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New Frontiers for Growth
by Jim bramlett
Major regional banks have both the motive and the opportunity to reclaim territory in the estimated $1.5 trillion market for unsecured credit.
Over the last 20 years, regional banks have been shoved to the sidelines in unsecured lending. Monoline credit card issuers have dominated on the strength of national scale and brand recognition, excellence in direct marketing and advanced credit analytics. Now, however, the regionals have both the motive and the opportunity to reclaim territory in the estimated $1.5 trillion market for unsecured credit. Disrupted by new regulations, economic stagnation, new technologies and changing customer expectations, traditional retail banks are hungry for profitable asset growth and new revenue sources. Along with natural advantages in marketing and managing credit within a relationship context, regional banks also have opportunities to redefine the market for unsecured lending. By filling in important product gaps, they can broaden the base of eligible borrowers and also capture a larger household “share of wallet.” With unsecured credit lines, for example, banks can provide interim credit for the many households that, while on sound financial footing, do not have significant home equity. Canadian banks are achieving double-digit growth in this category. Another opportunity is short term cash flow-based lending to consumers. Customers’ liquidity and payment deferral needs are not adequately served by overdraft, deposit advance and credit card solutions. Banks are well positioned to offer “dynamic liquidity lines,” which provide a line of credit for short term borrowing which adjusts based on household cash flow characteristics, offering valuable spending flexibility for customers without creating needlessly large exposure for the bank. These concepts, like everything related to consumer credit, benefit greatly from the information advantage that is inherent in “primary bank” relationships. Most regional banks could strongly improve their credit card businesses by taking much fuller advantage of customer relationship strengths. In targeting, customer access, underwriting and risk management, they have many advantages over monoline card issuers, and there is no reason for these strengths to lie fallow.
At time when many consumer lending categories are shrinking, regional banks will need to gain market share in order to grow. One obvious avenue is unsecured consumer lending, a huge market where banks are severely under-represented today (Figure 1). The monoline-dominated market for unsecured credit is by no means impenetrable for banks that can think innovatively and leverage the core customer relationships that are the basis of enormous competitive advantages:
Consumer Credit: New Frontiers for Growth
“In Canada, banks have been quite successful in the cross-sale of unsecured lines of credit, and personal lines of credit have grown at a 13% compound annual rate over the last four years. The product is primarily sold through branches to established customers, and often bundled with credit insurance.”
Information Advantage. A household’s primary bank has a lot more customer information than a single-shot card issuer. Examples include transaction insights from monthly payment and purchase patterns; cues about family “life events” and emerging needs; and financial insights from the total picture of loans, deposits and cash flow. This richer interplay is helpful in designing product bundles and matching customers with the right offers. It permits sharper targeting, timing and positioning of marketing messages, and enhances underwriting and pricing decisions. Behavioral Advantage. Engaged banking customers are less fussy about pricing; more conscientious about loan repayment; and hold on to their accounts longer. These constructive behaviors provide a favorable atmosphere for consumer lending. Instead of raw price competition, for example, banks can gain traction with soft benefits such as service, rewards and recognition. Marketing is more effective in a relationship context and can capitalize on the parent company’s brand strength. A larger pool of customers can be underwritten, moreover, and in times of duress the primary bank has better standing among creditors for repayment. Access Advantage. Compared with monoline players, banks can solicit new business more easily and at lower cost, given their frequent contact with customers through multiple channels, not only in the branch but also via mail, call centers, automated teller machines and online. Also customers are more receptive to offers from their primary bank, compared with one-off product solicitations. Sadly, most banks fail to capitalize effectively on the customer access that they enjoy. Even aggressive banks often focus their card sales efforts on the branch channel, for example, yet with the penetration of direct channels into the core of most customers’ banking experience, “branch dominant” customers are now in a distinct minority. Retail executives should assign a high priority to reaching customers where they most frequently touch the bank, across all channels. In many cases, these underdeveloped channels will be more effective than the branch in needs assessment and offer presentation, and provide more opportunities to detect and manage emerging credit risk. Putting all of this together, the adept regional bank can gain significant advantages in account origination, balance formation and risk management.
Figure 1: Revenue Crisis in Retail Payments
Primary banking relationships capture most of customers' payments volume but far less revenues, largely because they fail to capture credit balances.
Share of Dollar Volume
Share of Transaction Volume
Share of Payments Revenues*
new pRoduct pRopositions
The current product set for retail banking has some important gaps, exacerbated by changing regulations and market conditions. By updating the product line, banks can offset some of the damage done to core offerings and also expand the eligible customer base for unsecured credit. The need for new consumer credit products is clear, given challenges in two areas where banks formerly did quite well: Home Equity. For years, home equity lending has been a mainstay of retail banking, leading most other product areas in growth and profitability. Following the nationwide drop
* Includes fee revenues from both consumers and merchants, such as interchange, as well as revenues from both deposit and loan balances associates with transaction accounts.
Source: Novantas, LLC
in housing values, far fewer households have any kind of equity cushion to borrow against. Today the business line is a shadow of its former self, with balances off dramatically from pre-recession peaks. Yet many additional households could use a credit line and have the financial profiles to qualify. Overdraft Coverage. Reg E has seriously dented this line of business. Yet our national consumer research shows that many frequent overdrafters do so consciously, relying on OD/NSF coverage as a crude form of household cash management. This speaks to a continuing customer need for contingency account liquidity. In both cases, there are opportunities to go beyond old business models to restart revenue growth and actually broaden the eligible customer base. It is a matter of thinking fresh about customer needs and building out the supporting capabilities in pricing, underwriting, credit line management and risk management (Figure 2). The unsecured line of credit (ULOC) fits between the credit card and the home equity product. It is positioned as an alternative to the home equity line of credit (HELOC) that can be
used for common purposes such as home improvement and debt consolidation. Rates are higher than the HELOC but lower than the credit card. It offers a fixed line of credit that is usually lower than the HELOC but higher than the credit card. In Canada, banks have been quite successful in the crosssale of ULOCs, and personal lines of credit have grown at a 13% compound annual rate over the last four years. The product is primarily sold through branches to established customers, and often bundled with credit insurance. In marketing the personal line of credit, for example, TD Canada Trust promotes “access to funds whenever and wherever you want them.” The bank offers flexible payment options on credit lines ranging from $5,000 to $50,000, including an ability to lock outstanding balances into a fixed rate installment loan. At the other end of the product spectrum, the dynamic liquidity line (DLL) fits between the credit card and overdraft coverage. It is not intended to finance larger projects, as with the ULOC, but rather functions as a short-term household cash management tool. By virtue of being pre-arranged, it avoids the penalty context of overdraft fees. Bundled with the checking
Figure 2: New Ways to Serve Retail Customers and Leverage Core Relationships
Using the information advantages of core relationships, retail banks can field new credit product lines to expand the pool of eligible customers and deepen share of wallet.
Transaction Liquidity • Alternative to credit card or occasional overdraft • Positioned as “integrated cash management” and bundled with checking • Dynamic line of credit based on track record
Size of balances and lines of credit
Unsecured line of credit (ULOC)
Home equity loans and lines of credit (HELOC)
Credit Card Dynamic liquidity lines & loans (DLL)
Overdraft coverage & deposit advance
Event-Based Loans • Cross-sold; positioned as HELOC alternative • Higher rates than HELOC; lower than credit card • Fixed line based on household cash ﬂow, lower than HELOC, higher than credit card
Source: Branch productivity benchmarking and analysis by Novantas, LLC
Consumer Credit: New Frontiers for Growth
account, the DLL also enfranchises a large segment of customers who either may not quality for a credit card or simply do not want the spending temptation that goes with it. There are numerous examples of how a credit facility can be tied with consumer payments products, independent of the credit card. At CaixaBank in Barcelona, Spain, the “Fraccionamiento” facility allows consumers to split the repayment of any individual purchase into three, six or twelve equal monthly installments, providing repayment flexibility for customers who are averse to using revolving credit. In the U.S., PayPal’s “Bill Me Later” facility has racked up more than $1 billion in balances by offering a “fast, simple and secure way to pay online without using a credit card at more than 1,000 stores.” American Express illustrates this same concept on a somewhat larger scale by selectively offering extended payment flexibility on AMEX charge card products. Importantly, it manages to do this while maintaining the differentiated positioning of the charge card as a pay-in-full product, not to be confused with a revolving credit card. The DLL represents a potential game-changing credit facility for retail banks. Linked to the checking account and having no preset spending limit, this product confers a marketing advantage relative to credit card issuers, which are perennially locked in a costly battle to win customers with high credit lines. It takes advantage of the superior customer relationship and transactional information enjoyed by banks. And it offers substantial benefits for customers.
banks have significant opportunities to widen the pool of eligible borrowers (i.e. customers with a 640 credit score whose account dynamics suggest a 680-level profile). Then in the course of customer credit usage, analytically adept banks have more opportunities to detect emerging risk and work proactively with customers in distress. These three information advantages permit banks to move relatively quickly in rolling out new unsecured lending products. To lay the groundwork, the immediate priority is to assemble a multi-faceted view of the retail customer. This includes monthly account-level product ownership and balance flows, account transaction detail, credit bureau and demographic information, and channel usage patterns. The developmental stage begins with a customer segment analysis that considers channel preferences and the expected value of various potential offers based on factors such as credit approvals, purchase propensity, product usage and valuation models. Then the bank is ready for pilot tests aimed at specific objectives such as expanded credit approval; channel-targeted sales strategies and event-based sales offers.
While banks still enjoy a dominant position in consumer payments, even with a weak position in credit cards, they have not yet realized the tandem opportunities in unsecured lending. Today, payment deferral propositions are not extended to 70%–80% of retail banking customers, which has the effect of excluding credit cross-sell possibilities for 95% of the retail payment transaction stream. Fortunately the industry now has specific possibilities to begin closing the gap, including the unsecured line of credit and the dynamic liquidity line. The same informational advantages and techniques used to advance these products can also be helpful in ramping up credit card origination and balance formation. Given the overall constrained opportunities in retail banking, these innovative paths should be top priorities. Banks that take action now should be able to gain significant traction in 2013 and 2014, offering the promise of a competitive advantage that will only grow as new propositions gain momentum in the marketplace.
unlocking the infoRmation advantage
Primary bank relationships offer a goldmine of relevant information and insight, much of which is unexploited. To fully mine the opportunities in unsecured lending, a deeper, more textured examination of customer behavior patterns will be needed than what is typically seen at most banks, even those that are aggressive and sophisticated. Channel Insight. Here the bank is discovering where it can best reach customers, based on their preferred touch points with the bank. While banks have an enormous access advantage, the branch is not the most relevant channel for many customers — five of every six prefer alternatives such as the phone, ATMs and online banking. This is why a comprehensive channel usage analysis is needed. Targeting Insight. Who are the priority customers with needs that can be profitably fulfilled? Which propositions should be offered to best meet those needs and realize value? Within each channel, product priorities can be considered within the context of customer purchase propensity and expected returns per customer segment. Risk Insight. By virtue of deeper customer interaction,
Jim Bramlett is a Partner in the New York office of Novantas LLC, a management consultancy.
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