Magazine article The Journal of Lending & Credit Risk Management

Integrated Credit and Marketing for Profitable Customer Management in Retail Lending

Magazine article The Journal of Lending & Credit Risk Management

Integrated Credit and Marketing for Profitable Customer Management in Retail Lending

Article excerpt

Over the last decade, retail lenders have found themselves in previously uncharted territory - a deregulated market with intense competition and dramatic technological/analytical innovations. In response, leading financial institutions have greatly enhanced their capability to integrate their extensive customer information, credit experience, and marketing strategies to drive the profitability of customer segments.

Changes to the Credit and Marketing Processes

It would appear that a majority of organizations within the retail lending industry have shifted away from a production orientation, which emphasizes lower costs through efficient production and distribution. While slow to begin, many retail lenders are rapidly moving to the selling (through heavy promotion) or marketing (through an integrated customer, market, and profitability focus) of credit lending products as a commodity.(1) The influx of marketers from fast-moving consumer goods industries into senior management positions in retail lending, for example, indicates a focus on the marketing of loans as commodity products.

At this stage, the customer has been the winner of the competitive environment. Retail lenders have become more flexible and responsive by offering:

* Decreased interest margins.

* Faster turnaround times.

* Proliferation of new products and access to information on them.

* Ease of application, with less customer information required for a loan application.

* More accessibility to credit, generally.(2)

Arguably, though, this environment holds disadvantages for some customers:

* Decreased customer service as financial institutions downsize staffing levels and remove the "relationship" with the local branch manager.

* Confusion over the range of products and delivery mechanisms.

* A higher level of debt than the customers have previously sustained (for example, private credit in Australia has increased by around 35% over the last three years), which could result in financial hardship in the future.(3)

Intense competitive forces and rapid technological innovation also have played a part in dramatically changing lending and marketing processes in the retail market. These changes are outlined in the following sections.

The marketing process. Marketing efforts have been significantly refocused within the retail lending environment. Relatively undifferentiated mass-marketing techniques have been replaced by one-to-one, or customer-specific, marketing. Traditional broadcast marketing methods, such as television advertisements promoting the community support provided by the retail lenders, still play a pivotal role in branding and selling lending products. However, cost-effective distribution of products through a range of channels has encouraged widespread usage of targeted, customer-specific, direct-marketing initiatives. The omnipresent mailing of credit card offers is a prime example of this type of marketing.

In addition, there has been a refocusing of decision-making to comprehensive data analysis of portfolio segments, rather than "gut feel." In Customer Specific Marketing, Brian Woolf examined individual relationships through customer-specific marketing in the retail environment.(4) He states, "The real power of differentiated marketing is that we can gather customer information, understand our customer economics, and market to each customer segment in a much more intelligent manner than ever before." Woolf comments that retailers have not introduced differentiated pricing previously for three reasons:

1. A lack of information on cost and profit differences.

2. No easy way to calculate customer profit.

3. No simple, speedy mechanism to implement customer-specific pricing.

Similar issues have applied to retail lending. Although much richer information on customers has been available to financial institutions, it could not be accessed electronically. …

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