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
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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
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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
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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 of
ContaCt teleteCh: refinancing existing home loans has attracted a host of small local and regional providers to
solutions@teletech.com the market, consumers are more likely to seek the stability of familiar financial institutions under
1.800.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 cost-effectively
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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.
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