How the rental economy will transform banking

Our society is on a clear trajectory towards becoming a rental economy, moving away from ownership and opting for high-quality, convenient on-demand services and experiences instead. How will this impact saving, spending, and the banking industry overall? And, crucially, how can traditional banking models transform and adapt to embrace this trend and thrive?

According to the last Census, one in five households in England and Wales are renting – a total of five million, growing from just under four million only ten years ago. While fewer people buy homes, what we are seeing is more institutional investment, including private equity capital, flowing into residential housing, particularly built-to-rent accommodation, a sector predicted by Knight Frank to reach £100 billion by 2028 (compared with £35 billion in 2019). 

Several driving factors, not least the housing crisis, the cost of living and, more recently, high interest rates, gave rise to ‘Generation Rent’. While there are certainly many who are unable to get a foot on the property ladder, there are also those who simply do not wish to be tied to the long-term commitment of a mortgage. There is a new generation that is saving and spending differently to their parents and who want a flexible lifestyle full of choices and diverse experiences. They rent whatever they need on a pay-as-you-go basis, from cars to tech and even clothing, with advancing technology making it easier than ever to do so at the click of a button.

Beyond homes, research shows that 40% of consumers prefer renting and subscribing to a variety of products and services rather than buying them, because it enables a more flexible lifestyle; nearly one in three, meanwhile, do it for the environmental credentials – feeding into today’s more climate-aware generation keen to avoid waste and live more sustainably – and 13% foresee a time when “absolutely everything” will be rented. This approach also aligns with a more agile, ‘hybrid’ way of working and living that has emerged in recent years. 

The transition to a rental economy undoubtedly holds implications for the evolution of the wider lending markets. Financial services firms are set up on the premise that people will save for something major further down the line, be it a deposit for house, a car or for their retirement. Investments and pensions will certainly remain, but the asset product mix of banks will go through a transformation as individuals borrow smaller ticket loans, for ever-shorter periods.

The lending portfolios of banks are still vastly mortgage-centric but, if fewer people and more PE firms own houses for instance, the residential mortgage as a product will decline. In its place, smaller, near-term liabilities (i.e., under a year) will increase and become more dynamic in nature. That’s especially key for Building Societies whose survival depends on transitioning away from solely focusing on savings and mortgages. These community banks do not have many other asset products or processes to support short-term, high risk and high yield assets. Established, bigger banks can reshape their product mix more easily, by redirecting their efforts towards P2P lending, credit cards and so on. It is critical to prepare now to ensure resilience, retain competitive edge and customer relevance and stickiness in the future. 

The vital role of deeper, data-led customer insights 

Banking leaders need to consider how best to make a major push towards near-term asset products, as the credit models for long-term and near-term lending are completely different. Further, how to evaluate and verify creditworthiness and how to evaluate, admit and optimise collateral in a world where an ever increasing number of people want to spend on experiences instead of fixed, appreciating assets.

There is a fundamental difference in assessment of risk between wholesale and retail customers. While corporate creditworthiness is often based on future potential, retail individuals are evaluated on their current ability to service the debt. Better and more rounded customer data can allow us to adopt the corporate philosophy in retail lending markets - to make decisions based on individuals’ future potential too. For applicants who seem riskier bets, there is always the option to ask them to buy insurance for additional assurance on the loan. 

In order to make the switch, a much deeper level of analysis is needed into the customer’s life to get a fair and accurate idea of their future potential. Banks are already doing this for corporate clients, which are much more complex in structure. This is where stronger data integration is of paramount importance to compile a comprehensive profile of a person’s everyday life, work, behavioural patterns and prospects. Harnessing the power of open finance (the next phase of evolution from open banking) can help by allowing for greater sharing and access across a much wider scope of customer information that goes beyond purely transactional data. 

Banking leaders must diversify their models in line with an ever-changing world. Data analytics and digitally enabled technologies, not least embedded finance, generative AI and other innovations, can support them in getting to know their customers far better and therefore be able to serve them in more personalised ways, reimagine the user experience and refine their own strategies according to shifting social and economic trends.