I recently asked a client about her institution’s pricing strategy, particularly in light of the recent Fed announcement. She went into great detail about how they price their mortgages, equities, consumer loans, auto loans and credit cards (they did not have a commercial portfolio). When she had finished discussing how they used the Home Loan Bank’s advance rates, Treasury, and competitive data for formulating their pricing strategy, I ended the discussion with “So, what about deposits?” There was not as much consideration there – hence, why deposits were discussed first in this two-part blog series. There does generally seem to be more rigor on controlling pricing on loans than there is on deposits. The typical challenges on the lending side involve overcoming institutional inertia and doing things differently as market conditions warrant a change in focus for lending operations and marketing.

I asked the client referenced above about how her institution oscillates in lending marketing as the rate environment shifts and their liquidity ratio respirates. They just used price primarily to accelerate or decelerate their lending. I would argue that during environments with substantial rate changes, such as now and likely in the medium term (see crystal-ball average referenced in the last blog), a change in priority and loan-garnering practice is warranted.

It will be interesting to see the impact of the latest Fed cut on loan demand. Figure 1 shows how 2023 was the lowest loan demand has been in four years, although it is still moderate to high since 2008. The economic pressures on the consumer may see that drop a bit further. Loan harvesting may be more challenging in the near term than it has been in the last three years. And any time potential borrowers have their mind on rates in a non-negative way, we should ponder our loan acquisition tactics.

Figure 1: Percentage of Households That Anticipate Applying for Any Loan in the Next 12 Months

Consumer Demand for Loans Has Declined Significantly Over the Past Two Years

Source: Lending Insights, Tougher Sledding Ahead, Raddon Research Insights, 2024

If you have forgotten the vocabulary from your last marketing/economics class, service-dominant logic is a business perspective where consumer demands drive a firm’s production, versus goods-dominant logic, where a business just produces a product and expects the public to buy it. When living in a competitive world driven by service-dominant logic, rather than goods-dominant logic, we should consider what consumers are thinking about from a lending perspective. When interest rate declines make the nightly news, one of the early thoughts consumers have is whether they should refinance their house.

Although each consumer’s context is different, it is likely that most consumers are not going to be in a good position to refinance their 30-year mortgage when the Fed lowers their short-term rate by 50 basis points. Of course, this does not keep consumers from wondering if it is a good time. Most of the time the disembodied “they” suggest that consumers should refinance their mortgages when the savings with the new rate pays back the costs of refinancing, either within a couple of years or at least before they expect to sell their home. Either way, the recent 50 bp reduction is unlikely to create a refinancing opportunity for a mortgage purchased two years ago. (Some variance may apply.) However, consumers are still thinking about it. They might actually appreciate their financial institution reaching out about now, letting them know that this may not be a good time for a refinance.

If a particularly consumer-motivated financial institution wanted to instill substantial loyalty in a consumer, that institution might even suggest what the conditions would look like for a potential borrower to refinance. That institution would just reach out, unrequested, with such information. Talk about being relevant to your consumer base.

Where a refi is more likely to benefit consumers directly in terms of the new rate environment concerns auto loan refinancing. When was the last time we pulled competitive data on our consumers’ auto loans and tried to refinance their auto loan away from a competitor? Might be time to dust off that tactic soon. If we have let our subscriptions lapse for those “credit trigger” services that make us aware when our customers are getting loans elsewhere, it might be time to resubscribe. While this service is evergreen in its value, in an environment where consumers may be particularly more rate-conscious, such outreach is likely to be better received.

Reaching out to your customer in a credit card context also may make sense in this season. Even if you are not anticipating changing your card rates, emphasizing your cards’ particular features, rates, and fees may gain more traction now as consumers have rates on the brain. Such marketing tactics need to be primed and ready for the next expected rate cut as well.

If your institution has made any improvements in your loan process, it might be a good time to inform your prospective or current consumers about that. You may not even have to mention a rate in such a notification. Consider an email, web banner or mobile window that mentions your loan process improvements that make applying and underwriting quick and easy. That might be a sufficient message for a customer who was already wondering about whether now is a good time to buy/refinance that auto, make a balance transfer, or transition their bathroom décor from the late ’90s with a home equity product.

Regardless of how much a consumer may benefit from current or future rate cuts, these events are likely to make the news. This presents a good opportunity for financial institutions to help consumers understand what these cuts may mean to them personally. Many institutions are already doing this. I receive several “what the latest rate cut means to you” messages in my email just about every day. These messages range from auto refinance to card balance transfers to high-rate savings promotions. Even if the firm making the offer is pitching the exact same products at the exact same rates they had before the Fed announcement, they seem to understand that consumers have rates on their mind. The only remaining question is whether your institution’s voice will at least be in the mix for consideration.