In the next expansion phase for the home equity line of credit, winners will succeed on the strength of segment-, channel- and market-informed strategies.
Following years of retrenchment, the home equity line of credit is finally showing signs of life. Line origination is expected to approach $80 billion among all U.S. lenders this year, nearly double the 2012 nadir (Figure 1: HELOC Origination Trends). And balance growth is becoming more widespread as institutions shake off the recession detritus of non-performing loans.
This does not mark a return to business as usual, however. First, the market is quite uneven and much smaller compared with the expansion era of a decade ago, calling for more of a precision outreach and also foretelling intense competition for market share. Second, the expanding customer embrace of digital channels for shopping is shaking up the traditional marketing and sales dynamic centered on the branch. Third, trends in customer composition and product usage are changing the face of the business, requiring key adaptations to serve younger and more cash management-oriented borrowers.
The situation presents a clear call to action on HELOC growth strategy. Winners in the next expansion phase will succeed on the strength of segment-, channel- and market-informed strategies. Progress will critically depend on refinements in product design, pricing and promotion, targeted marketing and distribution.
Fortunately banks have some strong advantages. As freshly confirmed by the Novantas 2015 HELOC Consumer Survey, households gravitate to the bank that provides the primary checking account when seeking a home equity line of credit, often applying to just one provider and making extensive use of the branch. Trust, familiarity and convenience factors will continue as valuable banking competitive assets.
But widespread receptivity does not translate into uniform opportunity, as underscored by a survey-based behavioral segmentation showing significant differences in how various customer groups use the HELOC product. Given the degree to which customers vary — demographic profiles, price sensitivity, utilization potential, borrowing purpose, shopping patterns — it is clear that a new orientation, skill set and level of preparation will be needed to optimize HELOC growth and profitability in what likely will be a constrained recovery in this line of business.
Going straight into action implications coming out of the study, one priority is improving responsiveness to customer segment differences. An in-depth segment understanding provides the basis for plans to optimize each subset of the overall book of business.
From the perspective of borrowing activity (frequency of borrowing vs. line utilization), current customers fall into four major groups:
Periodic Borrowers (50%). These are traditional HELOC customers who tend to borrow less frequently but carry higher balances.
Revolvers (28%). This behavioral segment is composed of generally younger customers with more of a “cash management” orientation for HELOC use.
Emergency Only (14%). This is an unprofitable segment largely composed of dormant accounts.
Pay-Downs (8%). This is a marginally profitable segment of accountholders who have worked down prior large balances or never borrowed much in the first place.
Overall, younger and wealthier customers skew toward Revolvers, while older customers skew toward Periodic Borrowers. As detailed in the body of this report, careful recognition of these and other differences in customer profiles and needs can provide many opportunities for performance improvement:
Marketing. Ramifications include a need to target messages by segment and also refine the media mix by segment.
Consultative Sales. HELOC needs to be couched within the credit product spectrum to help customers more fully understand the comparative advantages of this product and encourage line utilization.
Portfolio management. Segment insights can illuminate the drivers of HELOC profitability and growth. Benefits include a more precise identification of current strengths, upside potential and downside exposure, and improved resource allocation.
Borrowing purposes also matter. The intended purpose of the line is predictive of utilization potential and account profitability, as well as customer price sensitivity and product preferences and concerns. These factors suggest upside for banks that refine advertisements with purpose in mind, adjust pricing (both rates and fees) and credit structure based on purpose, and satisfy purpose-related customer requirements with improved product controls and flexibility.
That said, our research also indicates that borrowers often shift among purpose categories after obtaining their lines. In fact, in some cases the majority of actual usage attributed to a particular purpose category stems from households that had other initial reasons for acquiring a HELOC. Crossover among borrowing purposes has a significant bearing on line utilization over the life of the account relationship, making the case for ongoing customer education and promotion of HELOC’s full utility.
Looking ahead, the Novantas HELOC survey highlights a changing environment for HELOC marketing and distribution, reflective of the digital migration in retail banking and a shifting composition of prospective HELOC customers.
Asked about preferred channels for product research, more than half of prospective applicants listed comparison shopping websites among their options, compared with less than a sixth of current HELOC holders. Similarly, more than half of prospects mentioned lender websites for shopping, compared to less than a quarter of recent purchasers.
Prospects also expressed widespread receptivity to online account application, particularly younger households. Including desktop, laptop, smart phone and tablet, 76% of prospects in the 21–34 age group specified digital as the preferred channel to apply for a HELOC from the bank supplying the primary checking account. There was a 58% preference in the 35–54 age group.
One implication is a need to strengthen online marketing and product presentation. While current customers expressed considerable loyalty to the primary DDA bank and the branch channel, that feedback is coming in a flat rate environment where households have little motivation to shop around. In addition to being far more comfortable with online shopping, the emerging generation of prospective applicants appears more likely to consider multiple providers in a future environment of rising rates.
Another implication is a need to revisit the sales system, given that increasing numbers of HELOC branch sales conversations and originations will trace back to successful interactions with online shoppers.
Again as with other product lines in retail banking, work is needed to sustain HELOC online shopping momentum and carry customer consideration all the way through to an application (primarily in the branch for the foreseeable future). This includes a different level of preparation for sales staff, who will need to keep abreast of the bank’s digital outreach in order to maintain conversational continuity with online-informed shoppers coming through the door.
At a more basic level, banks can gain ground with prospective HELOC applicants by addressing two major concerns that surfaced in the study — fear of inadvertently overextending their debt and origination hassles. Through improvements in borrower education, account versatility and controls, banks can promote responsible usage of the product and also mitigate apprehension among potential borrowers.
Across multiple sectors of the retail banking industry, business units have encountered a dual challenge: adapting to the new realities of a post-recession climate while preparing for steadily intensifying competition in the digital marketplace. Tactical refinements to the current business model, though often necessary, have provided only partial answers, given a changed dynamic that emphasizes analytically-guided customer responsiveness as the key to gaining share of customer wallet in an overall wary consumer borrowing market. Inevitably, leaders find that a comprehensive review is needed to re-direct the business.
Such is the case with the HELOC business line. In many cases a strategy review will be the more logical next step. Groundwork includes drilling into the portfolio and customer base to clarify the segment-driven sources and circumstances of opportunity and drag, mapping trends in marketing effectiveness, shopping and sales, and re-evaluating market stance and distribution in light of multi-channel competition.
On the strength of the vision coming out of this exercise, institutions will have numerous potential avenues to capitalize on HELOC survey insights. These include segment-targeted marketing; rate and fee optimization; purpose- and useage-aligned product design; integration of the new sales funnel that extends from the digital space to the branch; improved resource allocation in line with market opportunity; and purpose-aware product education and promotion supported by new levels of flexibility and control.