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Consumer credit: here we go again

4th February 2014

It’s back. After a five year break, it looks like a number of UK banks and financial brands are starting to show an interest in personal lending.

This is good news for the economy, partly because credit oils the wheels of economic growth, partly because it suggests confidence returning to the banking sector and the public. But will things be different this time around? The mistakes that financial institutions made in marketing credit wrecked the economy and withered public trust in banking brands. Banks need to be extremely careful in the way they approach this next phase of consumer lending.

Two new ways to mess up

Since the last time credit was being actively marketed there have been two significant changes. First is the advent of big data. Credit has always been a data business but the accuracy and sophistication of data analysis has moved on hugely in the last few years. In theory this could be used to identify potential customers who can get credit in a way that’s useful for them and profitable for the bank. In reality there’s the danger that data tools can be used to find demographic and behavioural signals that point to unsophisticated and vulnerable people.

The second issue is a lack of experience in the banks. This might sound counter-intuitive: banks have been in the unsecured credit business for decades. But for the last five years the focus has been elsewhere: wealth, current accounts, savings and investments. The teams being put together to drive growth in credit sales will not all have first-hand experience of the mistakes that were made last time around – and those who do not learn from history are in danger of repeating it.

Five ways to get it right

So what can banks do to ensure that this time around credit doesn’t threaten their own sustainability as businesses and brands? Here are a few things to think about:

1. Learn from Wonga

As the one of the few high-growth lenders in the UK in recent years Wonga has attracted a lot of attention, most of it negative. The pay-day loan company has been the subject of criticism from all quarters: government, the banking sector, the media and even the Church of England. But what can’t be argued against is that Wonga has done a lot of experimentation and learning in this space and probably has the most up-to-date understanding of the drivers and behaviours of people looking for credit. They will almost certainly apply this into more mainstream credit products in the coming years. Are the big banks ready to compete? Wonga’s service has a number of features which should be starting principles for a new era of consumer credit:

  • Simplicity: the language and tools used on their site do not presume any experience or sophistication in the user. Their how it works page is a great example of how to explain a complex product in human terms.
  • Transparency: the full cost of the loan and associated fees is clearly disclosed at the earliest stage of the process.
  • Early repayment: customers are encouraged to repay early and don’t suffer any financial penalty if they do. This has been a persistent grumble since we first started doing user research on bank credit products in the early 2000’s.
2. Offer good protection products

Payment Protection Insurance (PPI) is a good idea which fulfils an important need for borrowers: peace-of-mind. The problem with PPI in the past was not the concept but the execution: lenders offered terrible products in a highly pressurised sell, often to people who could not substantially benefit from the product when they needed it. As a result PPI repayments by UK banks have passed £8bn and most banks do not offer these products at all. This isn’t a good service to consumers who would benefit from protection. Banks need to work out a way (with the regulator if necessary) to identify and serve this need for their customers – even if they do not directly sell or profit from the protection product itself. The UK banking industry’s current stance on PPI looks like sulking. This should stop.

3. Targets and incentives

Almost all of the problems of the credit crunch were created by poorly devised targets and incentives from the top to the bottom of financial institutions. So how are you going to incentivise that tiger team you are building to sell 10,000 loans or cards in Q4 2014? Well, the simplest answer is don’t incentivise them. Credit is a service that banks provide to their customers at certain moments in the customer relationship, not a product to be sold. Why would you create any incentive that could lead to a customer getting something they did not need, or which could harm their wealth and security?

We probably have to accept that this kind of thinking is still a few years off, ironic though that sounds. But in the meantime there are some basic tenets around incentives which need to be in place:

  • Measure against long-term as well as short-term outcomes: the volume and potential value of sales made today need to be balanced against other factors like customer satisfaction, brand affinity, product retention and loyalty. 
  • Think about externalities: long-term outcomes should also be measured amongst customers who are offered a credit product but who do not borrow: what effect is the selling of credit having on wider perceptions of the lender? The way credit is sold does not only affect those who buy. This is what economists call an ‘externality’ – a concept which is poorly understood in modern, data-driven marketing and which is largely responsible for the way financial brands are perceived in the world at present.
  • Pay incentives when long-term outcomes have been realised: the best solution is for incentives to be paid in stages over the lifetime of a successful lending event and based on the long-term factors mentioned above. Lenders should at least have the ability to claw bonuses back if poor sales and marketing decisions lead to long-term negative effects. How much of that £8bn paid back in PPI compensation was offset against recouped bonuses?
4. Record everything

Everything. Record and store calls. Record and store web sessions using tools like SessionCam. Record and store internal communications and meeting notes. Record and store social media engagement. Record the targeting data, the A/B testing recipes - and their outcomes. It sounds like a recipe for bureaucratic ass-covering (and in the short-term it might be) but to influence cultural change in banks around the way credit products are conceived and sold it’s inescapable. The fastest way to get rid of shady practices is to let sunlight in, and if everyone knows that their decisions and actions can be called into question years down the line it will start to influence behaviour immediately.

5. Re-introduce the human touch

Back in 2007 we published research about how UK consumer shop online for personal loans. One striking insight - and this was well before the start of the credit crisis – was that shoppers were mistrustful of an approval process which they could complete in seconds. Some respondents said that this seemed irresponsible on the bank’s part, that they couldn’t have enough information to make a balanced assessment of the suitability of the loan or their ability to repay.

During the years that followed the opposite rule seemed to apply: applicants with long, good standing with a bank suddenly found that their access to credit was constrained – again without any evidence of human intervention or interest. We’re not suggesting that all credit cases should be reviewed by hand, but this is clearly an aspect of the experience that needs to be explored. Responsible lending is a serious commitment from both parties, but for over a decade (in good times and bad) banks seem to have seemed off-hand, acting at a remove from the customers they are supposed to serve.

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