenge.

Even when these obstacles begin to noticeably subside, perhaps two or three years from now, the retail credit market still will look different. Increasing numbers of Baby Boom households are nearing retirement and won’t return to the peak borrowing and spending patterns of recent years. Credit demand likely won’t revive to prior levels.

The situation calls for a fundamental re-thinking of retail credit strategies. Instead of strictly pushing credit products through separate lines of business, winning banks will shift the emphasis from new account acquisition to relationship expansion among established customers. This will require a far deeper analytical understanding of customer needs and risk profiles; an improved ability to drive information to the point of sale; and a different sales orientation and skill set.