As we emerge from turbulent economic times, the desire to return to sustained portfolio growth has been a clear trend in mature credit markets.
Prior to the economic downturn, credit unions and other financial institutions met this objective with aggressive marketing offers to attract new customers and members through loan acquisitions. Today, however, they are increasingly looking to deepen their relationships with existing customers in order to better serve them.
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. This can lead to deeper and more valuable customer relationships.
The need to optimize customer touch-points and provide the best possible customer experience is paramount to future performance, as measured by market share, customer satisfaction and long-term profitability.
For example, the more of your products a customer uses, the less likely the customer is to leave you for the competition. This example further illustrates how cross-selling expands existing relationships and provides better customer retention. Also, by responding rapidly to changing customer credit needs, you can build trust, increase wallet share and profitably grow your loan portfolios.
Although the benefits to enhancing existing relationships are clear, there are a number of challenges involved in implementing a successful cross-sell strategy:
- 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?
In addition to these issues, few credit unions or financial institutions have lending strategies that differentiate between new and existing customers. In the majority of cases, new credit requests are processed identically for both. The problem with this approach is that it fails to capture and use the power of existing customer data, leading to suboptimal decisions.
The Essentials for Successful Cross-Selling
Evaluation of Credit Risk
The ability to accurately predict a consumer’s default risk is paramount. The most successful strategies balance the predictive power of data for existing customers with data from third parties (credit reporting agencies) to feed predictive models. The models rely on an appropriate definition of a customer.
At first glance, this may appear simple, but the definition of a customer becomes more complex as you consider joint or multiple account holders or customers with both a consumer and a small-business relationship. Effective strategies bring these data sources together in an optimal manner to feed predictive models of credit default risk.
Calculation of Customer Affordability
The capacity to absorb increased credit commitments in an affordable manner is both a key component of the solution and a legal requirement. Approaches in this area have developed significantly in recent years. Successful strategies incorporate a mechanism for capturing consumer income and deriving their disposable income from this information.
Disposable income incorporates expected monthly expenditures (bills, food, tuition rent, insurance, gas) with the customers’ known credit commitments (mortgage, cards, car loans, credit lines) to derive disposable income.
The Right Product Offerings
By combining the evaluation of credit risk with the calculation of affordability, customer-level credit limits can be used to set maximum thresholds for each customer holistically. These customer limits can be apportioned among different product families (revolving credit, fixed-term loans). The comparison of maximum customer limits with existing commitments allows residual lending limits to be calculated, which forms the basis of the cross-sell offer. The residual lending capacity is communicated to the customer in either a push or a pull mode.
Effective Operational Deployment
Finally, the decision elements used to create the cross-sell offer are positioned in a user interface for branch managers of agents. This mechanism permits the branch manager to identify a credit amount for which the existing customer has been preauthorized. As such, credit requests for new customers can be fast-tracked, resulting in improved servicing times and enhanced customer experience.
As with any effective strategy, the ability to deploy in a test-and-learn environment is key to successful implementations. By continually testing new approaches for the components of the solution and monitoring their success, organizations can continually improve and learn, positively drive portfolio growth and enhance the customer experience, leading to greater loyalty and ultimately greater profitability.
Andrew Beddoes is a senior business consultant with Experian’s Global Consulting Practice.