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Deloitte on Consumer Lending

Deloitte on Consumer Lending

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12/04/2010

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The Next Chapter inConsumer LendingA new way forward
Highlights from a surveyconducted by the Deloitte Centerfor Financial Services
 
Deloitte Center for Financial Services 1
Select Findings:
 
Deloitte’s Consumer Lending Survey
 
We have entered a new phase in the evolution of U.S.retail banking. As banks face unprecedentedpressures from a combination of tough economicconditions and pervasive regulatory reforms, will wesee the emergence of a new paradigm for consumerlending?To determine the scale of the challenge facing thebanks and to find out how consumers have beenreacting to these developments, the Center forFinancial Services sponsored a survey conducted byHarris Interactive between August 12, 2010, toAugust 30, 2010, to obtain a national sample of U.S.retail banking customers. According to our survey of5,142 respondents, many consumers are still dealingwith the aftermath of the financial crisis and recessionof 2007 - 2009. The Center for Financial Services willfurther investigate this consumer lending paradigmamong three dimensions: first-time defaulters, crossselling, and customer satisfaction.
The emerging “first
-
time defaulter” market segment
 
We see a new segment emerging as a result of the financial crisis. We call this group of
consumers the “
first-
time defaulters”
 
― individuals who have gone through at least one
serious negative credit event in the last two years
for the first time
in their lives.
 
According to Deloitte’s survey, 22% of Americans with bank accounts experienced a
serious negative credit situation during the last two years. For fully 11%, this was anew experience
the first time in their lives they fell into delinquency.
Unemployment and reduced income were the principal reasons why theseindividuals have failed to meet their credit obligations.
Many first-time defaulters rated their interactions with lenders during their negative
credit event as “poor.” This dissatisfaction may strongly encourage them to look
elsewhere when borrowing in the future.
If not for the economic recession, which has affected millions of households inAmerica, many of the first-time defaulters might have remained in good credit standing.
The care and attention shown to these first-time defaulters now
and when they are on the path to becoming creditworthy customersagain
may well determine who they do business with in the future. Lenders could benefit from having more effective ways to identifyand differentiate the temporarily credit-impaired from those more seriously affected for the long term.
* Total exceeds 100% as respondents could pick more than one response.
2%6%8%9%12%13%14%14%29%43%58%Been delinquent on child support paymentsForeclosureCharge-offs, meaning bank has forgiven all or
Legal judgmentsThree or more times when you were more than
BankruptcyBeen delinquent on taxesThree or more times when you were more than
Three or more times when you were more than
Been delinquent on medical billsContacted by collection agency
Exhibit 2: Negative credit experience during the last two years (first-time defaulters) *
How Do We Define a First-TimeDefaulter?
First-time defaulters are those who, forthe first time, have had a negative creditexperience such as delinquency,foreclosure, bankruptcy and/or charge-offs, among others, in the last twoyears, since the peak of the economiccrisis is September 2008. (To becategorized as first-time defaulters, theywould have had to experience at leastone of the 11 events listed in Exhibit 2.)11%10%12%66%
Exhibit 1: Credit experience segments
First-time defaulters -Those whoexperienced a negative credit event in thelast two years for the first time-11%Those who have experienced a negativecredit event more than two years ago andalso during the last two years-10%Those who have experienced a negativecredit event more than two years ago butnot during the last two years-12%Those who have never had a negativecredit event in their past-66%Figures may not add due to rounding
 
Contacted by collection agencyBeen delinquent on medical billsThree or more times when you were more than 30 days late on a credit card billThree or more times when you were more than 30 days late on a mortgageBeen delinquent on taxesBankruptcyThree or more times when you were more than 30 days late on a loan other than your mortgageLegal judgmentsCharge-offs, meaning bank has forgiven all or part of a loanForeclosureBeen delinquent on child support payments
 
 
Deloitte Center for Financial Services 2
Can cross-selling efforts become a reality?
Consumers seem to be open to having an expanded relationship with their primary bank. The survey findings indicate that the opportunity isthere, but, given past attempts by banks to achieve broader relationships via cross selling, this is going to require some fresh, creative effortsby service providers.
Consumers in our survey exhibit high preference to use a single bank for many of their needs; however banks will be challenged to takeadvantage of this latent need.
More than three-quarters of customers surveyed saw convenience as a significant reason to focus their banking with a single provider.
With a single bank, survey respondents want better fees and service
 
but don’t expect they will get it.
 
Also in our survey, not all consumers wishing to obtain a loan product in the next two years expect to use their primary bank. Might this bea short-term opportunity for banks?
More than 80% of the customers surveyed named lower fees as their main reason for having or wanting a single provider. Given thestrong level of loyalty and support among customers of community banks and credit unions, this might reflect the power of strong personalrelationships at the local level to minimize fees and deliver value for money. Banks generally appear to have limited pricing power.
In order to increase their share of wallet, banks may need to be more consistent and connected across distribution vehicles to appeal tothe multi-channel consumer.
Bank customers’ satisfaction and loyalty
 
Despite banks’ efforts to improve their customer relationships over the last two years, overall satisfaction
levels have remained almostunchanged.
Satisfaction levels among customers of large and mid-size banks were significantly lower than those for community banks and creditunions.
Customers are quite receptive to new services that encourage loyalty and personalization.
However, more than half the respondents said they expect banks to start charging more fees for their services.
 
Most respondents have seen little change in their banks’ lending process.
 
Historically, there has been strong customer inertia in retail banking, with many remaining loyal for lengthy periods even though they mightnot be completely satisfied. As banks respond to the current environment by changing their services and prices, consumers might breakthis cycle and consider moving to other providers in large numbers.
Are price increases inevitable across the board given regulatory pressures and the need to make up for shortfalls in traditional sources ofrevenue such as overdraft fees and debit interchange fees? For those banks likely to increase fees and reduce service levels, the surveysuggests that customers may look for alternatives16%11%10%9%9%8%7%6%6%4%4%3%0%2%4%6%8%10%12%14%16%18%Higher feesassociatedwithloans/creditDenied acredit cardapplicationLower rateson loansHigh rateson loansMore offersfromdifferentlendersthan IexpectedMorepaperworkinvolvedwhenobtainingcredit/loanDenied aloanapplicationFeweroffers fromdifferentlendersthan IexpectedOffered ahigher loanamountthan IwantedLesspaperworkinvolvedwhenobtainingcredit/loanLower feesassociatedwithloans/creditOffered alower loanamountthan Iwanted
Exhibit 3: Credit experiences since September 2008

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