Old ways of promoting and selling consumer lending products are less effective in an era of multi-channel banking and weak demand. How should banks respond?
The cross-sale of consumer credit is a top priority in the growth-starved retail banking industry. But despite the heroic efforts of various product, marketing and channel teams, the typical bank is struggling to generate effective sales leads and elicit reliable applications in response to product offers.
While tightened underwriting standards and consumer caution have contributed to the slowdown, recent research has identified a third factor – eroding marketing and sales effectiveness as customers retreat from branches in favor of multi-channel banking. The once-reliable techniques used to promote individual products in an over-the-counter sales setting are far less applicable in an era when customer face time is scarce and shopping-related activity is increasingly conducted via web and mobile banking.
To meet this challenge, banks will need a historic revision of the marketing and sales model for retail credit. The individual efforts of various product and channel teams will no longer get the job done. Instead, the time has come for a coordinated outreach that is organized around the customer.
There are three areas where banks need progress. The first is to improve underwriting by making better use of customer relationship data. The second is to improve marketing by better aligning offers and channels. The third is to improve sales execution by adopting a streamlined set of leading practices. The goal is to look comprehensively at emerging customer borrowing needs and credit eligibility; identify priority offers; and convey them via customers’ preferred delivery channels.
This customer-centric approach will require new analytical capabilities that draw on customer information from all areas of the retail bank, including customer accounts, transaction activity and channel usage. Distillations of this aggregate data will guide key tradeoffs among the various product and channel teams, to assure that viable prospects receive the right offers via the right channels at the right time. It is a complicated endeavor, yet one that will yield many pragmatic advantages if handled correctly.
Terms of Engagement
Although the economy is showing renewed signs of life, recession-scarred households are not borrowing as they did before. While commercial lending has rebounded to the point that balances are on par with pre-recession levels, consumer balances are down more than 13% from their fourth quarter 2007 peak, excluding industry accounting adjustments that brought credit card balances back on the balance sheet. Most of the decline is associated with residential-secured credit, including home equity loans.
Meanwhile deposits continue to pile up, vastly underutilized. Between yearend 2007 and midyear 2013, core deposits have risen by 47% across the banking industry. Yet the industry’s current loan-to-deposit ratio languishes near 70%, down by more than 25 percentage points from the 2006 peak.
Against this backdrop of copious funding and weak consumer demand, retail lenders are paying renewed attention to established customers, looking to win loan growth and market share by expanding core relationships. But while our research shows vast potential for account consolidation, banks have struggled to unlock this cross-sell opportunity. One reason is that customer behaviors have changed, undercutting traditional marketing and sales practices.
Historically banks have taken a product- or channel-specific approach to consumer lending sales and marketing, with separate divisions mounting their individual pursuit of lending opportunities. While this “silo” approach has always entailed a lot of duplicative (and even conflicting) effort, the inefficiencies were masked and more than offset in prior eras of high demand. Also in the past, the branch was much more of a foundation for customer outreach, with an overriding emphasis on in-person engagement to drive sales and deliver a superior customer experience.
Now, however, channel proliferation has diminished the branch while introducing vast complexity in serving more fickle multi-channel customers. These customers are avidly using web and mobile banking to conduct research and respond to offers, while also making significant use of automated teller machines and contact centers. Basics such as branch sales staff training, mass market advertising and direct mail campaigns still matter. But there is now far more complexity in the mix (Figure 1).
The influencers of consumer lending success have expanded to include the customer’s communication preferences, research practices, transaction behaviors and web-enhanced product knowledge, as well as the bank’s channel accessibility, functionality and multi-channel marketing capabilities. And while splinters of customer information may reside “somewhere” in the organization, typically they have not been assembled in a way that paints a full picture of opportunity and guides the right course of action, across products and channels, with each customer.
It boils down to considerable revenue leakage. For example:
- Many retail banks are not taking full advantage of composite customer knowledge for underwriting and may be overly restricting the loan prospect pool. Among customers currently excluded from credit offers by a typical retail bank, up to a fourth could be feasibly underwritten based on the total banking relationship – opportunities that are falling victim to the narrow filters of underwriting policy.
- Based on the fractured nature of banking relationships, especially for high-value customers, many eligible borrowers are relatively dormant, meaning that the bank will need to take proactive measures to extend offers and engage these customers directly. Such instances are not being carefully identified today, in some cases leaving an inadequate outreach with up to a third of the eligible customer base.
- Even among prospects who were successfully presented with a product offer via their preferred transaction channel, the majority of these interactions never lead to a sales conversation, much less a submitted application. There is much work to be done in carrying the interest of remote customers into engaging conversational settings where customer needs can be clarified and applications can be generated.
These findings raise legitimate questions about marketing and sales for consumer lending. Leading retail banks have taken note of these trends and have started to rethink their approach to engaging consumer borrowers and driving profitable revenue growth.
An effective consumer lending strategy starts with a comprehensive understanding of customer needs, as well as the overall sales and marketing experience. This is achieved through the use of detailed, customer-level data, including channel preferences, product ownership and usage, and product offer response behaviors. The bank not only needs a standardized approach for capturing and analyzing customer data, but also the capability to translate learnings into tangible actions that drive measurable results.
In terms of major actions that the bank will need to take:
- The first step is to improve the use of customer analytics to develop product offers, sales leads and referrals. A core skill is identifying and tracking customer-level credit needs over the course of repeated customer interactions across multiple channels.
Based on this groundwork, the bank can then identify major customer groups, or segments, having similar credit needs. This is fundamental in developing an overall marketing and sales approach that resonates with individual needs and preferences, yet can be effectively used to reach a large number of customers.
Once the segment strategy is established, customer analytics are further used to determine the right product offers for each customer; decide how to prioritize and sequence offers; and coordinate the efforts of various consumer lending product groups.
In support of segment-based initiatives, sophisticated test-and-learn capabilities will be needed to promote the rapid integration and implementation of customer learnings. This includes the ability to quickly identify and discontinue ineffective and unprofitable marketing activities.
- As product offers, sales leads and referrals are analytically refined, the next step is to assure their proper distribution across available channels. In addition to generating the right offer for each customer, it is critical to approach customers via their preferred communication and transaction channels. Recent client work underscores the value of enhanced channel analytics. One organization had strong propensity models but then began incorporating customer channel preferences into “next-best-product” decisions. The findings sparked changes in the product mix and improved the expected financial results from certain marketing campaigns by more than 12%.
This is often a gap in existing customer analytics – too much emphasis is placed on capturing and addressing customer needs, and not enough emphasis is placed on distribution and delivery of offers. If the customer receives the offer in a rarely-used transaction channel, there is a highly likelihood that the marketing effort will be wasted. Unfortunately this is an all-too-common occurrence.
Again with distribution, robust test-and-learn capabilities must be married with advanced customer analytics to produce the desired results. Banks not only need to be able to capture and monitor evolving customer channel behavior and preferences, but also learn how to deploy this valuable information to maximum effect.
- Lastly, banks will need to better leverage customer relationship management (CRM) systems to assure effective customer interaction. This includes an ability to track the performance of sales leads, product offers and customer applications across customer segments and channels, and to identify critical sales gaps. Other specifics include providing frontline staff with the ability to compare competitive offerings; track product and rewards usage after the sale; and provide effective counter-offers at the point of sale.
In each of these three areas, a continuous improvement approach will be needed, one that allows for constant evaluation and refinement of sales practices. One payoff is an ability to quickly identify the most successful sales and referral practices and then rapidly implement them system-wide.
In frontline sales, for example, banks have found great advantage in analytically identifying leading practices, adopting them broadly, and using performance measurement and incentives to promote and reinforce desired sales behaviors. The process comes together with easy-to-use CRM tools that prompt specific sales behaviors and also track how staff activities and sales tool usage affect sales performance.
In taking action, a key question is how to make necessary changes without disrupting current production or negatively impacting the customer. In our experience, a four-step approach works best, including analyzing current performance and practices; setting a vision for the future marketing and sales model; identifying priorities for improvement; and fleshing out the revenue, cost and operational implications, both to set expectations and to measure progress.
Current state. The first step is to define the current processes for sales leads and marketing offers. Along with clarifying the organization’s marketing and sales infrastructure and capabilities, it is important to diagnose performance variability across customer segments, individual markets and product groups.
Future state. The core of the future state model is built around robust data analytics that enable the delivery of a customer-level sales and marketing program across discrete product groups and multiple channels. The ability to rapidly aggregate, analyze and leverage customer data is the key to delivering more effective marketing campaigns and providing the frontline with superior sales leads and referrals (Figure 2).
Roadmap. The bank will need a structured and phased program of consumer lending initiatives. This road map includes coordinating efforts across the organization (e.g., infrastructure, product, staff training and incentives). It also considers the best way to integrate new initiatives with ongoing developmental activities across the bank.
Sizing. The goal of this last phase of work is to develop functional estimates of expected revenue, along with relevant costs and timing. Opportunity sizing includes estimates of projected new consumer lending account volume, by product and associated balances. This is necessary to ensure ongoing management support, as well to define practical targets to measure performance and track progress.
A slow economic recovery and changing customer buying behaviors have constricted consumer lending performance at a time when banks are hungry to employ deposits and drive credit revenue growth. But opportunities for profitable growth are within reach. Successful players will leverage aggregated customer data and advanced analytics to improve credit leads and product offer pull-through across the bank.
Michael Rice is a Managing Director and Robert Griffin is a Principal in the Chicago office of Novantas Inc., a management consultancy. They can be reached at firstname.lastname@example.org and email@example.com, respectively.