I’ve read and heard many stories in the past several months about credit card companies that are reacting to the economic downturn by reducing credit limits and hiking interest rates without first warning the cardholders. This latest article in Bloomberg Markets gives a good explanation of the institutions’ reasoning. The news alarms me as a prospective card holder, and it saddens me because I believe that financial institutions should be analyzing and using their customer data to enhance the trusted advisor relationship.
The trusted advisor relationship that I’m referring to is a combination of customer relationship management and risk management. In some ways, it’s a return to sound lending practices from the past. These practices are enabled by deep analytic insights into a customer's behaviors and state of mind. The key point is to leverage all of the customer information you have to win the customer’s loyalty and additional business by truly understanding critical events within the customer life cycle. This deeper relationship with enhanced insights goes beyond a simple view of a change in the FICO score and is a much better way of enhancing profitability for the financial institution. If done correctly, analytics and data mining can help target customers with the right offers to gain more business.
We have seen numerous situations where our clients have used data mining and predictive modeling techniques to see a much greater lift in response to marketing offers while reducing marketing spending. Additionally by combining proven marketing techniques with proven credit scoring and credit risk management techniques, banks can balance customer relationship management with credit relationship management to target the right offer with the appropriate credit line, payment cycle and repayment schedule. Increased ROI is achieved by targeting the message to the individual, and the cost savings results from eliminating the blanket offers to the entire customer base.
So what is causing all the fuss? It seems as though the credit card companies may be suffering from the current crisis, and not looking at a longer-term horizon and accounting for the impact of recent economic events over an entire customer life cycle. They are moving away from proven marketing and analytical principals that reward good customers and build strategies and tactics that can help encourage unprofitable customers to do business differently. One way to drive good customers away is to alter fees and credit without a good justification. I have experienced this myself. I have also talked to several people recently who feel ill will toward their banking and credit card institution because of increased fees, new fees or adjusted credit limits without clear notification - all of this while the customer still maintained good credit. Again, our point is to reinforce that the opportunity now is for banks to regain their position as a trusted advisor. Spend the time and effort to not only look at trends at the portfolio level for how to stop losses, but also look at the individual loans and credit card performance of an individual before adjusting interest rates, fees or loan limits.
Banks and financial institutions find most of their revenue from the interest and fee income side of the house. Clearly, the customers who have remained loyal and profitable through the worst of economic times should be the ones who are treated with care. I would suggest that these organizations go back to mining and analyzing their data to study past and current credit scores. Understand how that information relates to current transactions. Use that information to target the right offers and messages to loyal clients to thank them and reward them for remaining loyal.
As for those customers who truly are at risk for default, more appropriate contact strategies should be put into place to help them through the turbulent times. This does not mean to let them default, but there might be methods to restructure or lower their payments over some limited time period so that they can make payments until they are in a better financial position. And yes, there may be the few customers who are too much risk to carry as a customer; one way of dealing with this is to review the entire credit management process from origination to servicing to "next product" and make sure that when credit is approved, it is in the shared interests of both the bank and the consumer.
Business analytics used appropriately can help make an organization better and gain customer loyalty. Analytics used incorrectly can ruin a company’s reputation and leave it with many angry customers.