Customer Targeting & Segmentation
The desire to return to portfolio growth is a clear trend in mature credit markets, such as the US and Canada. Historically, credit unions and banks have driven portfolio growth with aggressive out-bound marketing offers designed to attract new customers and members through loan acquisitions. These offers were typically aligned to a particular product with no strategy alignment between multiple divisions within the organization. Further, when existing customers submitted a new request for credit, they were treated the same as incoming new customers with no reference to the overall value of the existing relationship. Today, however, financial institutions are looking to create more value from existing customer relationships to drive sustained portfolio growth by increasing customer retention, loyalty and wallet share. Let’s consider this idea further. By identifying the needs of existing customers and matching them to individual credit risk and affordability, effective cross-sell strategies that link the needs of the individual to risk and affordability can ensure that portfolio growth can be achieved while simultaneously increasing customer satisfaction and promoting loyalty. The need to optimize customer touch-points and provide the best possible customer experience is paramount to future performance, as measured by market share and long-term customer profitability. By also responding rapidly to changing customer credit needs, you can further build trust, increase wallet share and profitably grow your loan portfolios. In the simplest sense, the more of your products a customer uses, the less likely the customer is to leave you for the competition. With these objectives in mind, financial organizations are turning towards the practice of setting holistic, customer-level credit lending parameters. These parameters often referred to as umbrella, or customer lending, limits. The challenges Although the benefits for enhancing existing relationships are clear, there are a number of challenges that bear to mind some important questions to consider: · How do you balance the competing objectives of portfolio loan growth while managing future losses? · How do you know how much your customer can afford? · How do you ensure that customers have access to the products they need when they need them · What is the appropriate communication method to position the offer? Few credit unions or banks have lending strategies that differentiate between new and existing customers. In the most cases, new credit requests are processed identically for both customer groups. The problem with this approach is that it fails to capture and use the power of existing customer data, which will inevitably lead to suboptimal decisions. Similarly, financial institutions frequently provide inconsistent lending messages to their clients. The following scenarios can potentially arise when institutions fail to look across all relationships to support their core lending and collections processes: 1. Customer is refused for additional credit on the facility of their choice, whilst simultaneously offered an increase in their credit line on another. 2. Customer is extended credit on a new facility whilst being seriously delinquent on another. 3. Customer receives marketing solicitation for three different products from the same institution, in the same week, through three different channels. Essentials for customer lending limits and successful cross-selling By evaluating existing customers on a periodic (monthly) basis, financial institutions can assess holistically the customer’s existing exposure, risk and affordability. By setting customer level lending limits in accordance with these parameters, core lending processes can be rendered more efficient, with superior results and enhanced customer satisfaction. This approach can be extended to consider a fast-track application process for existing relationships with high value, low risk customers. Traditionally, business processes have not identified loan applications from such individuals to provide preferential treatment. The core fundamentals of the approach necessary for the setting of holistic customer lending (umbrella) limits include: · The accurate evaluation of credit and default risk · The calculation of additional lending capacity and affordability · Appropriate product offerings for cross-sell · Operational deployment Follow my blog series over the next few months as we explore the essentials for customer lending limits and successful cross-selling.
By: Staci Baker As we approach the end of the year, and the beginning of holiday spending, consumers are looking at their budgets to determine what level of spending they can do this holiday season, or if they will need additional credit for those much wanted gifts. With that in mind, it is a great time for lenders to evaluate their portfolios to determine which consumers are the best credit risks. According to the National Retail Federation, consumer spending will be up 2.1% for the 2010 holiday season. Although still at pre-recession levels, consumer confidence is starting to re-bound. But, with an increase in consumer confidence, how will lenders meet the demand for credit, and determine the credit worthiness of potential applicants? Since the beginning of the recession there has been a demand for tools that will assist lenders in managing credit risk. One such tool is the tri-bureau VantageScore, a scoring model that is highly accurate, offers greater predictiveness, and is able to score more people. Scoring models allow lenders to predict the likelihood a consumer will default on a loan. Determining who is a qualified candidate through scoring models is only part of the equation. Each lender needs to determine what level of risk to take, and what is the cost of the credit per applicant. By assessing credit risk, having a good plan in place and knowing who the target customer is, lenders will be more prepared for the holiday season. ___________________ National Retail Federation, http://www.nrf.com/modules.php?name=News&op=viewlive&sp_id=1016
Recently, a number of media articles have discussed the task facing financial institutions today – find opportunities growth in a challenging and flat economy. The majority of perspectives discuss the fact that lenders will soon have no choice but to look to the ‘fringe’, by lowering score cut-offs, adjusting acquisition strategies and introducing greater risk into their portfolios in order to grow. Risk and marketing departments are sure to be creating and analyzing credit risk models and assessing credit risk in new, untapped markets in order to achieve these objectives. While it may appear to be oversimplifying the task, many lenders have the opportunity to grow simply by understanding more about two groups of consumers that are already sitting in their offices (or application queues) today: applicants who are approved, but book elsewhere, and applicants that are declined. There are a number of analytic techniques that can be utilized to understand these populations further. Lenders can study the characteristics of other loans originated by these lost consumers, and can also perform analyses of how these consumers performed after booking competitive offers. By understanding the credit characteristics and account delinquency trends of its current applicants, lenders can uncover a wealth of information and insight about the growth opportunities sitting right before them.
By: Kari Michel What are your acquisition strategies to increase consumer lending and gain market share? This blog will discuss new approaches to create segment-based targeting campaigns and the ability to precisely time the offer delivery with consumer needs. The most aggressive and successful banks are using need and attitudinal segmentation, coupled with models that identify consumers in the market for loan products. The return on marketing investment from these refined marketing efforts often exceed 350%, measured on a net of control basis, after all marketing costs. Here is a case study, using Experian tools, showing how one marketer used segment-based targeting, tailoring and timing to increase their response rate 145% over a competitor’s product. In the highly competitive credit card arena, a new business model is emerging that is dependent on acquiring new accounts from consumers that are grouped into specific behavior segments (Credit Hungry Card Switchers and Case Oriented Skeptics) and looking at consumers that were in the market, as well as had the highest likelihood of opening a bankcard account within the next 1 – 4 months. Test Results Total Competitor Experian Experian lift Quantity 624,000 623,953 Response Rate % 2.09% 3.03% 145% Actual Responses 13,035 18,902 Booked Rate % 1.64% 2.24% 137% Actual Booked 10,208 13,989 Approval Rate % 78.30% 74.01% 95% In addition to a 145% lift in response rate, over 3,700 more accounts were booked over the competition. These same tools, “In The Market Models” (developed using credit bureau data) and “Financial Personalities®”, can help your organization have a greater return on your direct marketing investment by increasing acquisition rates.
By:Wendy Greenawalt In my last few blogs, I have discussed how optimizing decisions can be leveraged across an organization while considering the impact those decisions have to organizational profits, costs or other business metrics. In this entry, I would like to discuss how this strategy can be used in optimizing decisions at the point of acquisition, while minimizing costs. Determining the right account terms at inception is increasingly important due to recent regulatory legislation such as the Credit Card Act. These regulations have established guidelines specific to consumer age, verification of income, teaser rates and interest rate increases. Complying with these regulations will require changes to existing processes and creation of new toolsets to ensure organizations adhere to the guidelines. These new regulations will not only increase the costs associated with obtaining new customers, but also the long term revenue and value as changes in account terms will have to be carefully considered. The cost of on-boarding and servicing individual accounts continues to escalate, and internal resources remain flat. Due to this, organizations of all sizes are looking for ways to improve efficiency and decisions while minimizing costs. Optimization is an ideal solution to this problem. Optimized strategy trees can be easily implemented into current processes and ensure lending decisions adhere to organizational revenue, growth or cost objectives as well as regulatory requirements. Optimized strategy trees enable organizations to create executable strategies that provide on-going decisions based upon optimization conducted at a consumer level. Optimized strategy trees outperform manually created trees as they are created utilizing sophisticated mathematical analysis and ensure organizational objectives are adhered to. In addition, an organization can quantify the expected ROI of a given strategy and provide validation in strategies – before implementation. This type of data is not available without the use of a sophisticated optimization software application. By implementing optimized strategy trees, organizations can minimize the volume of accounts that must be manually reviewed, which results in lower resource costs. In addition, account terms are determined based on organizational priorities leading to increased revenue, retention and profitability.
By: Wendy Greenawalt Marketing is typically one of the largest expenses for an organization while also being a priority to reach short and long-term growth objectives. With the current economic environment, continuing to be unpredictable many organizations have reduced budgets and focused on more risk and recovery activities. However, in the coming year we expect to see improvements and organizations renew their focus to portfolio growth. We expect that campaign budgets will continue to be much lower than what was allocated before the mortgage meltdown but organizations are still looking for gains in efficiency and response to meet business objectives. Creation of optimized marketing strategies is quick and easy when leveraging optimization technology enabling your internal resources to focus on more strategic issues. Whether your objective is to increase organizational or customer level profit, growth in specific product lines or maximizing internal resources optimization can easily identify the right solution while adhering to key business objectives. The advanced software now available enables an organization to compare multiple campaign options simultaneously while analyzing the impact of modifications to revenue, response or other business metrics. Specifically, very detailed product offer information, contact channels, timing, and letter costs from multiple vendors and consumer preferences can all be incorporated into an optimization solution. Once defined the complex mathematical algorithm factors every combination of all variables, which could range in the thousands, are considered at the consumer level to determine the optimal treatment to maximize organizational goals and constraints. In addition, by incorporating optimized decisions into marketing strategies marketers can execute campaigns in a much shorter timeframe allowing an organization to capitalize on changing market conditions and consumer behaviors. To illustrate the benefit of optimization an Experian bankcard client was able to reduced analytical time to launch programs from 7 days to 90 minutes while improving net present value. In my next blog, we will discuss how organizations can cut costs when acquiring new accounts.
By: Wendy Greenawalt Marketing is typically one of the largest expenses for an organization and it is also a priority to reach short- and long-term growth objectives. With the current economic environment continuing to be unpredictable, many organizations have reduced budgets and are focusing more on risk management and recovery activities. However, in the coming year, we expect to see improvements in the economy and organizations renewing their focus on portfolio growth. We expect that marketing campaign budgets will continue to be much lower than those allocated before the mortgage meltdown but organizations will still be looking for gains in efficiency and responsiveness to meet business objectives. Optimizing decisions, creation of optimized marketing strategies, is quick and easy when leveraging optimization technology. Those strategies enable your internal resources to focus on more strategic issues. Whether your objective is to increase organizational or customer level profit, growth in specific product lines or maximizing internal resources, optimization / optimizing decisions can easily identify the right solution while adhering to key business objectives. The advanced software now available to facilitate optimizing decisions enables an organization to compare multiple campaign options simultaneously while analyzing the impact of modifications to revenue, response or other business metrics. Specifically, very detailed product offer information, contact channels, timing, and letter costs from multiple vendors -- and consumer preferences -- can all be incorporated into an optimization solution. Once defined, the complex mathematical algorithm factors every combination of all variables, which could range in the thousands. These variables are considered at the consumer level to determine the optimal treatment to maximize organizational goals and constraints. In addition, by optimizing decisions and incorporating them into marketing strategies, marketers can execute campaigns in a much shorter timeframe allowing an organization to capitalize on changing market conditions and consumer behaviors. To illustrate the benefit of optimization: an Experian bankcard client was able to reduce analytical time to launch programs from seven days to 90 minutes while improving net present value. In my next blog, we will discuss how organizations can cut costs when acquiring new accounts.
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