Recent years were marked by higher interest rates, mounting consumer debt and rapid tech advancements – all presenting challenges and opportunities for banks and credit unions when it comes to lending. As we progress deeper into 2025, there are several key shifts underway and expected to persist that can guide financial institutions in fortifying their lending strategies.
FIs that recognize these trends and appropriately respond will be better positioned to put their capital to work in ways that drive growth, portfolio diversification and customers’ financial health.
Fed rate cuts influence lending strategy decisions
While the rising rate cycle has ended, as indicated by the Fed’s rate cuts last fall, strong employment trends and higher-than-target inflation means rates are likely to stay higher than we may have otherwise anticipated. For sure, economic uncertainty, along with trade policy and other factors, leave interest-rate predictions as challenging as ever.
Still, this climate creates an interesting opportunity for banks who have seen deposits stabilize and will again enter growth mode this year. Those ready to seize the moment should refine their lending strategies, as the mortgage market is unlikely to be a source of growth. Lending strategists will instead need to embrace more effective ways to diversify their balance sheets with strong risk-adjusted return assets. Banks that act swiftly will be able to strengthen their portfolios while also positioning themselves for responsible growth and to better meet the needs of today’s consumers.
Financial stress continues for consumers
While inflation is down materially from its peak, it risks poking back above the Fed’s 2% benchmark. The need for smarter, more proactive personal financial management has never been greater as financial anxieties linger. With people and households juggling budget cuts, tough trade-offs and debt restructuring options, there is a significant opportunity for banks to step up and support their customers, especially until their incomes catch up with the higher cost of living.
This year, more banks will offer innovative tools and lending products to enable customers to regain control of their finances and make the most of their cash flow. Those that provide convenient, digital-first solutions will have a particular edge.
Debt consolidation options are increasingly sought after
The trend of consumers increasingly turning to credit to meet short-term needs in the face of inflation continued last year, causing U.S. credit card debt to surge to a staggering $1.17 trillion, with interest rates hitting a record high of 24%. Because of this ongoing financial strain, refinancing options, such as debt consolidation through unsecured personal loans, are more attractive than ever.
APRs on personal loans are currently about 7.5% lower than credit cards, prompting more consumers to consider consolidating high-interest debt to alleviate financial stress. In fact, refinancing credit card balances into personal loans could save U.S. households more than $80 billion a year. As a result, we hope to see more banks take steps to offer debt consolidation solutions that help customers pave the way for a more stable, successful financial future.
Risk management and AI converge
As consumer performance stabilizes in a soft-landing scenario, returns are expected to improve. We anticipate lenders will also look to further enhance returns through leveraging advanced technologies like artificial intelligence (AI) to streamline operations and boost efficiencies. But while AI holds significant potential, it’s no substitute for solid risk management practices. As regulators set more rigorous oversight for AI-driven technologies, banks must be ready to adapt quickly. It will be critical for AI initiatives to closely align with a bank’s credit culture and risk policies, allowing them to explore this new frontier without compromising safety or compliance.
As the lending landscape continues to evolve, banks have a unique opportunity to sharpen their strategies based on these shifts, leading to stronger portfolios and deepened customer relationships. Doing so successfully will require offering effective debt consolidation options and financial wellness tools while maintaining sound risk management. By embracing these opportunities, banks can drive responsible growth while helping customers prioritize stronger financial health this year and beyond.
Matt Potere is CEO of Happy Money.
