German consumers are in a buying mood – and have been for a number of years now. The economy is flourishing, jobs are secure and interest rates are at historic lows – all perfect conditions to boost consumption.
When the prices for cars, furniture, kitchen appliances and TVs exceed the household budget, some financial firms are eagerly standing by with short-term financing deals.
Such installment loans are enjoying growing popularity in a nation that has long been known for saving rather than spending its hard-earned money.
But not all financial firms are able to rub their hands in glee. Market watchers say that a massive shift is underway in the German banking landscape.
The winners are a new breed of banks that specialize in short-term installment loans – banks like Spain’s Santander or Germany’s Targobank.
“The potential here is going to waste. Savings banks are throwing away income return in times of low interest rates.”
The losers are traditional savings-and-loan banks, a breed of publicly-backed bank that has died out in many other countries but remains the pillar of many local communities and regions across Germany. Such banks have been extremely slow to adapt to the new demands of consumers.
Analysts say they’re losing a huge opportunity to make money, at a time where many are struggling to survive in this age of low interest rates. Barkow Consulting found the average profit margin for installment loans in recent months was at 5.5 percent, the highest mark in twelve years, and better than the profit margin for many longer-term mortgages.
“The potential here is going to waste. Savings banks are throwing away income return in times of low interest rates,” said Frankfurt banking consultant Christoph Pape.
Instead, it is specialist banks that have profited, often by being present right at the point of sale. Firms specializing in car loans now count among this growing breed of credit banks.
Such credit banks have seen their market share explode in the last five years (see graphic). The group in 2014 managed to sell a record number of loans worth nearly €150 billion, or $169 billion, up 6 percent from the previous year.
“These institutions traditionally maintain good relationships with retailers,” said Stephan Moll, who heads the German association of credit banks, the BFACH. Mr. Moll added that credit banks were the first institutions to start offering loans online. This segment now accounts for 11 percent of their new business.
Apparently the installment credit specialists have hit the nerve of the times. Savings banks, by contrast, have recorded considerable losses in this segment.
Oliver Mihm, chief executive and founder of Investors Marketing, speaks of a “strategic failure to act” on the part of these publicly-backed institutions.
The savings banks appear to have lost sight of the growing installment credit market: “Installment loans have to be actively marketed, and many savings and loans haven’t mastered that,” said Mr. Pape.
Or they don’t want to. Mr. Pape said he finds that, on the management board level of many savings banks, installment loans are still considered to be a no-go product. “They have the image of a grubby urchin,” he said.
That, he says, is a cultural problem which needs to change. If it does, Mr. Pape argues that many savings banks would actually be technically equipped for the challenge.
There have been some efforts to get into the action. Some savings banks, for example, have organized themselves into a lending partnership, setting up an umbrella institution called S-Kreditpartner, with the goal of pooling the management of installment loans.
It’s a model that has worked well in other segments – small savings banks pool mortgages too, for example, by running them through an umbrella group called LBS-Bausparkasse.
Of the more than 400 savings banks operating across Germany, only 113 have joined the new partnership to boost short-term private loans and short-term car loans.
The trouble is that not all have joined in. Of the more than 400 savings banks operating across Germany, only 113 have joined the new partnership to boost short-term private loans and short-term car loans.
Technically, the partnership works in that cooperating savings banks will promote and offer S-Kreditpartner’s installment plans. The umbrella group then closes the deal in the name of the respective savings bank that gave it the business.
“We continue to see a large number of savings banks having the potential to permanently improve their performance by partnering with S-Kreditpartner,” said a spokesperson of the DSGV, the German Savings Banks Association.
This won’t solve all their problems. Mr. Pape said he doesn’t see the savings banks getting much more of the retailers’ point-of-sale business.
“They missed their chance there and that creates the danger that the savings banks will be among the losers in the increasing online financing of installment loans,” he said.
In contrast to the savings and loans, Germany’s cooperative banks – another grouping of hundreds of local banks that tend to pool their resources – have chosen another path.
Cooperatives have also created an umprella group for installment loans, called Teambank. But in contrast to S-Kreditpartner, Teambank also has its own market presence in Germany, represented by 48 “Easycredit” shops across the country.
The model has helped cooperative banking institutions slightly increase their market share in recent years. Savings banks might do well to take a page out of their rivals’ books.