AQN examined the Small Business space at the start of the COVID Pandemic, focusing on what comes next for lenders in the space. Since then, the pandemic forced further change in the industry. Another round of PPP loans started recently, major SME lenders were acquired, widespread in-person relationship management stopped, and demand for loans shifted. Here we share some of AQN’s thoughts on the last year of change, how things may look after, and what’s on our minds as we start 2021.

We recently surveyed our network of consumer lending executives to see how they expected non-residential lending risk to evolve over the next 12 months. While few anticipate risk will remain artificially low in the long term, most expect the depth of economic recession forecasted back in March may not fully materialize.

Banks are likely on the precipice of seeing a two-fold impact in their current credit risk reporting. First, consumers have started aging out of the first round of hardship programs and second, CARES benefits have expired, including enhanced unemployment.

Uncertainty is the term AQN has heard the most when talking to bank leaders and lenders during the pandemic. The world has changed a lot for everyone, and commonly held pre-crisis truths in lending may not stand in the coming months and years. To date, defensive moves have been the market move. Provide relief for customers; cut back on marketing and acquisitions; lower current unused exposure. While effective in the short run, these are not sustainable strategies.

Journalists, industry research groups, government agencies, and others have spent several months pontificating about what the economic fallout from the COVID-crisis might look like in the lending industry. With the release of 1Q2020 earnings and regulatory reporting, we got our first look at actual impacts – sort of.

As a consulting firm specializing in consumer and small business lending, we’ve had ongoing crisis-related discussions with dozens of clients and experts across the industry. The question at the center of these conversations is always “How badly will this impact lending?” Both sides of the debate are offered up without meaningful stances taken, as if lenders are balancing weights on both sides of a scale. A single party can find themselves arguing both positions, ultimately ending up back at square one with a “wait and see” approach. What I can offer is a list of no-regrets actions you can take today to be ready for the future.

If you are a lender who entered the crisis with an active loan portfolio, you have without a doubt been thinking about managing credit stress in your portfolio. Providing payment relief to distressed borrowers was likely an integral part of your reaction, and it has several considerations like I discussed in an earlier blog post. Recent data from Transunion now shows an enormous spike in the percentage of accounts in hardship across loan categories. It is noteworthy that some banks have deferred payments for more than 15% of their loan portfolios, according to Janney Montgomery Scott in this Bloomberg article. Trends in serious delinquency rates are however nowhere close to such extremes, masking the true nature of risk here.

The credit loss bubble will not be the only impact of COVID-19 on credit card issuers, changes in consumer spend behavior are also suppressing interchange revenue. This is especially true for high-end transactor products, despite being poorly understood by the very banks experiencing this decline.

The growth curves for unemployment rates of COVID-19 look an awful lot like those of large natural disasters. After the first three weeks of surges, the NY Fed equated the impact to hurricanes Katrina and Maria. Looking at the data, we agree it is hard to deny the similarities which have only gotten stronger as more claims data became available. AQN also looked into some of the key outcome metrics for consumer financial products after hurricane Katrina to try and baseline how lenders should be thinking about impacts to their portfolios.

The rubber band has been pulled too far, so when you finally let go, it won’t return to it’s original shape. The popcorn can’t be unpopped. You can’t put the toothpaste back in the tube. Choose your favorite metaphor, but whichever one it is, the answer is the same: The world is not going back to the way it was before COVID.

Crises and recessions tend to punctuate and accelerate trends that were previously slow and sometimes unnoticed. Unemployment numbers are up by at least 22 million in the last month, consumer spending was off over 8% in March, and trillions of stimulus dollars are now flying (or failing to fly) around the country. This crisis is going to change things farther and faster than prior ones did. Today, let’s talk about the impact to digital adoption in banking.

AQN Payments Monthly is a regular review of news in the payments space, along with AQN’s perspective on how that news impacts you and your business.