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Posts Tagged ‘Customer Retention’

The thing is: no one really cares about banking products. There’s no idolizing of the guys who started AmEx Cards or CapitalOne, no queue outside HSBC the night before a new card is launched. This is a problem because people only buy things they care about, or things they need and for which there is no alternative.

Banks used to keep outside competitors away with the huge capital and regulatory costs of setting-up a payments system but as more commerce moves online and as these other costs drop, those barriers will fall.
The problem is cards are essentially commodities. With a few exceptions, a credit card is a credit card is a debit card, even. This is especially true as the actual plastic starts to play a smaller role in the transaction. In freeing customers from location-specific branch and ATM networks, online banking has also removed the personal relationship that may once have made a bank something more than a logo on a card.
The credit card survives – and indeed still thrives – because it is the most convenient way for most people to make most payments, at the moment, but this is changing. With more and more online and mobile alternatives, banks will have to start competing with more retail-savvy competitors and to do that they need to reconsider the way they consider and market their products.
Traditionally banks spent large amounts on above the line advertising to attract customers and retain customers who they offered a suite of standard products; a one-size-fits-all model. Then, stand alone credit card issuers and other niche companies started to attack the banks’ market share with tailored products offered through direct marketing campaigns; an altered-by-the-in-store-tailor, still not 100% customized.
Direct marketing is no longer enough because it works on a some key principals which are being undermined: the contact must be made at a time and place where the customer is open to the idea of a new card, but in a flooded market the chances of your contact reaching a customer before a competitors in this window period is getting smaller and you’re almost always contacting them at home; the contact must come in a medium that is relevant to a customer, both mail and email are becoming less relevant to customers; and the offer should appeal to a particular niche, but a direct marketing campaign, even a niche one, must involve a degree of choice compromisation.
A new model is needed that can reach customers at a convenient time and place, through a relevant medium to offer products tailored to their needs, cheaply. The last word is especially important because banks have long used vague pricing structures to protect themselves from commodity prices but new laws and competition from more transparent – and even ‘no cost’ –competitors will drive prices down, making only the most efficient banks profitable.
This article is an attempt to run with that idea, sometimes beyond the limits of practicality; hopefully in doing so I will raise some interesting questions about what is and isn’t important in the modern, mass market credit card business.

That’s where the idea for the credit card vending machine took root: it is a symbol for efficient, convenient, and ‘productized’ transactional banking. Turning the credit card marketing model around to offer customized cards to customers in convenient locations, without paper work and at low cost.
I envisage a customer approaching a machine in a shopping mall, choosing a card design from the display, entering the relevant data, selecting product features, paying a fee based on the feature bundle, and then waiting while the machine embosses, encodes and produces their card.

The concept is simply an amalgamation of components that are all already available and automatable:
·        an online application form,
·        a means of automated customer verification (ID card scanning in HK and fingerprint reading in Hong Kong for example) ,
·        a secure communications channel,
·        a card embossing machine

Data Capture
I hate forms, especially hand written forms. Every time someone asks me to write out my name and address I immediately assume they value bureaucracy over customer service.
Instead, the data capture process should be designed to leverage stored data, focusing on verifying data rather than capturing it. In Hong Kong I can use my government-issued identity smartcard and a scan of my thumbprint to enter and leave the country, the same tools could provide my demographic which could then be supplemented by bureau and internal databases, requiring me to enter only minimal data. An ATM card and PIN code might do the same thing.
Where this is not possible, the interface would need to provide a vivid and easy means for manually capturing data.
Customer Acquisition
Credit acquisition strategies should already be automated. Very little about them will change, they’ll just be implemented closer to the customer. Hosting them in a vending machine – or doing it via secure link to the bank’s system – is also no different, just a lot of smaller machines processing the data rather than one big one. In fact if there is anything in your processes that can’t be automated in this way you should probably revaluate the cost:benefit trade-off of them anyway.
In terms of marketing, by being located closer to the point of use also makes it easier to do short-term, co-branded campaigns.
Product Selection
Once the data has been captured and the credit and profitability scores have been calculated, a list of product features can be made available, either explicitly or as shadow limits. The obvious way to do this would be to allow a customer to add features onto a low cost, low feature basic card: higher limits, a reward programme, limited edition designs, etc. all with an associated higher fee.
But I’m not threatening anyone’s job here. Any number of strategies can be implemented in the background. The product characteristics might be customer selected, but the options provided and the pricing of those options will be based on analytics-driven credit strategies.
Even target market analysis is still important. In fact, you’ll have one more important data point: the demographic data will allow you to model risk and behaviour based on home address, but you’ll now also now where they shop, allowing you to model behaviour in more detail.
Just because credit card designs don’t obviously affect the standard profit levers, it doesn’t mean they can’t be important influencers of application volumes, but most banks offer only two or three options in each product category.
In part this is because the major card companies want to protect their visual brand identities, but mainly it is because it is hard to advertise hundreds of different card designs to your customers without confusing them.
By filling each machine with a unique selection of generic and limited edition designs, though, you could offer a selection of designs to the market that is never overwhelming but which presents more opportunities for individualism across the market. You might even be able to offer an electronic display of all possible designs to be printed on white plastics.
Look, I started out managing fraud analytics on a card portfolio and I know my old boss will be fuming at this stage; there are risk involved in storing blank plastics and especially in storing the systems for encoding chips and magstripes. However, ATMs have many of the same risks and I believe that they are sufficiently controllable to support the rest of the idea at least in its intended purpose here.
Invoicing
Connecting the card to a funding account could be done offline afterwards, but I would prefer a model that had the customer link the card to their savings account by inserting their ATM card and entering the PIN; the bank could to the debit order/ standing order administration in the background.
Payment
Finally payments, I would propose a single cost model where the actual card is paid for by debiting the funding account when the invoice is created or by cash as with any other vending machine purchase; a single cost model makes the process more transparent and helps to reposition the card as a product purchased willingly.

The systems that make the credit card vending machine could also be leveraged for other, revenue generating purposes.
It provides a channel that could revitalize card upgrades. Instead of linking card upgrades to hidden product parameters, they can become customer initiated and feature driven: learning from the internet’s status-badge mindset, banks could allow customers to insert a card into the machine, pay a small upgrade fee and have it replicated on a new, limited-edition plastic made available based on longevity and spend scores for example, even linking it to retail brands so a Burberry Card might become available only if you spend $5,000 or more in a Burberry store on a vending machine card, etc. Multiple, smaller upgrades would create a new and different revenue stream.
The machines could also act as a channel for online application fulfillment. Customers who have applied online, who have a card, or who need to replace a lost card could have those printed at the most convenient vending machine rather than having to visit a branch.

The way I have spoken about the credit card vending machine is as a new and somewhat quirky sales channel for of generic cards in a generic market place – a Visa Classic Card with a choice of limits, reward programmes and designs, for example. In other words, I have positioned it as a better way to make traditional credit cards relevant in a retail environment.
But it could also offer opportunities in other ways too, for example in the unbanked sectors in places like South Africa where branch networks are prohibitively expensive to roll-out in low-income, rural areas. There customers incur significant costs to reach a bank for even simple services. Though mobile banking is making inroads, there is still room for card based transactional banking. A credit card vending machine would be more difficult to get right in this sort of environment, but if done right it would be a cheap way to expand market share for innovative lenders.

This article is not intended to stand as business proposal, but rather to highlight the parts of the traditional lending business that I feel are most at risk from competition and irrelevance. A review of your marketing efforts and team structures with this in mind might reveal functions that are no longer needed, product parameters that are too complex or attitudes to customer service that need to be improved.

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Many lenders feel that once an account has entered the debt management process it is time to start terminating the relationship.  This is an attitude that may be valid in low risk environments where debt management tends to see only the worst accounts.  However in today’s environment lenders should not view debt management as purely an exit channel for bad customers but also as an alternative sales channel.    

In other words, in the diagram below you can no longer view the procession of an account as always being from left to right but need to consider the reverse movement; turning ‘bad’ customers ‘good’ again.   

Debt Management fulfils the same role as sales and account management

In times of strong economic growth it might be possible to drive portfolio growth solely on the back of new customer acquisition.  In these times the market is full of ‘good’ potential customers looking for new credit and the customers that end up in debt management are few and of very high inherent risk.  However as the economy slows down, two significant things happen: ‘good’ customers stop borrowing and so new sales slow (and the quality of new customers tends to drop) and more customers find themselves in the debt management process (and conversely the quality of those customers tends to rise).   

In such times then, the lender should invest more effort in identifying the best prospects from within their debt management portfolio.  Customers in debt management provide an attractive prospect pool for a few reasons: the expected ‘response rate’ to an ‘offer’ is likely to be higher than in marketing campaigns; the lender has extensive data on each customer and their habits; there is a cost of not recovering; and, in the case of revolving products, the ‘new’ customer comes with an already established balance – mimicking a traditional balance transfer.   

But not all customers are worth retaining and so it is important to understand the relative risk and value of each customer in debt management before assigning a retention strategy.  Risk segmentation is ideally done using a dedicated debt management scorecard but, at least in the earliest stages, it can also be done using a behavioural scorecard.   

Customers who are high risk are by definition likely to re-offend.  Customers like this, who are regularly in debt management, are expensive to retain and consume both operational resources and capital provisions.  Unless the balance outstanding is large or the price premium charged is very high, it may be best to expedite these customers through the process by outsourcing this debt to a third-party debt collector.    

The fact that the balance outstanding is small though should not, on its own, be used to label a customer as ‘not worth retaining’.  The most important value is not the current value but the potential future value of a customer.  The lender should consider the potential for future loans and cross-sells too.  When the relationship is sacrificed with one product, as it surely will be with an expedited outsourcing/ write-off process, it is sacrificed for all other current and future products too.    

So segmentation should only be done based on a full customer view which includes a measure of risk and reward.  As always, the way to do this is through data analysis, scorecards and test-and-learn strategies.    

Where good customers have been identified it is worth investing in their retention.  This investment must be made in long-term and short-term retention strategies.    

The debt management process provides lenders with a rare opportunity to spend a significant amount of time speaking to their customers on a one-to-one basis.  Viewed in this light, debt management provides a wonderful opportunity for long-term relationship building.  Make sure your organisation can benefit from this opportunity by having staff that are skilled in customer handling and sales techniques – not just in demanding repayment.  In the long-term, investing in staff training should be a priority for every organisation.  Good training in this area will include references to reading a customer, over-coming objectives and structuring budgets/ payment plans (I’d recommend speaking to Mark Smith for all of your collections staff training needs).   

In the short-term, monetary investments – waived fees, discounted settlements, etc. – should be considered on a case by case basis.  These are the easiest incentives to provide though they should not be the first solution to which a lender turns.  When a ‘good’ customer falls into arrears it is, almost by definition, because they lack the ability to pay rather than the willingness to do so.  This means that the customer is usually willing to work with the lender to find a payment plan that will lead to full repayment while still accommodating their temporary financial difficulties.   

If the customer’s income source has temporarily disappeared – through a loss of job, etc. – then a payment holiday should be considered with a term extension to cater for increased interest repayments.  While term extensions can be used on their own, as can debt consolidation, where the problem stems simply from monthly costs exceeding monthly incomes – as perhaps in the case of rising interest rates or falling commission earnings.  In all case a payment plan should of course be accompanied by education and budgeting assistance.

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