Sponsored: Getting the customer acquisition right

Over-investing in acquisition at the expense of retention is not efficient. Damian Young, Managing Director at Nomis Solutions, outlines a strategy that will allow banks to both nurture their existing assets and successfully hunt for new business.

The Australian market has generally weathered the storms of Europe and North America in the wake of the global financial crisis (GFC). In other regions, banks saw crises of balance sheets, capital, funding and profitability. New lending in banks effectively ceased and banks shored up deposits in a bid to save the integrity of the institutions.

In comparison, banks in Australia were less exposed to the contagion effect of the GFC and the status of the sovereign remained unscathed. While growth was indeed impacted in the initial period of the GFC, GDP growth restarted in late 2009. The past two years has seen largely positive but modest growth in Australia and this trend is expected to continue into 2017 with growth rates averaging 2 per cent.

Despite the outlook for economic activity, home prices in Australia have continued to rise, creating a fear of a real property bubble. Home loan pricing has become an aggressive market as customers engage with the market in search of a better deal. As this momentum intensifies and the number of customers ‘on the move’ increases, we are likely to see intense surges of competition between lenders. Customers may well see exceptional value as banks compete aggressively in the market for those borrowers seeking a mortgage change.

These lending strategies are generally successful in their immediate goal of driving new business volumes, but the impact on profitability and margin remains a concern for all banks. In the short term the official cash rate of Australia remains low with the immediate outlook for a further lowering in 2017. However, as the rate cycle reverts (possibly in 2018/9), future rate increases may be muted somewhat as banks attempt to hold onto existing mortgages at all costs, thus exacerbating the margin challenge.

The leaky bucket syndrome

A natural strategy for banks may be to focus on the market and the acquisition of new mortgages as property prices continue to rise and demand remains high. However, the ‘leaky bucket’ syndrome means that banks may find that they are lending to stand still as existing customers shop around for the best deal. We all know that managing/retaining the existing customer base is far more cost-efficient and easier to plan for than customer acquisition. But are banks sufficiently engaged with their customers to manage the backbook effectively?

The current tendency to rely on customer apathy or information asymmetry is under threat from concerned regulatory authorities and disillusioned customers that may start defecting in their thousands.

Incumbent mortgage lenders must be wary of these threats. The ‘unloved’ individuals that make up their existing customer base may be closer to the edge than lenders appreciate. A broadening market choice will only exacerbate the issue. Further restrictions on ‘foreign lending’ in both Australia and New Zealand is also a consideration for banks to examine their existing, solid customer base.

The only feasible option for lenders is to recognise the mortgage-book retention challenge for what it is and miti mitigate its potential effects. The key to success here is redefining ‘what good looks like’ for existing customers. This will require advances in retention strategies that incorporate more sophisticated technologies which consider customer segmentation, behavioural-based pricing analytics, discretion management and regulatory commitments.

Possibly the most crucial step is to achieve a better understanding of customers and identify what they are looking for from their bank. This allows for the most appropriate offers to be made based on a real understanding of genuine needs. Lenders must provide the motivation for loyalty.

Building a robust base of customer loyalty requires a precise, scientific approach to lending. Pricing science driven through appropriate technology tools at the frontend (branches, online, brokers, etc.) and at the back end (price strategy) is the most effective means to achieve a more precise approach.

An optimised pricing strategy

Technology software, such as that which Nomis provides banks, will collate customer information onto a single big data platform, relate this information to market data, customer attributes, customer preferences and price point sensitivities. By using this information, banks can improve segmentation of customers, design right fit products, select appropriate channel and communication methods and ultimately improve profitability by improving retention strategies (of the right customers), acquisition strategies and optimum product pricing levels.

‘Optimised Rates’ are reached by using, not only internal data, but also by considering all segment, economic and regulatory variables. This external dimension offers banks a new level of flexibility that will resist shifting market pressures. Lenders can therefore achieve an optimised pricing strategy that envelops both a deep understanding of customer behaviour and a precise outlook on market potential. The result is a sustainable plan that will retain loyalty, react quickly to external shifts and grow profitability.

However, while there has been significant progress in the modernisation of lending, there is still a significant opportunity for banks to learn from other sectors in exploring the heights to which their data can take them. The fact remains that although a majority of banks do possess huge stores of customer information, they need greater support from partners to ensure it doesn’t lie dormant and underused, deep within data vaults. Exercising the data to its full potential will bring banks closer to the nirvana of greater customer satisfaction. By producing a strategy that offers customers a demonstrably fair deal, lenders create a virtuous circle where by loyalty is established and returns are made.

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