Last January, I published an article in the Credit Union Journal covering the trend among banks to return to portfolio growth. Over the year, the desire to return to portfolio growth and maximize customer relationships continues to be a strong focus, especially in mature credit markets, such as the US and Canada. Let’s revisit this topic, and start to dive deeper into the challenges we’ve seen, explore the core fundamentals for setting customer lending limits, and share a few best practices for creating successful cross-sell lending strategies.
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.
Although the benefits for enhancing existing relationships are clear, there are a number of challenges that bear to mind some important questions:
- 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:
- Customer is refused for additional credit on the facility of their choice, whilst simultaneously offered an increase in their credit line on another.
- Customer is extended credit on a new facility whilst being seriously delinquent on another.
- 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 holistically assess 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 rise
- 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 core fundamentals for setting customer lending limits, and share a few best practices for creating successful cross-sell lending strategies.