Cutting Through The Fog 06 2009


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Cutting Through The Fog 06 2009

  1. 1. White Paper Cutting through the Fog of Consumer lending THE CONSUMER LENDING ENVIRONMENT HAS CHANGED DRAMATICALLY IN THE SHORT SPAN OF THE PAST TWELVE MONTHS. As a result, financial institutions are re-examining their relationships with customers – and vice-versa. Consumers are confused regarding their options, obligations, rights, and responsibilities under the new lending regulations that have emerged during 2008-2009. Press coverage of lending legislation has touched off a firestorm of debate from both sides of the lending equation and at both ends of the credit quality spectrum. That, in turn, has created an environment of uncertainty on the part of consumers with respect to pursuing credit with lending institutions. It is simply not clear, from the consumer perspective, whether credit remains available – and to whom, and at what interest rates. At the same time, lenders now have new hurdles to surmount to deliver credit to consumers demanding it. Flexibility in pricing for risk in lending has been reduced considerably in card lending, while the mortgage market has seen stiff new regulations applied to the qualification, escrow, and payment processes. Historically, there is a strong correlation between increased regulatory oversight in lending and increased cost in lending, as Federal legislation tends to introduce more work into the lending process while limiting fee and interest income. At the nexus of these two trends – consumer uncertainty and lender regulatory restraint – is both a problem and an opportunity. The problem, of course, is connecting consumers with credit appropriate to their income profile and creditworthiness. It’s not a new challenge, obviously, but in the space of just one year, the supply and demand curves for lending have been materially disrupted. The industry is now in motion from a state of ubiquitous supply and strong demand to an unprecedented state of both restricted supply and declining demand: Figure 1. The supply and demand curves for credit, circa 2006 and (projected) 2010. The market is still in the process of finding its new equilibrium point for S2 and D2, which is not projected to stabilize until 2010 at the earliest. A change in either the supply or the demand of a product is disruptive to the market, and identifying – and stabilizing on – a new point of equilibrium takes time. However, when both supply and demand are disrupted at the same time, that stabilization process takes even longer. Add in the fact that elasticity of demand for credit is also changing at the same time, and it Comprehensive Customer and enterprise solutions ©2010 teletech holdings, inc. - all rights reserved. 1
  2. 2. White Paper Cutting through the Fog of Consumer lending appears – according to most economic forecasts – that a new equilibrium point in the consumer lending market will not likely emerge until mid-2010 at the earliest. This is true for both mortgage lending and card lending. The challenge for both lending institutions and consumers is that between points of market equilibrium, uncertainty and inefficiency tend to take hold. Unsure that they are getting the best rates, consumers tend to hold off on large-scale borrowing. That is particularly true in the mortgage environment, where new originations dropped to near-historic lows in 1Q09 and are not projected to recover until well into 2011. According to new data from the Mortgage Bankers Association, the 2009-2010 period looks to be especially challenging for mortgage lenders looking to originate new purchase loans. The good news? Refinancing volume is projected at record highs: Figure 1. The supply and demand curves for credit, circa 2006 and (projected) 2010. The market is still in the process of finding its new equilibrium point for S2 and D2, which is not projected to stabilize until 2010 at the earliest. The opportunity amidst all of this uncertainty is the possibility of taking a leadership position in the market through decisive action. By establishing the right business partnerships, selectively re- engineering key processes and sourcing human capital and expertise strategically, it is possible to leverage the current credit environment to grow and evolve a brand and a lending portfolio. Doing so will require three separate initiatives: lending process optimization, customer outreach and relationship-building, and the development of a holistic view of the consumer/bank lending relationship. In the points to follow, we’ll examine in brief the tasks that lenders must undertake if they are to succeed in cutting through the fog of the current credit environment – and, ultimately, establish a sustainable source of competitive differentiation. Use the credit-card legislation as a catalyst to initiate customer dialogue. Accountholders’ understanding of the new legislation, and how it impacts their accounts, shouldn’t be garnered exclusively from news publications and business periodicals. It’s an excellent opportunity to reach out to customers – segment by segment, account by account – and work directly with them to strengthen relationships and increase account value. The regulatory changes could spur customers to seek out alternative lending products, or, worse yet, churn away to a competitor. That makes the process of relationship-building vital to the process of building a consumer lending business that can thrive in the post-recession environment. But many lending institutions are not prepared to initiate dialogue at the account or even the segment level, the economics and logistics of establishing meaningful conversations with a large volume Comprehensive Customer and enterprise solutions ©2010 teletech holdings, inc. - all rights reserved. 2
  3. 3. White Paper Cutting through the Fog of Consumer lending of accountholders can seem daunting. But leading-edge outsourcing providers can turn what seems like an expense into an investment with rapid, meaningful returns. TeleTech’s experience in building and evolving customer relationships has made our organization the first choice of lending institutions seeking to grow account value even in a challenging credit environment. Take another look at the consumer relationship - from a holistic perspective. In the past, consumers’ mortgage and card accounts were treated as separate entities, or, at best, cross-selling candidates. In the new economic realities that the recession has imposed, consumers have begun to look at their total access to credit in an entirely new light – and the most successful financial institutions will adopt the same perspective. As credit availability tightens, unsecured credit impacts access to secured credit, and vice versa. In this environment, consumers will be motivated to seek out credit solutions that work for them. Taking a fresh look at consumer lending, and building and marketing those solutions, will quickly become a major source of differentiation. Understanding the customer is key to success in this area, which makes tools like TeleTech’s Customer Interaction Analyzer™ and Disposition Manager valuable sources of insight into accountholders’ changing attitudes toward credit. By intelligently applying these tools to the process of customer relationship management, financial institutions can quickly build an accurate picture of customers’ desires, concerns, and issues in their evolving philosophies of credit usage. Build flexibility into the lending process from the expense management side. Mortgage and card lending regulations have significantly reduced financial institutions’ flexibility in managing the risk environment. In card lending, for instance, card issuers must provide notice 45 days before changing account interest rates, regardless of changes in the macro interest rate environment. At the other end of the spectrum, loan qualification, escrow governance, and even prepayment penalty regulation have all transformed the accessible fee income stream in the mortgage lending sector. In both cases, the ability of lenders to respond quickly to changes at the macroeconomic level has been markedly diminished. But without fee income to create a revenue ‘buffer’ against the loss of ability to reprice risk, financial institutions must source their fiscal flexibility from other areas. Reducing the expense associated with the lending process is an excellent way to free up organizational capital and create that ‘buffer.’ Partnering with an experienced business process outsourcing firm to improve the cost efficiency of the lending process is a logical step – but it’s now more important than ever to ensure that high lending quality and data accuracy rates are maintained in that process. That’s where TeleTech’s balanced approach to outsourcing puts our clients ahead of the competition: we focus on blending real expense reduction with an emphasis on maintaining or improving process quality levels. The result? Efficient lending that saves money with every transaction – while reducing rework and error-related losses. Capitalize on strong refinancing volume during 2009-2010. Mortgage refinancing volume is not expected to return to historical norms until late 2011 or early 2012, and for good reason; low current interest rates and aggressive pursuit of refinancing business by many mortgage lending operators has created a frenzied market condition for existing mortgage accountholders. Even after refinancing demand peaks in 3Q09 – when refinances are expected to account for a stunning 72% of all mortgage lending origination activity Comprehensive Customer and enterprise solutions ©2010 teletech holdings, inc. - all rights reserved. 3
  4. 4. White Paper Cutting through the Fog of Consumer lending – the MBAA still forecasts solid refinance demand through the end of 2011. While the ease ofContaCt teleteCh: refinancing existing home loans has attracted a host of small local and regional providers the market, consumers are more likely to seek the stability of familiar financial institutions under1.800.TELETECH or current market conditions. But the ‘spike’ in refinancing volume indicated by the MBAA data+1.303.397.8100 (outside the U.S.) creates a workflow management challenge for lending institutions: namely, how to manage a large volume of applications and originations over a short period of time. TeleTech back-office outsourcing services can offer a high-quality, cost-effective solution to this issue. Refine segmentation models to identify and focus on top mortgage and card accounts. Business analytics and customer segmentation will both play key roles in re-engineering the consumer lending process for success. Mortgage and card lending alike have suddenly become significantly more disciplined – and competitive – lines of business for financial institutions. The companies that can quickly sift existing customers and prospects for the most attractive accounts and focus on them will be the long-term winners in the lending market. Analytics and segmentation tools are once again in the BPO spotlight as a result. Business analytics and segmentation tools like TeleTech OnDemand Real-Time Analytics can surface customer trends and characteristics that provide a 360-degree view of customer credit behavior. Map the complete lending process and look for longitudinal outsourcing options. So much of the consumer lending process in both mortgage origination and card issuance is executed in functional ‘silos’ that it is often difficult for financial institutions to see the full process from a single expense management perspective. As a result, organizations tend to underestimate the total cost involved in card and mortgage lending. It’s important to map the entire process – from customer segmentation and acquisition through application evaluation and loan origination and even into customer retention and payment processing functions. Often, financial institutions find that a more longitudinal approach to BPO – in which an entire task is outsourced end to end – offers a dramatic improvement in cost savings over parting out piecework to outsourcing partners. TeleTech’s deep experience in managing the outsourcing process can be a valuable asset for financial institutions looking for greater efficiency in lending. Our professional services associates are skilled in mapping complete functions before building outsourcing solutions to service workflow needs. In the current lending environment, it’s become more important than ever to identify the most promising accounts and focus on delivering intelligent credit solutions to them, at competitive interest rates. By offering innovative lending products, clearly communicating the benefits of a lending relationship to key accounts, and optimizing expense levels in card issuance and mortgage banking, it’s possible for financial institutions to emerge from the current recession with healthier, more profitable customer relationships and a solid competitive footing for the growth era to come. Business process outsourcing partnerships can play a key role in achieving all three goals, through a combination of leading-edge business analytics, customer interaction management solutions, and front- and back-office workflow management solutions. With more than two decades of experience serving the needs of financial institutions around the world, TeleTech is the first choice of many lending organizations seeking a sustainable competitive edge in the marketplace. Comprehensive Customer and enterprise solutions ©2010 teletech holdings, inc. - all rights reserved. 4