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 This is no different in financial services. However, in the last decade, a more competitive environment has emerged, with greater emphasis on new business growth, i.e., acquiring new customers, and this has been coupled with unprecedented demand from consumers for credit.
Up until now there has been plenty of money to fund this demand, so supply and demand have been well matched, resulting in low interest rates. However, this supply has tightened up, and the money that was previously used to finance this credit has gone to safer harbours, such as gold. The result is a general nervousness to take on new lending that has been building since well before the so called ‘sub-prime crisis’. A quick look at most portfolios is likely to show that the bad debt is concentrated in the longer standing customers, not the new ones. So given these key factors, and that the stock markets are looking for continued growth from lenders, the question is…
‘How should we proceed’?
The starting point is clearly the existing portfolio of customers. There are a number of strategic levers that should be manipulated in order to profitably grow the existing portfolio. These include:
- Customer level analytics – essential for the profitable growth of a lender, analytics requires the identification of all accounts associated with a customer and uses the transactional account (e.g., cheque account or credit card) as the driver for centralised customer assessment and implementation of profit driven policies. Assessments include credit and attrition risk scores, marketing propensity models, customer value and Basel ratings.
- Customer exposure management – through which we can now effectively manage a customer’s exposure and their debt position. This will be used to approve transactions on out of order accounts (pay/no-pay decisions on cheque or direct debit payments and card authorisations) and granting increases for cards and overdrafts. It can also be used to identify customers with capacity and demand for new products, both lending and non-lending. In short, exposure management will grow the business by reducing bad debt, reducing cost through automation of risk decisions, and increasing revenue from new product sales.
- Strategic Collections – collections success has an important impact on the growth of the business, not just in terms of reducing costs and bad debt, but also in its ability to take on more business. The collections process starts before accounts actually miss a payment, through pre-emptive collections strategies that identify customers about to go into collections and apply appropriate actions. Once in collections, customer analytics will be used to push low risk cases down a low cost route, leaving collections staff to focus on high risk cases. Successful collections activity will reduce bad debt and costs and grow revenue by increasing capacity for lending.
- Reissue and renewal strategies – used to extend existing relationships and to determine what to offer the customer at the end of an existing loan term, controlling bad debt and increasing revenue.
- Risk based pricing – to provide ‘best price’ offers (based on an individual’s risk profile) for customers who threaten to leave, to ensure that they are only kept on a profitable basis - for higher risk customers, their pricing will be increased to reflect their risk profile. For new business, the pricing lever is used to set the optimal price, based on likelihood to take up the offer as well as risk, again at optimal price.
- Product promotion and marketing – to drive usage of existing services like overdrafts and credit cards, as well as cross-selling new services such as loans, up-selling additional features on existing products and promoting usage on existing products that generate fee income.
"A quick look at most portfolios is likely to show that the bad debt is concentrated in the longer standing customers, not the new ones."
In summary, the financial press is quick to point out how tough times are and the onset of a period of recession, and lenders can see that demand for credit from low risk customers is slowing. Opportunities for growth will therefore come from existing customers: satisfying demand from lower risk  customers and managing higher risk ones in a controlled manner. This requires centralised and automated assessment of customers and converting this assessment into action plans for each customer for deployment via the most appropriate contact channels.
Imagine reducing bad debt by up to 15% or collections cost ratios by up to 30% whilst still growing revenue? For an established lender, the potential uplift from existing customers can be much greater than from new business.
Matthew Dodd
Head of Customer Management Core Solutions
Decision Analytics
Experian
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