The UK has experienced a number of significant economic stresses in recent years. Most recently, the impact of the escalating cost of living has meant changes to how consumers are prioritising their finances, and how lenders are able to continue to grow.
For example. during the COVID-19 pandemic, we saw a pay down of unsecured consumer debt[1] and a short-term increase in the household savings rate[2]. Since Q2 2021, our own data shows there has been a steady increase in credit card and personal loan outstandings, but balances still remain lower than pre-pandemic. As overdraft usage is increasing, we’re now also seeing a reduction in the household savings rate and credit delinquencies are trending upwards, but for now remain below pre-pandemic levels.
With some forecasters predicting the UK base rate will hit 5%[3] in the first half of 2023 and with inflation expected to remain high for some time, we can expect consumer behaviour and use of credit to see significant changes. Many households could look to reduce discretionary spend, restraining personal loan growth, and look to credit to pay for increasing food and utility bills.
When considering these significant changes and challenges, how can organisations identify how and where growth can be found? We look at five simple, but critical, steps below.
Benchmark performance across multiple dimensions – qualitative and quantitative
Quantifying the performance of your business is a critical step in understanding how and where growth can be achieved. Benchmarking has a place to play in each of the above four steps and should be undertaken on a regular basis.
Qualitative benchmarking can provide insight into current practices, processes and capabilities and can be a highly effective way of identifying areas for improvement. When considering the core base there may be unknown inhibitors to growth caused by existing systems and customer journeys. These could be at the front-end during eligibility and onboarding, restricting growth in new customers/accounts; or in customer management affecting cross-sell and retention rates.
Understanding your capabilities in collections and recoveries relative to your peers can be another area of focus to help deliver growth through an improvement in rehabilitated customers.
Quantitative benchmarking will provide your business detailed insight into the current and past performance of your business strategies. Comparing the performance of your business to that of your peers will enable you to make informed decisions on the strategic and operational changes needed to deliver growth and outperform the competition.
Quantitative analysis should be deployed throughout the customer lifecycle covering eligibility, acquisition, customer management and collections and recoveries. The most sophisticated organisations now use a combination of regular quantitative benchmarking coupled with the capability to drill down and segment trends by any available data items. This capability becomes even more valuable as the macroeconomic environment changes and new analysis and segmentation is required.
Find out why data and analytics are the cornerstones of credit decisioning
Read moreMicro-segmentation of existing portfolios – optimise the core base
Highly granular segmentation of existing customer bases can help highlight areas where lending within certain customer groups may be underrepresented. For a lender offering multiple products, understanding your natural market share can identify customer segments where market share falls below this level. This approach is equally applicable to lenders with one main lending product to investigate and identify granular customer segments of low penetration. Whilst there is always room for improvement in marketing and onboarding processes, the infrastructure should exist to facilitate growth within the existing product sets. Optimisation of the core base will require analytical capabilities, and perhaps new data sources, but fundamental changes to core processes and banking systems will typically not be required.
Once an understanding of market share and performance of key value drivers is achieved it is then important to understand where the opportunities for growth exist and to prudently balance these against future risks and uncertainty driven by the cost-of-living crisis. These could be in targeting the underrepresented segments to grow customer volumes or it could be through changes to customer management strategies to drive greater value creation from the existing customers. On revolving credit products this could be through programmes of work to optimise credit limits at both origination and then ongoing credit limit management strategies. For fixed term products there may be opportunities to optimise retention, upsell and cross sale opportunities.
Analysis of market potential and profit pools – evaluate adjacencies
Looking just outside of your core customer demographic and existing products will highlight opportunities for growth. In some instances, expansion will be possible without significant changes to processes and systems. In other instances, there could be the need to create new products, channels and customer communications.
In the credit card market we now see a number of the more traditional lenders expanding their offerings into near-prime with a particular initial focus on ‘credit builder’ propositions. When considering personal loans, we see expansion at both ends of the spectrum with lower value loans and high value longer term. With the cost-of-living crisis, it’s expected that we’ll see a shift in the demand for personal loans with applications driven by discretionary purchases becoming subdued and in certain demographics an increased use of credit to simply meet living costs.
Looking slightly outside of historic product offerings we’re now seeing mainstream lenders actively launching products and propositions to compete with Buy Now Pay Later providers and meet the customer demand for deferred payment credit as a payment mechanism. For some this is being achieved through the creative use of existing systems whilst other will be undergoing more significant system changes to accommodate these propositions.
To evaluate and analyse the market size and profit potential of new demographics, segments and propositions organisations can turn to the use of external sources to either help validate internal assumptions or build up the market view of customer segments and associated profit. Understanding the latest customer behaviour and importantly how customers are using lending products from other providers is critical in evaluating market potential and where growth can be achieved.
Proposition development and launch – core expansion and product adjacencies
A challenge often facing organisations when expanding into new segments is the speed and scale with which to do this. Test and learn is a well-established approach which can be deployed to mitigate risks but with this comes a slower full scale roll out as sufficient time needs to be allowed to understand the performance of any pilot. This challenge can be even greater when launching new propositions as there will typically be a greater level of scrutiny on business case assumptions and financial forecasts.
To supplement and validate any internally developed forecasts, organisations should consider using ‘off-book’ bureau data (i.e. the performance of accounts, products and propositions with competitors). Analysis and understanding of actual performance can provide an increased confidence and allow a more rapid roll. This will provide the financial benefits more quickly but also allow a faster and stronger presence in the market and the associated benefits that this will bring.
Applying segmentation and demographic considerations to the actual performance will allow organisations to include and account for future economic risks and uncertainties.
Effective marketing, onboarding and customer management
As the areas and opportunities for growth are identified and business plans approved it is essential to be considering and evaluating the processes that will enable the growth. Too often we see friction in customer journeys that will constrain growth opportunities, for example, through dropouts. If products and services are being promoted to existing customers through ‘channel X’ then it is essential that the customer can apply for these products seamlessly through the same channel. Whilst this may sound obvious, we see examples where customers have to leave mobile journeys and/or enter data that is readily available to the organisation.
With the continued growth in the use of price comparison websites, organisations need to understand what current leading practice is and ensure their capabilities do not lag behind their peers and the wider market. Enhanced data assets and analysis can enable organisations to confidently increase the level of their pre-approvals thus driving growth.
When considering growth on existing products it is important to ensure that all business and customer management strategies are aligned. Taking credit cards as an example proactive credit limit increase strategies should be joined up with incentives to drive spend and balance growth.
In these uncertain times, with the right approach, organisations can find opportunities for growth. Benchmarking, data, analytics and market evaluation are fundamental to identify these areas and accelerate associated launches and roll outs.
At Experian, we have a long track record of working with organisations to deliver safe, profitable and sustainable growth. Our data assets, analytical capabilities and consulting expertise can combine to help build your growth opportunities, whatever the economic forecast.
To speak with one of our consulting team, get in touch.
Sources
[1] Money and Credit – July 2022, Bank of England
[2] Household debt and Covid – Bank of England
[3] Rates to rise to 5% to offset loose fiscal plans and low pound, Capital Economics