CONSUMER CREDIT: A RAPIDLY CHANGING LANDSCAPESeptember 2012
REPORT
2
CONSUMER CREDIT: A RAPIDLY CHANGING LANDSCAPE
Contents
Preface..........................................................................................................................3
Executive.summary..........................................................................................................4
Chapter.1:.trends,.threats.and.opportunities.on.the.consumer.credit.market............................5
. I..Regulatory.changes.in.Europe...............................................................................5
. II..Changing.consumer.expectations.........................................................................6
. III..Market.changes.and.the.impact.on.consumer.credit...............................................7
. IV..The.threats.to.the.consumer.credit.business.model................................................12
. V...The.opportunities.of.the.consumer.credit.business.model.......................................12
Chapter.2:.changes.to.the.business.model.of.specialist.consumer.finance.companies............13
. I..The.strategic.levers.for.emerging.from.the.crisis.....................................................13
. II..Actions.to.optimise.business.models....................................................................13
. III..Actions.implemented.as.part.of.a.change.strategy...............................................19
. IV..Renewed.governance.......................................................................................22
Chapter.3:.increasing.customer.value..............................................................................24
. I..Innovation.and.development.of.new.offerings.for.retailers......................................24
. II..Innovation.and.development.of.new.offerings.for.consumers..................................26
Chapter.4:.towards.greater.operational.efficiency.............................................................30
. I..Switch.to.variable.costs.and.reduce.middle.and.back.office.costs............................30
. II..Managing.debt.collection.to.master.the.cost.of.credit.risk......................................33
. III..Urbanising.the.information.system.and.reducing.the.total.cost.of.ownership............36
About.us......................................................................................................................40
Acknowledgements.......................................................................................................42
What.the.Think.Tank.members.said.................................................................................43
3
Preface
Sopra.Group.and.Efma.are.proud.to.present.their.analysis.entitled.“Consumer.credit:.a.rapidly.changing.landscape”..This.analysis.marks.the.end.of.the.Think.Tank.on.“Consumer.Finance”.coordinated.by.Sopra.Group.in.collaboration.with.Efma.conducted.in.may.2012..This.analysis.aims.to.examine.changes.in.consumer.credit.business.models,.which.have.been.heavily.impacted.by.the.crisis,.the.recent.regulatory.changes.and.the.actions.taken.in.response.by.specialist.consumer.credit.companies.in.order.to.continue.to.grow.their.business.while.restoring.profits.to.pre-2007.levels.
The.contributions.of.the.participants.in.the.Think.Tank.organised.in.conjunction.with.the.Efma.conferences.have.been.integrated.into.the.Sopra.Group’s.analysis..The.themes.covered.in.this.survey.are:..•...The.impact.on.consumer.credit.of.regulatory.changes.and.changes.in.
consumer.behaviour...•...The.threats.and.opportunities.for.the.consumer.credit.market...•...The.strategic.and.operational.levers.for.optimising.and.reinventing.the.
business.model.in.the.framework.of.a.renewed.system.of.governance...•...The.actions.to.increase.customer.value...•...The.ways.of.increasing.operational.efficiency.
This.latter.theme.has.further.been.explored.by.Sopra.Group.during.the.Brussels.Efma.conference.of.June.2012.in.its.intervention.entitled:.“Improving.operational.efficiency:.the.next.challenges.facing.consumer.credit.information.systems.in.Europe”.
Jean-Yves BrunaExecutive.Director.Strategic.DevelopmentSopra.Banking.Software
.
Patrick DesmarèsSecretary.General.Efma
4
CONSUMER CREDIT: A RAPIDLY CHANGING LANDSCAPE
Executive summary
Consumer.credit.outstanding.fell.by.3%.in.Europe.in.2010.and.2011..However,.this.average.masks.large.differences.between.most.Eastern.European.countries.(where.households.still.have.relatively.little.debt).and.the.other.more.mature.countries..This.trend.has.led.to.the.disappearance.of.local.players,.the.withdrawal.of.international.brands.from.certain.countries.and.the.emergence.of.new.players.from,.for.example,.the.telecoms.and.Internet.sectors,.some.of.which.have.developed.a.new.approach.to.credit,.such.as.direct.peer-to-peer.lending.
In.response.to.these.challenges.to.their.business.model.and.to.counter.new.entrants,.specialist.consumer.finance.companies.have.abandoned.their.“bigger.is.better.approach”.and.are.refocusing.their.activities.on.the.markets.where.they.have.significant.strategic.positions..This.shift.in.focus.reflects.two.underlying.trends:.optimising.the.business.model.and.breaking.with.the.existing.model,.depending.on.each.company’s.specific.situation..
The.Think.Tank.on.consumer.credit.of.May.2012.allowed.Sopra.Group.to.identify.three.levers.used.by.specialist.consumer.finance.companies.to.optimise.their.business.model:...1...Value.creation:.acquiring.new.customers.and.developing.new.loyalty.processes...2.....Operational.efficiency:.rationalising.activities.by.country,.developing.closer.synergies.with.
retail.banking.when.the.parent.company.is.a.bank,.and.reducing.information.system.costs.and.operating.expenses.
..3....Tighter.risks.controls:.developing.default.prevention.processes.and.more.efficient.and.better.segmented.debt.collection.processes.
However,.given.the.extent.to.which.the.business.model.has.deteriorated.on.some.markets,.these.levers.may.be.deemed.insufficient,.in.which.case.the.only.viable.alternative.may.be.to.break.with.the.traditional.model,.by.implementing.change.strategies,.based.on.four.areas:...1....Diversifying.towards.a.bancassurance.model.in.order.to.increase.the.number.of.products..
per.customer...2....Exiting.certain.markets/countries.where.the.potential.and.the.market.position.are..
considered.unsatisfactory...3.....Refocusing.on.the.business.of.distributing.credit.by.outsourcing.back.offices.and.IS.or.
alternatively.constructing.loan.servicing.platforms.for.third.parties...4...Moving.into.niche.markets,.such.as.P2P.lending.communities.
Finally,.whatever.transformation.approach.is.adopted.the.criteria.for.creating.lasting.value.for.the.profession.(other.than.the.fundamental.principles.of.risk.management.and.operational.efficiency).must.include.the.following.actions:..•...Constructing.a.value.proposition.that.is.better.suited.to.the.needs.of.increasingly.mobile.
customers,.in.particular.by.integrating.social.media...•..Capitalising.fully.on.the.Internet,.for.the.management.of.both.partners.and.consumers...•...Continuing.to.invest.in.innovation:.for.example,.dematerialisation.at.the.point.of.sale.helps.to.
shorten.considerably.the.loan.origination.and.approval.processes...•...Integrating.the.corporate.social.responsibility.expectations.of.consumers.and.the.regulator,.by.
ensuring.a.duty.of.advice.in.terms.of.approval.practices.and.customer.services.
5
Chapter 1: trends, threats and opportunities on the consumer credit market
I. Regulatory changes in Europe
1. Increased borrower protection Since.2008,.numerous.regulatory.changes.have.been.introduced.in.Europe.in.order.to.increase.protection.for.borrowers..
The.European.Commission’s.regulatory.initiatives.resulted.in.the.Consumer.Credit.Directive,.adopted.on.23.April.2008..This.directive…..•...regulates.credit.advertising,.by.requiring.adequate.explanations.to.be.provided.to.consumers;..•...enhances.the.information.to.be.provided.by.specialist.consumer.finance.companies.to.
consumers,.by.proposing.Standard.European.Consumer.Credit.Information.and.a.representative.example.of.pre-contractual.information.to.be.provided.to.customers;
..•...requires.companies.to.assess.the.creditworthiness.of.borrowers.via.a.database.before.validating.the.offer.and.to.link.the.sales.contract.to.the.credit.agreement;
..•...requires.companies.to.explain.to.customers.why.they.have.been.refused.credit;
..•...requires.companies.to.inform.customers.about.the.interest.rate,.costs,.the.method.used.to.calculate.interest.and.any.changes.throughout.the.life.of.the.agreement;
..•...reinforces.consumer.protection.by.improving.consumer.rights.(right.of.withdrawal,.right.of.early.repayment,.etc.).and.by.clearly.formalising.the.obligations.or.each.of.the.parties.to.the.agreement;
..•...establishes.the.need.for.transparency.regarding.intermediaries.(costs,.obligations,.etc.).
The.transposition.and.implementation.of.this.new.directive.in.each.European.country.via.a.series.of.national.laws.have.now.been.completed.according.to.the.specific.characteristics.of.the.countries..In.the.United.Kingdom,.France,.Turkey.and.Italy,.the.transposition.of.the.European.directive.has.targeted.in.particular.revolving.credit.
The.framework.for.granting.credit.with.the.assessment.of.the.borrower’s.creditworthiness.has.been.generally.reinforced.by.the.European.directive,.resulting.even.in.regulations.governing.the.credit.approval.process.(for.example.Regulation.T.in.Poland)..In.France,.the.Lagarde.law.enshrines.the.principle.for.lenders.to.set.up.and.consult.a.central.consumer.credit.database..A.report.on.the.arrangements.for.the.implementation.of.this.register.was.drawn.up.by.the.Constans.Commission.and.published.in.August.2011,.but.it.has.not.yet.been.transposed.into.law.
In.some.States,.a.law.has.been.enacted.on.credit.intermediaries.in.order.to.redefine.and.supervise.their.role..Two.major.measures.have.been.decided.for.credit.intermediaries..First,.retailers.and.distributors.have.been.given.increased.responsibility.as.regards.training.and.point.of.sale.information.with.a.view.to.enabling.consumers.to.choose.the.type.of.consumer.finance.that.corresponds.to.their.personal.situation..Secondly,.in.order.to.underscore.the.liability.of.intermediaries,.lenders.now.have.the.possibility.to.take.legal.action.against.an.intermediary.that.fails.to.comply.with.its.obligations..
For.specialist.consumer.finance.companies,.these.wide-ranging.regulatory.changes.make.the.management.of.both.borrowers.and.retail.partners.more.complicated..
6
CONSUMER CREDIT: A RAPIDLY CHANGING LANDSCAPE
2. Higher liquidity costs
At.the.same.time,.a.new.regulatory.framework.was.introduced.in.September.2010.on.the.basis.of.the.work.of.the.Basel.Committee.on.Banking.Supervision..Basel.III.imposes.more.challenging.capital.and.liquidity.ratios.on.financial.institutions,.by.specifying.both.short-term.(30.day,.Liquidity.Coverage.Ratio).and.long.term.(over.one.year,.Net.Stable.Funding.Ratio).liquidity.ratios.to.be.respected..As.financial.institutions.have.up.to.2019.to.implement.Basel.III,.pressure.on.the.consumer.credit.costs.is.likely.to.increase.over.the.next.seven.years,.while.the.supply.of.consumer.credit.is.likely.to.fall.at.the.same.time..Moreover,.budgetary.tightening.measures.adopted.to.contain.the.risks.of.the.sovereign.debt.crisis.in.Europe.will.also.have.a.direct.impact.on.consumer.credit..
In.order.to.maintain.their.profitability,.banks.in.certain.European.countries.are.prioritising.among.their.business.lines.that.consume.the.most.liquidity..Specialist.consumer.finance.companies.are.also.choosing.between.their.product.lines.and.targeting.the.lowest.risk.consumers.in.a.flight.to.quality,.thereby.increasing.the.possibility.of.a.subsequent.contraction.of.balance.sheets.
II. Changing consumer expectations
For.many.years.before.2008,.consumer.associations.had.denounced.the.dangers.of.revolving.credit.in.several.European.countries..In.particular.consumers.had.the.feeling.that.they.were…..•...badly.informed.about.their.projects.and.“forced”.to.opt.for.a.revolving.credit,.in.most.cases.linked.to.
a.credit.card,.systematically.proposed.by.specialist.consumer.finance.companies.at.the.point.of.sale;..•...badly.informed.about.the.loan’s.characteristics.(total.cost,.interest.rate,.etc.).
The.post-crisis.period.is.likely.to.be.characterised.by.a.more.cautious.and.better.balanced.use.of.credit.according.to.a.FICO/Efma.survey.carried.out.in.May.2011...•...Customers.declared.that.they.are.less.likely.to.borrow.and.are.more.interested.in.building.up.
their.savings...•...Consumers.are.more.cautious.and.want.to.reduce.their.use.of.credit.although.they.are.sensitive.
to.the.efforts.of.specialist.consumer.finance.companies.to.revitalize.their.offerings...•...Customers.have.improved.their.credit.management.skills:.consumers.now.prioritise.their.
payments.and.pay.down.credit.card.debt.in.the.same.way.as.other.obligations,.including.mortgage.payments.
..•...Responsible.borrowing.and.lending.expectations.are.increasingly.important.and.transparency.requirements.are.higher.as.regards.both.lenders.and.borrowers.
In.conclusion,.notwithstanding.regulatory.changes.intended.to.promote.more.responsible.lending.and.borrowing.practices.in.an.enlarged.market.(“fewer.excesses,.more.access”),.credit.continues.to.be.perceived.negatively.by.consumers.in.general,.with.in.particular.a.significant.loss.of.interest.in.revolving.credit.
7
III. Market changes and the impact on consumer credit
1. A fall in consumer credit outstanding
The.gloomy.economic.environment,.credit.restrictions,.tighter.regulatory.requirements.and.a.lack.of.liquidity.have.contributed.to.the.fall.in.outstanding.consumer.loans.in.all.European.countries.
.
In.2011,.for.the.second.consecutive.year,.the.European.consumer.credit.market.fell..Sofinco’s.annual.consumer.credit.review.published.in.March.2012.shows.that.consumer.credit.outstanding.fell.by.2.9%.in.Europe.between.the.end.of.2010.and.the.end.of.2011..This.decline.affected.all.European.regions:.Southern.Europe.fell.by.4.9%;.Eastern.Europe.by.3.2%.and.Northern.Europe.by.1.5%..Some.countries.have.even.recorded.stronger.falls,.such.as.Spain.(-14%).and.Ireland.(-12%)..Overall,.consumer.credit.levels.fell.in.20.out.of.27.EU.counties.and.there.was.therefore.a.very.sharp.contraction.in.loan.production.
2. A mixed situation on the consumer credit market
a. Significant geographical differencesThe.European.Union.represents.almost.a.quarter.of.the.world.consumer.credit.market.and.total.consumer.credit.outstanding.in.the.EU.amounted.to.1.071.billion.euros.in.2011..However,.its.distribution.is.very.uneven.between.European.regions..There.is.a.strong.concentration.of.lending.in.Northern.Europe.and.Southern.Europe,.since.these.two.regions.account.for.56%.and.37%.respectively.of.total.consumer.credit.outstanding,.while.they.represent.41%.and.39%.respectively.of.the.European.Union’s.population..On.the.other.hand,.volumes.are.relatively.low.in.Eastern.Europe.since.this.region.accounts.for.7%.of.total.consumer.credit.outstanding,.whereas.it.represents.20%.of.
Northern Europe56% of EU’s outstanding
Southern Europe37% of EU’s outstanding
Eastern Europe7% of EU’s outstanding
2010 2011
-5
GROWTH RATE OF CONSUMER CREDIT OUTSTANDING BETWEEN 2009 AND 2011
Source: ASF 2011
8
CONSUMER CREDIT: A RAPIDLY CHANGING LANDSCAPE
the.European.Union’s.population..Five.countries.stand.out.in.Northern.Europe.and.Southern.Europe:.the.United.Kingdom,.Germany,.France,.Italy.and.Spain,.since.they.account.for.75%.of.total.loans.outstanding.and.represent.63%.of.the.European.Union’s.population.
b. Consumer credit growth potential is higher in Eastern European countriesDespite.significant.geographical.differences.in.total.outstanding.consumer.loans,.three.indicators.point.to.a.higher.consumer.credit.growth.potential.in.Eastern.European.countries:..•...The.growth.rate.of.household.debt.between.2009.and.2011.(see.chart.below).which.reached.
around.30%.in.Eastern.European.countries,.such.as.Turkey,.while.it.is.very.low.(around.0%).in.Northern.and.Southern.European.countries.
..•...The.proportion.of.consumer.credit.in.total.household.debt.is.still.very.low.in.Eastern.European.countries,.compared.with.16%.for.the.European.Union.as.a.whole.
..•...The.“household.debt.ratio”.which.translates.total.consumer.loans.outstanding.in.relation.to.the.total.household.consumption.of.a.country.(see.chart.on.page.9).is.far.lower.in.Eastern.European.countries.compared.with.a.European.average.of.14.6%.in.2011.
The.consumer.credit.market.therefore.has.significant.growth.potential.in.Eastern.European.countries.in.comparison.with.Northern.European.and.Southern.European.countries.where.the.markets.are.mature..
.
.
-30
Ukr
aine
Rom
ania
Russ
ia
Turk
ey
Bulg
aria
Hun
gary
Cze
ch R
ep
Pola
nd
Slov
akia
Gre
ece
Slov
enia
Spai
n
Irela
nd
Austr
ia
Denm
ark
Fran
ce Italy UK
Belg
ium
Portu
gal
Net
ther
land
s
Ger
man
y
0
30
60
90
CAGR 2002-09 (Compound Annual Growth Rate) CAGR 2009-11
INCREASE IN HOUSEHOLD DEBT OUTSTANDING
Source: IHS Global Insight, based information from European central banks
9
3. Differences by type of product between European countries
a. A stagnation of outstandings and a fall in the production of revolving credit in certain regionsThe.development.of.revolving.credit,.which.was.previously.heavily.promoted.by.specialist.consumer.finance.companies.because.of.its.high.returns.and.contribution.to.customer.retention,.is.a.model.which.is.gradually.being.called.into.question.in.all.European.countries..The.production.of.revolving.credit.decreased.sharply.between.2008.and.2009.and.revolving.credit.outstanding.has.stabilised.in.countries.in.groups.2.and.3.(see.chart.on.page.10),.especially.in.France.and.Italy..
0
Rom
ania
Pola
nd
Cze
ch R
ep
Hun
gary
Russ
ia
Ukr
aine
Bulg
aria
Turk
ey UK
Denm
ark
Austr
ia
Belg
ium
Fran
ce
Ger
man
y
Gre
ece
Irela
nd Italy
Net
herla
nds
Portu
gal
Slov
akia
Slov
enia
Spai
n
40
80
120
160Mortgage Loans Consumer Loans Other Loans
RATIO OF HOUSEHOLD DEBT OUTSTANDING TO GROSS DOMESTIC PRODUCT IN 2011 by type of loan
Source: IHS Global Insight, based on information from European central banks
10
CONSUMER CREDIT: A RAPIDLY CHANGING LANDSCAPE
This.slowdown.can.be.attributed.to.several.factors:...•..From.the.customer’s.point.of.view:.....–.Worsening.product.perceptions......–.A.growing.awareness.of.its.cost......–.The.unstable.economic.environment...•..From.the.point.of.view.of.specialist.consumer.finance.companies:.....–..Lower.returns:.an.increase.in.the.cost.of.risk.and.regulatory.changes.in.certain.countries,..
such.as.France......–.The.implementation.of.responsible.lending.principles.and.practices.which.favour.instalment.loans.
b. A core business of specialist consumer finance companies which is under attackIn.mature.countries,.the.core.business.of.specialist.consumer.finance.companies,.which.differ.from.banks.by.their.specific.revolving.credit.know-how.and.distribution.partnerships,.is.therefore.under.attack..Furthermore,.the.possibilities.for.these.lenders.to.switch.to.other.consumer.credit.products.are.limited:...•...Because.instalment.credit.has.a.lower.cost.of.risk.than.revolving.credit,.the.former.is.increasingly.
distributed.by.account.managers.in.bank.networks.and,.accordingly,.the.pressure.on.margins.on.this.type.of.lending.has.increased.since.2008.
..•...Debt.consolidation.requires.significant.customer.knowledge.and.mortgage.expertise..The.involvement.of.specialist.consumer.finance.companies.in.this.activity.therefore.remains.marginal..This.activity.was.previously.the.domain.of.specialised.financial.institutions.that.distributed.their.products.via.brokers..However,.the.major.banking.networks,.which.have.the.advantage.of.good.overall.customer.knowledge,.mortgage.expertise.and.the.possibility.to.monitor.borrowers,.whose.salary.is.paid.directly.into.their.bank.account,.are.increasingly.moving.into.this.market.segment..Their.risk.perspectives.are.better.than.those.of.specialist.consumer.finance.companies.
02008
50
100
150
200
2009 2010 2011
Group 1 Group 2 Group 3
EVOLUTION OF REVOLVING CREDIT OUTSTANDING BETWEEN 2008 AND 2011 BY GROUP OF COUNTRIES
Source: IHS Global Insight
Group 1: UK, Netherlands, Turkey, Portugal; Group 2: Austria, Denmark, France, Germany, Czech Republic, Slovakia; Group 3: Belgium, Italy, Ireland, Slovenia, Spain, Bulgaria, Ukraine, Russia, Hungary, Poland, Romania
11
4. The competitive landscape of the consumer credit market
Since.2007,.the.competitive.landscape.has.changed.radically:..•...Acquisitions.by.banks.of.non-bank.specialised.credit.providers,.with.a.view.to.boosting.liquidity.
and.capital...•...The.increased.influence.of.bank.shareholders.in.joint.ventures.with.distributors..The.
disappearance.or.withdrawal.of.certain.players.and.specialised.subsidiaries.(Internet.pure.players.and.direct.credit.subsidiaries).for.liquidity.and.risk.reasons..
..•...Returns.have.trended.down.for.all.consumer.credit.players,.even.if.2010.was.marked.by.an.upturn.in.profits..Nonetheless,.profits.are.still.far.below.the.pre-crisis.levels..According.to.IHS,.profitability.levels.should.stabilise.between.2012.and.2015.and.outstanding.consumer.loans.are.likely.to.increase.only.moderately..Credit.production.is.not.expected.to.return.to.2008.levels.before.2015..
..•...The.end.of.the.race.to.achieve.critical.mass,.with.traditional.players.repositioning.themselves.and.refocusing.on.the.markets.where.they.have.significant,.profitable.market.shares,.and.in.some.cases.withdrawing.from.countries.where.the.cost.of.risk.is.too.high.or.their.market.share.is.inadequate..
..•...The.arrival.of.new.entrants.on.the.consumer.credit.market.(P2P,.Telco,.Utilities).
This.new.competitive.landscape.is.forcing.traditional.consumer.credit.providers.to.rethink.their.business.model.
02006
4%
8%
12%
16%
0
€100
€200
€300
€400
2007 2008 2009 2010
Outstanding loans After-tax result/shareholders’ equity
EVOLUTION.OF.AGGREGATED.LOANS.OUTSTANDING.(€BN).AND.PROFITABILITY.(%) on the basis of a panel selected by IHS
Source: IHS Global Insight
12
CONSUMER CREDIT: A RAPIDLY CHANGING LANDSCAPE
IV. The threats to the consumer credit business model
There.are.three.major.threats.hanging.over.the.consumer.credit.business.model:.pressure.on.margins,.pressure.on.overheads.and.pressure.on.the.cost.of.risk.The.pressure.on.net.banking.income.(volume.and.margin).is.linked.to…..•..the.decrease.in.the.consumption.of.capital.goods;..•..credit.restrictions.leading.to.a.reduction.in.the.customer.base.of.eligible.customers;..•..increased.competition.between.lenders.competing.for.customers.with.the.best.risk.profile;..•..the.arrival.of.new.entrants.on.the.market.
In.addition,.certain.countries.may.continue.to.reduce.their.usury.rates.in.the.coming.years.The.upward.trend.in.overhead.costs.is.due.to…..•...the.radicalisation.of.local.regulations,.with.increased.protection.for.borrowers,.resulting.in.more.
comprehensive.documentation.and.more.preliminary.credit.controls;..•...a.stabilisation.or.increase.in.commissions.paid.to.distribution.networks.and.business.introducers.
in.a.context.of.falling.interest.rates.
Finally,.it.is.more.difficult.to.manage.the.cost.of.risk.because.of…..•...the.increase.in.overindebtedness.in.mature.countries.and.in.certain.emerging.countries.such..
as.Poland;..•...the.lasting.effects.of.economic.stagnation.and.the.rise.in.unemployment.undermine.the.
creditworthiness.of.borrowers.during.the.life.of.the.credit.(prime.to.nearprime,.near.to.subprime);..•...the.increased.difficulties.in.recovering.non-performing.credits,.leading.to.an.increase.in.LGD.
(Loss.Given.Defaults),.with.an.adverse.financial.impact.on.provision.calculation.models.
V. The opportunities for the consumer credit business model
Faced.with.this.bleak.outlook,.it.would.be.a.mistake.for.market.participants.to.ignore.the.opportunities.open.to.them.if.they.can.adapt.to.these.new.expectations.and.needs...•...Tap.into.demand.in.emerging.markets.where.a.middle.class.is.emerging:.
In.2012,.50%.of.the.population.in.emerging.countries.belongs.to.the.middle.classes..According.to.INSEE’s.projections,.80%.of.the.population.of.emerging.countries.will.belong.to.the.middle.classes.in.2030..However,.penetration.rates.for.durable.goods.remain.low.
..•...Adapt.products.to.changing.demand:.The.challenge.is.to.launch.simpler.and.more.practical.products.based.on.new.means.of.payment.that.come.from.e-commerce.and.m-commerce..These.new.offers.are.developed.for.more.mobile.and.often.younger.consumers,.also.targeted.by.the.major.Internet.players.and.mobile.telephone.operators..
..•...Finance.new.needs.for.new.customers:.Long-term.societal.changes.are.likely.to.lead.to.changes.in.the.way.credit.is.promoted,.with.specialist.consumer.finance.companies.placing.the.emphasis.on.projecting.a.strong.image.of.corporate.responsibility.to.their.customers..Pensioners,.whose.numbers.are.increasingly.strongly.in.the.old.Europe,.could.conceivably.make.greater.use.of.credit.to.finance.their.projects,.while.young.adults.are.increasingly.employed.under.fixed-term.contracts.or.on.a.part-time.basis.
In.conclusion,.the.traditional.consumer.credit.business.model,.based.on.the.acquisition.of.new.customers,.in.particular.thanks.to.in-store.distribution.partnerships,.and.on.customer.retention.via.revolving.credit.card.accounts,.has.been.under.threat.since.2008..Specialist.consumer.finance.companies.are.reacting.by.optimising.or.reinventing.their.business.model..
13
I. The strategic levers for emerging from the crisis
Four.major.strategic.levers.have.been.identified.in.this.survey.to.enable.specialist.consumer.finance.companies.to.return.to.profitability..The.actions.to.be.taken.as.part.of.the.implementation.of.these.strategic.levers.need.to.be.coordinated.with.actions.intended.to.renew.the.governance.of.these.companies.
.
II. Actions to optimise business models
1. Adjusting customer loyalty strategies
The.business.model.currently.in.use.in.specialist.consumer.finance.companies.was.based.mainly.on.customer.acquisition..However,.the.gloomy.economic.outlook.and.recent.regulatory.changes.have.increased.customer.acquisition.costs..As.these.costs.are.increasingly.high,.it.is.becoming.more.cost-effective.for.specialist.consumer.finance.companies.to.deploy.loyalty.strategies.(from.mass.marketing.to.one-to-one.market.thanks.to.behavioural.segmentation),.especially.as.they.are.now.less.expensive.thanks.to.the.development.of.new.technologies.and.the.Internet.
Chapter 2: changes to the business model of specialist consumer finance companies
DESCRIPTION OF FOUR STRATEGIC LEVERS TO EMERGE FROM THE CRISIS
Source: SOPRA Group
Optimisation ChangeTr
ans
form
atio
n Le
vers
Upgrade governanceReinforce the control frameworks and the role of central (vs. local)
Transpose social responsibility issue into responsible lending
Lever 1 - Optimisation of the exisiting model
Adjust loyalty strategies
Enlarge the number of customers eligible for consumer credit
Redistribute activities between countries: focus on countries with high potential and proven business models
Lever 3 - Optimisation of the operational model
Create European (nearshore) and international (offshore) industrial platforms
Develop synergies between specialist consumer finance companies and retail banks
Lever 2 - New business models
Enlarge the offer of consumer credit
Diversify into peer-to-peer lending
Capitalise on the Internet and mobile canal
Explore opportunities to exit some loss-making countries
Lever 4 - New operational models
Switch to variable costs through outsourcing and Software as a service (SaaS)/Business process as a service (BpaaS) model
14
CONSUMER CREDIT: A RAPIDLY CHANGING LANDSCAPE
Customer.retention.strategies.mean.that.it.is.necessary.to.adapt.the.customer.lifecycle,.by…..•..multiplying.customer.contract.opportunities.thanks.to.the.sale.of.additional.products;..•...improving.prevention.processes.by.detecting.more.rapidly.potential.customer.defaults.(silent risky);..•..calling.customers.in.the.case.of.late.payment.to.propose.solutions.to.prevent.overindebtedness.
2. Combating the downward trend in the customer base of eligible borrowers
a. The downward trend in the pool of eligible borrowersAt.the.current.time,.the.customer.base.of.eligible.borrowers.is.declining.in.mature.countries.in.Northern.Europe.and.Southern.Europe.due.to.three.major.societal.changes:..1.....Population.ageing,.which.may.be.expected.to.encourage.specialist.consumer.finance.companies.
to.finance.more.projects.for.seniors:.according.to.Eurostat’s.forecasts,.the.percentage.of.people.aged.60.or.over.in.Europe.will.reach.29.5%.in.2030,.versus.17.4%.at.the.current.time.
..2.....The.weakening.of.the.family.structure,.which.is.likely.to.lead.to.lenders.reconsidering.the.growing.importance.of.people.living.on.their.own.and.single-parent.families:.according.to.Eurostat.data,.the.number.of.single-parent.families.in.Europe.in.2011.varies.between.15%.and.20%.depending.on.the.country,.and.this.number.is.increasing.constantly.
..3.....Growing.labour.market.instability.which.concerns.all.categories.of.the.population..This.should.in.particular.encourage.specialist.consumer.finance.companies.to.review.the.way.they.profile.young.people:.according.to.Eurostat,.fixed-term.contracts.represent.50%.of.all.new.employment.contracts.concluded.in.the.European.Union..This.increase.in.fixed-term.contracts.has.been.accompanied.by.a.reduction.in.job.tenure.and.a.fall.in.labour.market.entry.ages..But.the.majority.of.young.adults.go.from.one.fixed-term.contract.to.another.and.some.lenders.have.succeeded.in.characterising.and.segmenting.this.type.of.customer.in.order.to.grant.them.loans.tailored.to.their.specific.professional.situation.
This.decrease.in.the.customer.base.of.eligible.borrowers.linked.to.societal.changes.has.been.intensified.by.the.introduction.of.more.stringent.customer.selection.criteria.because.of.a.fall.in.the.profitability.of.consumer.credit.
b. The need to expand the customer base by adjusting population targeting criteriaIn.order.to.halt.the.decline.in.the.customer.portfolios.of.specialist.consumer.finance.companies,.Sopra.Group.considers.that.the.criteria.for.targeting.eligible.borrowers.need.to.be.revisited.in.the.light.of.these.societal.changes.and.the.new.challenges.facing.the.industry.
PROPOSED NEW ADDITIONAL CUSTOMER TARGETING CRITERIA
Source: SOPRA Group
Prioritisation Parameters used New parameters to Proposed change in take into account the customer selection rule 1 Job tenure of less than Sector in which the The more the sector is dynamic in 1 year individual works terms of job creation, the lower the job tenure risk
2 Single-parent families The familiy’s assets The higher the assets, the lower the risk of overindebtedness
15
Some.previously.discriminating.loan.application.criteria,.such.as.job.tenure.and.single-parent.family.status,.could.be.reconsidered.on.the.basis.of.more.in-depth.customer.knowledge.and.by.introducing.offerings.adapted.to.their.situation.in.order.to.re-integrate.previously.ineligible.profiles..3. Redistributing the activities of specialist consumer finance companies between countries and creating European industrial platforms
In.order.to.optimise.their.profitability,.specialist.consumer.finance.companies.are.rethinking.their.international.investments.by:...•...Focusing.their.investments.on.high-potential.countries.and.withdrawing.from.countries.where.they.
generate.insufficient.profits.or.have.not.yet.reached.critical.mass..For.example,.in.the.revolving.credit.segment,.specialist.consumer.finance.companies.may.be.inclined.to.develop.their.activities.on.the.booming.Eastern.European.markets.
..•...Reorganising,.even.pooling.some.activities.between.countries.(creation.of.pan-European.industrial.platforms).
..•...Pooling.certain.components.of.the.value.chain.(CRM,.information.systems,.debt.collection,.etc.).with.the.retail.bank.of.the.same.country,.which.is.often.the.parent.company.of.the.consumer.credit.provider
100
10
20
30
40
50
200 300 400 600
Turkey
Czech Rep
Slovenia
PolandHungary
RussiaRomania Bulgaira
Serbia
Germany
Austria
Italy
GPD growth 2015
Mul
tiCha
nnel
read
ines
s rn
line
bank
ing
usag
e Development ofmultichannel banking
Optimisationof coststructure
3 Reduction ofcost-to-serve
4 Selective growth based
on mkt attractiveness and UniCredit postitioning
1MultichannelChampion
2Step-up
multichanneloffering
500Branch density per million inhabitants
UNICREDIT’S MULTICHANNEL, MULTI-COUNTRY STRATEGY
Source: Unicredit – Driving a Pan-European Multichannel Strategy
16
CONSUMER CREDIT: A RAPIDLY CHANGING LANDSCAPE
To.develop.its.activities,.Unicredit.has.taken.account.of.the.specific.characteristics.of.each.of.the.countries.where.it.operates,.by.distinguishing.countries.with.a.multichannel.development.potential.from.countries.where.cost.optimisation.is.possible...This.analysis.has.enabled.Unicredit.to.refine.its.overall.strategy.and.redistribute.its.activities.to.take.the.specific.characteristics.of.countries.into.account..For.example,.Unicredit.has.pooled.its.call.centers.in.low-cost.countries.such.as.Turkey.and.has.reinforced.the.weight.of.digital.channels.in.those.countries.where.the.quality.of.the.customer.experience.is.essential,.such.as.Germany.
The.redistribution.of.multi-country.activities.will.inevitably.lead.specialist.consumer.finance.companies.to.explore.the.benefits.of.creating.international.rather.than.simply.European.platforms.(see.chapter.4:.Operational.efficiency)..
Italy
1 2 3 4Example of strategy implementationMultichannel*
• Cashless spoke branches• Call center boost/upgrade• Online banking sales enablement boost• Best-in-class mobile offering
Germany • Smart banking services• Remote video sales/advice, extended opening hours• Further enablement of direct sales in multi channels
Turkey • Expand distribution smartly, introduce remote unattended branches• Leverage advanced call center• Step up Web/Online banking
Czech Rep • Boost web, social media, e-payments, self service as aquistion methods• Smart network expansion
“Branch network transformation and sales increase”
“Shift to predominantly multi-channel model”
“Fund growth from cost savings”
“Focus on Multichannel exploiting the huge internet users base”= Focus
UNICREDIT’S MULTICHANNEL, MULTI-COUNTRY STRATEGY
* Multichannels: 1 Multichannel Champion; 2 Step-up multichannel offering; 3 Reduction of cost-to-service; 4 Selective physical network developmentSource: Unicredit – Driving a Pan-European Multichannel Strategy
17
4. Developing synergies between specialist consumer finance companies and retail banks
The.distinction.between.specialist.consumer.finance.companies.and.retail.banks.is.becoming.increasingly.blurred..For.several.years,.specialist.consumer.finance.companies.have.also.been.providing.banking.products.and.services.while,.vice.versa,.banks.have.been.distributing.consumer.credit.products..
Specialist.consumer.finance.companies.and.retail.banks.are.now.facing.the.same.challenges:.winning.back.consumer.confidence,.reducing.the.risk.of.overindebtedness.among.their.customers.and.protecting.their.profit.margins.despite.increased.constraints.on.volumes.and.costs..
Some.specialist.consumer.finance.companies.have.already.multiplied.synergies.with.their.parent.company..
CHANGES IN THE ACTIVITIES OF SPECIALIST CONSUMER FINANCE COMPANIES
Source: SOPRA Group
Phase 1Specialist credit institutions
Credit acceptance
Hard and legal collection
Credit management(and customer care)
Soft collection(call center, debt rescheduling,...)
Servicing Savings
Insurance
Phase 2Service providers
Phase 3Banking product providers
18
CONSUMER CREDIT: A RAPIDLY CHANGING LANDSCAPE
ADVANTAGES OF DEVELOPING SYNERGIES BETWEEN SPECIALIST CONSUMER FINANCE COMPANIES AND RETAIL BANKS
Advantages for specialist consumer finance companiesBanks are in a position to provide liquidity to specialist consumer finance companies, including on local markets.
Cross-selling credit and banking products makes it possible to expand the network of partners, increase the customer portfolio and enhance customer loyalty
Banks have specific risk management expertise and specific knowledge of traditional banking products from which specialist consumer finance companies are increasingly benefiting
Advantages for retail banksConsumer credit is a profitable business (the projected ROE of banks is between 10% and15% on average, compared with 18% to 20% for specialist consumer finance companies).
Specialist consumer finance companies have specific expertise in certain activities such as scoring, customer monitoring, collection, e-credit and have IT platforms which could be shared by retail banks
Specialist consumer finance companies can be laboratories to test new practices, such as e-credit and dematerialisation
Specialist consumer finance companies have developed extensive partnership networks and would enable banks to be present at points of sale
Example of synergies within the Société Générale groupIn France, the personal loans of Société Générale’s retail bank are managed by the group specialist consumer credit arm Franfinance under the Sogefinancement brand.
In Russia, Rusfinance and Rosbank have a joint system for contacting car dealers for car loans.
In the Czech Republic, Komercni Banca and Essox share the same call centers for collection purposes.
Source: SOPRA Group
The.development.of.synergies.between.specialist.consumer.finance.companies.and.retail.banks.helps.to.reduce.the.pressure.on.margins.with.a.more.streamlined.organisation.thanks.to.a.better.division.of.work,.a.focus.on.value.added.activities,.a.reinforcement.of.risk.management.procedures,.the.acquisition.of.new.consumers,.a.better.customer.follow-up,.a.wider.range.of.services,.an.access.to.more.liquidity,.an.access.to.partnerships.put.in.place.(in.particular.at.points.of.sale).and.a.reduction.in.overhead.costs.
The.successful.implementation.of.synergies.between.retail.banks.and.specialist.consumer.finance.companies.presupposes.that…...•....the.role.of.each.party.is.clearly.defined.at.central.and.local.levels;...•....the.independence.of.the.specialist.consumer.finance.company.is.guaranteed:.....-.–....Financial.autonomy.which.assumes.that.it.has.the.necessary.liquidity.thanks.to.a.diversified.
offering.and.the.optimisation.of.its.customer.portfolio......-–..The.possibility.to.develop.synergies.outside.the.group.......-–...The.possibility.for.specialist.consumer.finance.companies.to.offer.banking.services.and.take.
deposits.
19
III. Actions implemented as part of a change strategy
1. Diversifying the consumer credit offering
Specialist.consumer.finance.companies.can.diversify.their.offerings.in.various.ways:.
..1....Diversification.by.boosting.balance.sheet.deposits.(collecting.deposits,.savings.accounts).as.a.way.of.reducing.the.cost.of.liquidity.and.retaining.customers.when.they.have.repaid.a.loan..
..2....Diversification.into.payment.services.as.a.way.of.developing.into.high-potential.markets,.such.as.m-payments.and.e-payments,.especially.in.emerging.countries.
..3....Diversification.into.non-life.insurance.products,.such.as.motor.insurance.and.home.insurance.would.enable.specialist.consumer.finance.companies.to.engage.in.cross-selling.and.retain.their.customers.via.insurance.products.closely.linked.to.car.loans.or.loans.to.finance.home.improvement.work..
..4....Diversification.into.the.credit.market.consists.for.specialist.consumer.finance.companies.in.extending.their.activities.to.microcredit.in.emerging.countries..Microcredit.is.not.a.traditional.activity.for.specialist.consumer.finance.companies.since.it.targets.a.market.of.entrepreneurs.and.individuals,.but.it.could.be.profitable.given.their.expertise.in.project.risk.analysis.and.their.networks.in.the.field.(distributors.decentralised.from.micro-financing.institutions)..This.diversification.would.enable.specialist.consumer.finance.companies.to.target.specific.customers.in.emerging.countries,.while.participating.in.the.fight.against.social.exclusion.and.promoting.responsible.lending.
..5....Debt.consolidation.(mortgages.and.other.debt).is.increasingly.becoming.the.domain.of.banks.which.use.it.as.a.signature.product..In.this.regard,.specialist.consumer.finance.companies.could.adopt.a.distributor.model.(business.introducer).for.their.parent.company.or.banking.partners.
Universes1. Savings business diversification2. Payment business diversification3. Insurance business diversification4. Credit business diversification5. Loan & mortgage debt consolidation diversification
Credit consommation
Life Insurance
SavingsPayment
Mortgage
Home
Auto
Debt consolidation loan
Micro Credit
Universe
1Universe 2
Universe 3
Universe 4 Universe 5
12
3
4
5
FIVE AREAS OF DIVERSIFICATION FOR CONSUMER CREDIT OFFERINGS
Source: SOPRA Group
20
CONSUMER CREDIT: A RAPIDLY CHANGING LANDSCAPE
2. Positioning on peer-to-peer lending communities
Peer-to-peer.lending.communities.bring.together.lenders.and.borrowers.in.P2P.transactions.via.an.Internet.platform..The.intermediary.which.operates.the.Internet.platform.does.not.bear.the.the.risk.(except.for.its.own.contribution).since.the.risk.is.assumed.directly.by.the.community.of.lenders.
P2P.lending.communities.can.be.an.additional.lever.for.traditional.specialist.consumer.finance.companies:..•....First,.the.offering.is.attractive..For.lenders,.P2P.community.lending.offers.a.more.attractive.risk/
return.trade-off.than.a.market.investment,.while.for.borrowers.the.rate..of.P2P.loans.is.lower.than.the.market.rate..
..•....Secondly,.the.model.is.cost-effective.and.relatively.risk-free..The.commission.(or.application.fee).charged.by.the.intermediary.is.deducted.directly.from.the.amount.disbursed.to.the.borrower.at.the.time.of.the.transaction..The.liquidity.costs.are.lower.because.of.the.limited.amount.lent.in.its.own.name.by.the.specialist.consumer.finance.company:.the.total.lent.directly.by.the.specialist.consumer.finance.company.on.the.platform.is.determined.in.advance..This.amount.may.be.low.since.it.is.intended.above.all.to.reassure.customers.about.the.quality.of.the.loans..The.risk.cost.for.the.specialist.consumer.finance.company.is.low.because.the.risk.is.directly.borne.by.the.lenders.
..•....Finally,.P2P.lending.communities.can.be.set.up.rapidly.by.these.companies.because.they.are.very.familiar.with.ALM.regulations.for.lenders.and.the.credit.chain.for.borrowers.(scoring,.credit.bureaus.and.eligibility.criteria).
Man
agem
ent o
f the
ac
cept
ance
of f
unds
from
priv
ate
lend
ers
Management of the provision of funds based on investment
orders from lenders
Management of customers repayment based on a model of risk sharing
The traditional value chain of credit institutions is doubled because of the management of lenders...
Lendersubscription Acceptance Validation
Borrowersubscription Acceptance Validation Utilization Recovery
Onlinesubscription
Assessing instantly the creditworthiness
Final decision Customer management Return on debt
Creation of customer file Instant response Funds collection
and provision
Repayment (private borrowers to private lenders)
Traditional activity Activities relative to intermediary
CREDIT APPROVAL PROCESS IN PEER-TO-PEER LENDING
Source: SOPRA Group
21
The.marketing.of.P2P.lending.communities.supposes,.on.the.one.hand,.the.creation.of.a.new.brand.(because.of.the.difference.in.lending.rates.between.a.traditional.credit.offering.and.P2P.lending.and.to.avoid.confusion.among.consumers).and,.on.the.other.hand,.an.exclusively.online.distribution.model.to.keep.costs.low..For.specialist.consumer.finance.companies.this.involves,.therefore,.putting.in.place.multi-brand.and.multi-product.management.procedures.and.closely.monitoring.customer.and.lender.acquisition.costs..
3. Capitalising on the opportunities created by Internet and mobile channels for traditional credit providers
Unlike.other.industries,.the.consumer.credit.sector.has.not.been.marked.by.an.influx.of.new.entrants.with.attractive.pricing.models.offering.little.or.no.service..A.pure.player.could.cut.its.distribution.and.management.costs.thanks.to.its.Internet.and.mobile.positioning..However,.such.a.model.is.not.really.feasible.for.new.entrants.since.the.credit.management.costs.are.low.in.comparison.with.the.cost.of.liquidity.and.risk:.there.is.limited.scope.for.making.substantial.cuts.in.the.interest.rates.charged.to.borrowers..Moreover,.a.low-cost.(full.web.or.full.mobile).distribution.model,.without.any.human.interaction,.would.encounter.problems.because.of.the.high.risk.cost.(especially.during.the.loan.approval.and.collection.phases).
Nonetheless,.specialist.consumer.finance.companies.could.reinforce.their.multichannel.strategy,.in.particular.on.the.Internet.(e-credit,.m-credit),.and.set.up.partnerships.with.new.e-commerce.players.and.the.retail.sector.which.is.undergoing.a.revolution.(see.Chapter.3).
4. Assessing whether it would be appropriate to withdraw from certain countries
When.market.conditions.are.unfavourable,.the.alternative.to.finding.synergies.with.banks,.reducing.costs.or.making.a.modest.investment.in.low-potential.countries.is.to.exit.the.country.in.question.
The.underlying.principle.behind.this.strategy.is.therefore.for.specialist.consumer.finance.companies.to.refocus.on.those.activities.where.they.are.the.most.successful.(“do.more.what.you.do.best”).on.growth.markets..These.actions.need.to.be.carried.out.in.consultation.with.the.parent.company.(retailer.or.bank).for.which.consumer.credit.is.only.part.of.its.overall.offering.
5. Switching to variable costs via outsourcing
In.order.to.change.their.business.model.and.cut.their.costs,.specialist.consumer.finance.companies.have.the.possibility.to.outsource.or.industrialise.their.back.office.and.their.information.system..Outsourcing.enables.specialist.consumer.finance.companies.to.refocus.on.an.activity.of.distributing.credit,.while.industrialisation.enables.them.to.remain.producers.and.even.become.service.providers.for.third.parties.(see.Chapter.4).
22
CONSUMER CREDIT: A RAPIDLY CHANGING LANDSCAPE
IV. Renewed governance
1. Reinforcing control frameworks and the role of central versus local
The.role.of.central.versus.local.has.been.reinforced.in.recent.years,.with.closer.monitoring.of.acceptable.credit.risk.levels.and.tighter.controls.on.operational.risk.management.and.more.generally.on.all.profitability.levers.
2. Transposing corporate social responsibility issues into responsible lendingResponsible lending is a means of…
..•...improving.the.reputation.of.consumer.credit.which.has.suffered.as.result.of.the.subprime.crisis;
..•....improving.the.pool.of.eligible.consumer.credit.borrowers.by.changing.segmentation.criteria.(fixed-term.contracts.of.employment.and.seniors);
..•....creating.market.opportunities.by.linking.the.financing.of.purchases.of.durable.goods.and.traditional.credit.offerings.(bonuses.for.the.purchase.of.low.carbon-emission.cars,.etc.);
..•....investing.in.the.quality.of.the.long-term.consumer.relationships.
For.specialist.consumer.finance.companies,.responsible.lending.means.complying.with.the.processes.described.below..
ROLE OF CENTRAL (VS. LOCAL) BEFORE AND AFTER THE CRISIS
Source: SOPRA Group
Pre-crisis Post-crisis
Relative independence of credit institutions owned by retail banks
Strong local autonomy in terms of strategy, target customers, information systems and
organisation as long as the credit institutions were profitable
More synergies as a result of closer integration between retail banks
and consumer finance companies
Operational control by the parent company of the companies concerned: product and price strategy; credit risks; costs cutting; operational efficiency (internal platforms) and compliance
requirements (responsible lending, etc.).
23
A.responsible.lending.approach.involves.publishing.completely.transparent.new.indicators,.such.as.the.monthly.refusal.rate,.adopting.new.practices,.such.as.explaining.the.reasons.why.consumer.loan.applications.are.rejected,.and.defining.wider.eligibility.rules..
In.conclusion,.responsible.lending.is.not.a.revolution,.but.is.part.of.the.transformation.of.the.business.model.when.it.is.linked.to.(or.combined.with).regulatory.changes.and.societal.changes..
Putting a responsible lending approach at the centre of the company’s project
Managing performance according to corporate social responsibility standards
Dialoguing with customers
Dialoguing with stakeholders(consumer associations)
Adapting processes Training all the staff involved in the value chain
Being more transparent and providing indicators such as rejection rates
• Managing customers by identifying events which indicate a potential future problem• Adapting operational performance criteria
To improve credit offerings and market acceptance
To offer a high-quality experience to new consumers
Spending time qualifying customersExplaining to customers why their loan request has been rejected and how they could become eligible
CHANGES TO THE CREDIT BUSINESS MODEL LINKED TO THE IMPLEMENTATION OF A RESPONSIBLE LENDING APPROACH
Source: SOPRA Group
24
CONSUMER CREDIT: A RAPIDLY CHANGING LANDSCAPE
To.grow.NBI.per.customer.it.is.necessary.to.increase.customer.and.partner.satisfaction.via.a.renewed.customer.experience,.better.suited.to.the.new.media.and.new.consumer.behaviour.patterns..The.drivers.of.increased.customer.value.are.examined.below:..•....Innovation.and.the.development.of.new.offerings.for.retailers.and.business.introducers;..•....Innovation.and.the.development.of.new.offerings.for.consumers,.in.particular.multichannel.
relations.and.a.responsible.credit.offering,.by.improving.the.quality.of.the.customer.experience.
I. Innovation and development of new offerings for retailers
1. Dematerialisation at the point of sale helps to cut costs and save time
Recent.changes.in.the.European.regulatory.framework.have.made.credit.processing.and.approval.processes.more.burdensome..Paperless.procedures,.for.example.obtaining.the.customer’s.signature.on.a.tablet,.would.facilitate.and.accelerate.part.of.the.formalities.and.thereby.reduce.costs:...•....Retailers.save.on.paper...•...The.company.saves.time.and.considerably.reduces.the.costs.involved.in.transmitting.paper.
documents,.form-filling.and.archiving.
.In.France,.several.point-of-sale.paperless.initiatives.have.already.been.piloted.and.are.likely.to.be.rolled.out.on.a.wider.scale.in.the.international.subsidiaries.of.the.major.players.
Chapter 3: increasing customer value
DEMATERIALISATION OF THE CREDIT ORIGINATION AND APPROVAL PROCESS IN FRANCE
Source: SOPRA Group
* Based upon a pilot of 400 retailers produced by a bank
Instruction process following new regulation Simplified process after dematerialization
3 documents to be signed by the
customer
A single document containing customer’s agreement to have all
his/her files dematerialized
Front Office Processing time nearly divided
by 2 at POS*
Middle Office (Bank)Transmission and
archiving time divided approximately by 4*
RESULTS
Personal information file
Dialogue file
Contract
Illustration in
France
25
2. Capitalising on e-commerce and m-commerce to develop new offerings for retailers
Despite.the.buoyant.growth.of.e-commerce.between.2009.and.2011,.with.an.increase.of.18.2%.versus.2010,.and.a.European.e-commerce.market.valued.at.more.than.200.billion.euros.in.2011.(according.to.the.London-based.Center.For.Retail.Research),.specialist.consumer.finance.companies.have.not.fundamentally.changed.their.value.proposition.next.to.their.partners..E-retailers.wanting.to.install.a.mean.of.payment.linked.to.a.credit.offering.must.contact.the.specialist.consumer.finance.company.via.a.traditional.approach.(involving.meetings.with.sales.teams).and.will.be.offered.a.solution.which.consists.in.offering.customers.the.possibility.to.pay.in.several.times.thanks.to.their.credit.card..Specialist.consumer.finance.companies.therefore.could.maintain.sales.teams.to.market.their.products.to.large.and.medium-sized.retailers.but.it.would.not.be.cost-effective.under.these.conditions.to.target.the.vast.number.of.small.e-retailers..
However,.in.order.not.to.miss.out.on.the.exceptional.market.opportunities.created.by.e-commerce,.some.companies.have.developed.innovative.solutions..Two.types.of.solutions.aimed.at.retailers.are.noteworthy:...•...Specific.solutions.designed.for.large.retail.chains:.for.example,.Crédit.Agricole.Consumer.
Finance.has.supported.La.Redoute.(leading.French.e-commerce.operator.which.concludes.the.bulk.of.its.sales.online).by.developing.a.digital.wallet.service,.which.simplifies.and.accelerates.payments,.and.enables.customers.to.benefit.from.credit.terms.when.making.payment..This.wallet.replaces.the.traditional.physical.credit.card.
..•...Packaged.solutions.which.are.accessible.to.any.retailer.that.wants.to.offer.credit.terms.to.its.online.customers.and.thereby.increase.significantly.its.sales..These.solutions.do.not.require.customers.to.have.a.physical.credit.card..The.e-retailer.submits.its.partnership.application.directly.online.and.receives.a.reply.from.the.specialist.consumer.finance.company.which.then.sends.it.the.packaged.solution.to.be.downloaded.and.installed.on.the.e-retailer’s.website..This.solution.does.not.involve.organising.meetings.with.the.specialist.consumer.finance.company.and.therefore.generates.significant.time.savings.
INTERNET PLATFORM (1EURO.COM) DESIGNED BY A FRENCH SPECIALIST CONSUMER FINANCE COMPANY (COFIDIS) TO OFFER AN E-CREDIT SOLUTION TO E-RETAILERS
Source: SOPRA Group
For the specialist consumer finance companyAn Internet credit platform enabling it to:
• increase its visibility via e-commerce partnerships• capture new customers, not captured via credit cards, at a lower cost
• reduce marketing costs and develop partnerships at a lower cost• target both large and small e-retailers
For e-consumersPayment options in several instalments without the
need to have a revolving credit card
For e-retailersPossibility to offer payment facilities and
self-financing solutions which enable them to increase their online sales
26
CONSUMER CREDIT: A RAPIDLY CHANGING LANDSCAPE
II. Innovation and development of new offerings for consumers
The.economic.crisis.and.new.consumption.patterns.have.impacted.on.consumer.expectations.
1. Improving the quality of the customer experience
Customers.want.to.optimise.their.purchasing.experience.based.on…..•...access.to.information.before.purchasing.that.enables.them.to.make.the.right.choice;..•....the.possibility.to.consult.their.online.networks.to.obtain.feedback.on.the.products.and.services.
that.they.are.considering.buying;..•...access.to.the.necessary.means.to.make.purchases.wherever.they.are;..•...receiving.suitable.advice.either.at.the.point.of.sale.or.via.remote.channels;..•...an.enhanced.check-out.experience.thanks.to.better.designed.and.more.welcoming.physical.
points.of.sale..
Specialist.consumer.finance.companies.need.to.transform.the.traditional.transactional.model.into.a.relationship-driven.model,.use.digital.channels.to.optimise.and.personalise.the.customer.lifecycle.(from.customer.acquisition.to.supporting.customers.in.the.management.of.their.loans.–.see.illustration.13).and.improve.the.physical.structures.distributing.their.products.(see.illustration.on.page.27)...
BORROWER EXPECTATIONS AND MEANS OF SATISFYING THESE EXPECTATIONS
Source: SOPRA Group
Borrower expectations Means
A better quality customer experience
More responsible consumption
To interact with specialist consumer finance companies on their offerings and to contribute to the development of products and services
To have multi-channel access to services, in particular via mobile channels
• Low prices• Transparent and flexible offerings• Simplified, secure access to services• A value proposition segmented by type
of consumers, taking recent societal changes into account
• Advice tailored to the customer’s needs and the coordination of communities via social networks
• More points of contact with customers (via social networks, mobile devices, telephone, the Internet, etc.)
27
This.is.how.Metro.Bank.illustrates.the.transformation.to.be.implemented..Metro.Bank’s.analysis.is.based.on.the.conviction.that.consumers.attach.more.importance.to.the.quality.of.service.than.to.the.interest.rate..The.pillars.of.Metro.Bank’s.strategy.to.develop.a.new.customer.experience.are.therefore…
OPTIMISED CUSTOMER ACQUISITION AND SUPPORT PLAN
THE CONCEPT-STORES DEVELOPED BY METRO BANK
Source: BNP PF - Efma Conference – Changing models in the credit sector
Mutichannel salesMaintaining a local presence via local branches while increasing access via digital channels
Capitalising on all contact opportunities (emails, social networks, video, etc.)
An innovative customer visionDeveloping emotional ties between consumers and their bank by focusing on brand attachment
Interconnecting all channels in order to trace the history of all customer interactions
Automated intelligence for following up all channel/customer interactions
Practical experience and servicesIntroducing simple but convincing services
Innovative branchesRolling out innovative branch models as a way of changing customer perceptions of the banking sector: fun atmosphere, etc.
Increasing value added interactions with branch staff by freeing up time for sales and advice
Recruiting staff on the basis of their customer service skills rather than their knowledge of financial services skills
Source: SOPRA Group
@ home with family/friends @ the office
When shopping
While moving
I’m watching TV, listening to the
radio during my breakfast while
checking weather forecasts and travel
I’m watching TV, surfing on the
Internet or calling friends
I’m in my convenience store
I’m in the public transportation or in
my car
I’m in the public
transportation or in my car I’m in the office and I’m
surfing on the Internet during my lunch time
I’m looking for my lunch at the food corner ( lunch time)
28
CONSUMER CREDIT: A RAPIDLY CHANGING LANDSCAPE
Metro.Bank’s.growth.model.is.based.on.a.high.level.of.customer.satisfaction.
Another.innovative.example.is.also.based.on.a.multichannel.offering:.the.specialist.consumer.finance.company.Sberbank.(ex.Deniz.Bank),.based.in.Turkey,.has.focused.on.reactivity.and.undertakes.to.respond.to.a.customer.loan.request.within.5.or.10.minutes.via.an.ATM,.SMS.or.by.telephone..This.value.proposition.is.based.on.a.very.high-quality.central.consumer.credit.database..
2. Developing responsible credit offerings
Wrongly.or.rightly,.specialist.consumer.finance.companies.have.been.blamed.for.the.excessive.debt.problems.of.part.of.their.customers..This.explains.why.consumer.organisations.and.the.public.authorities.have.called.for.more.responsible.lending.practices..In.most.sectors,.corporate.social.responsibility.is.focused.on.key.issues.such.as.the.environment,.health.and.well-being..In.the.financial.services.sector,.these.issues.also.include.the.need.to.inform.and.educate.customers.and.prevent.problems.of.overindebtedness.
Companies.have.undertaken.numerous.initiatives.to.demonstrate.their.responsible.behaviour......•...adapting.their.offerings.to.make.them.less.risky.and.easier.to.understand.for.customers;...•....increasing.their.efforts.as.regards.information,.financial.education.and.raising.customer.
awareness.about.the.financial.impact.of.loans;..•...supporting.their.customers.throughout.their.lifecycle;..•....developing.new.offerings.that.respond.to.customer.environmental.concerns.and.responsible.
consumption.expectations.
To.educate.their.customers,.several.companies.have.launched.variable.rate.credit.cards.which.reward.the.repayment.performance.of.their.customers:.consumers.who.meet.the.repayment.schedule.are.rewarded.by.an.interest.rate.reduction,.which.can.even.result.in.the.last.repayment.instalments.beings.waived..On.the.other.hand,.in.the.event.of.a.payment.default,.the.interest.rate.is.increased.
In.order.to.integrate.corporate.social.responsibility.criteria,.ING.has.launched.an.environmentally.responsible.loan.which.enables.consumers.who.take.out.a.car.loan.to.benefit.from.an.advantageous.rate.if.they.buy.a.low-carbon.emission.car..The.aim.of.this.initiative.is.to.stimulate.the.“green”.car.market,.for.both.new.and.second-hand.cars.
3. Capitalising on the new distribution channels
a. E-credit and m-credit Although.e-commerce.and.m-commerce.are.growing.rapidly.at.European.level,.the.fact.remains.that.penetration.rates.vary.considerably.from.one.country.to.another:.for.example,.in.Europe,.online.sales.in.Italy.represent.2%.of.retail.sales.versus.11%.in.the.United.Kingdom..
From.e-commerce.to.e-credit,.it.is.just.a.few.easy.steps….that.consumers.are.reluctant.to.take..The.first.obstacle.to.e-credit.is.linked.to.consumer.fears.about.online.payment..That.is.why.Compass,.a.specialist.consumer.finance.company.in.Italy,.has.developed.a.physical.credit.card.with.an.integrated.mini-keyboard.and.screen..This.system.ensures.maximal.security.for.customers.and.enables.the.company.to.guarantee.transactions.even.in.the.case.of.fraud..Financing.requests.are.submitted.directly.online.via.the.consumer’s.personal.space.or.via.a.dedicated.smartphone.app..A.loan.simulator.enables.consumers.to.view.the.financing.plan.corresponding.to.their.online.loan.application..The.second.obstacle.to.e-credit.is.linked.to.the.type.of.credit.(for.example,.revolving.credit).which.calls.for.advice.and.high.degree.of.expertise..
29
There.are.also.stumbling.blocks.for.finance.companies,.namely.the.high.risk.level.of.the.customers.captured.and.questions.regarding.the.validity.of.electronic.signatures.for.credit.offers..
Each.country.has.responded.in.its.own.way.to.these.obstacles:.putting.in.place.a.central.consumer.credit.database,.legislation.recognising.online.electronic.signatures.and.secure.e-payments.with.market.standards..
Noteworthy.specific.company.initiatives.include.....•...facilitating.seamless.access.to.transactional.services.(viewing.account.balances,.transfers,.etc.).
via.mobile.apps;...•...proposing.products.specifically.online;...•...developing.partnerships.with.mobile.virtual.network.operators.(MVNO).in.order.to.close.the.gap.
between.e-credit.and.m-credit.and.expand.the.brand.territory..For.example,.Cofidis,.a.specialist.consumer.finance.company.in.France,.distributes.straightforward,.commitment-free,.budget-priced.mobile.packages,.adapted.to.its.customers..
b. Social mediaToday,.almost.75%.of.teenagers.and.young.adults.(18-25.year.olds).use.social.networks.in.Europe.(Facebook,.Twitter,.Linkedin,.etc.)..In.this.regard,.it.is.preferable.to.use.the.wider.concept.of.social.media,.which.includes.not.only.social.networks.but.also.forums,.blogs,.collaborative.platforms.(such.as.Wikipedia).and.multimedia.platforms.(such.as.YouTube)..According.to.Gartner’s.projections,.by.2015,.50%.of.Internet.sales.will.be.generated.by.a.presence.on.social.media..Social.media.have.therefore.become.not.only.a.key.challenge.for.specialist.consumer.finance.companies,.but.also.an.opportunity.to.....•...interact.with.customers.constantly.connected.about.the.services.offered.and.about.prevention,.
without.the.specialist.consumer.finance.company.intruding.into.the.life.of.consumers;..•...satisfy.consumer.demand.for.a.multichannel.experience;...•...improve.their.online.reputation.provided.that.they.really.listen.to.consumers.and.that.consumers.
can.obtain.rapid.and.appropriate.answers;..•...enhance.customer.loyalty,.since.satisfied.consumers.will.spontaneously.defend.their.bank.in.
response.to.negative.comments.about.it.
Specialist.consumer.finance.companies.are.still.in.the.initial.stages.of.adopting.this.channel:.they.monitor.comments.posted.about.them.on.social.media.in.order.to.defend.their.e-reputation.and.define.their.value.creation.strategy..The.challenge.is.to.improve.their.business.performance.via.a.carefully.considered.and.consistent.presence.on.the.various.social.media.To.move.to.the.next.level,.specialist.consumer.finance.companies.should.ideally.respect.several.rules:...•...Adopt.the.same.overall.strategy.on.social.media.as.on.their.other.channels,.while.attempting.to.
maintain.the.same.image.and.disseminating.homogenous.information...•....Communicate.with.consumers.by.involving.employees,.who.are.the.best.spokespersons.of.their.
company,.and.by.training.staff.in.the.use.of.these.new.media...•...Offer.new.services.to.consumers.(for.example,.warning.them.via.Twitter.about.account.movements)...•....Involve.consumers.in.the.development.of.products.and.services..
In.conclusion,.although.specialist.consumer.finance.companies.are.very.much.aware.that.they.need.to.become.more.involved.on.social.networks,.they.are.still.undecided.about.the.best.way.to.social.media.as.a.source.of.business.in.their.own.right...
30
CONSUMER CREDIT: A RAPIDLY CHANGING LANDSCAPE
I. Switch to variable costs and reduce middle and back office costs
1. Switching to variable costs via outsourcing
Specialist.consumer.finance.companies.are.increasingly.outsourcing.or.industrialising.their.back.office.and.their.information.and.operating.systems,.depending.on.the.strategy.adopted,.in.order.to.optimise.their.operational.efficiency..Outsourcing.enables.financial.institutions.to.refocus.on.an.activity.of.distributing.credit,.while.industrialisation.enables.them.to.remain.producers.and.even.become.service.providers.for.third.parties.(including.for.competitors),.and.to.reduce.the.unit.cost.of.their.credit.management.
Furthermore,.some.support.functions,.which.are.not.business-specific.or.strategic,.are.ideally.suited.to.outsourcing:.notably,.accounting,.facilities.management.(property.management,.purchasing,.mail,.etc.),.as.well.as.human.resources.(industrialisation.of.payroll,.etc.),.provided.that.the.specific.regulatory.constraints.of.the.countries.concerned.are.taken.into.account.
2. Pooling back offices to enhance the quality of service by creating international industrial platforms
a. Advantages of pooling activities for the consumer credit industry Consumer.credit,.which.is.one.of.the.most.industrial.segments.of.the.banking.and.parabanking.sector,.is.structurally.geared.to.capturing.the.advantages.of.pooling.namely:.economies.of.scale,.thanks.to.the.centralisation.of.the.activity;.improved.productivity;.and.cost-sharing.as.regards.the.implementation.of.changes.(regulatory,.etc.)..It.also.enables.companies.to.deliver.a.standardised.quality.of.service,.by.benchmarking.best.practices,.achieving.crucial.mass.for.back.offices.and.centralising.expertise..Lastly,.it.enables.companies.to.improve.their.operational.risk.controls.by.....•...improving.anomaly.detection.and.processing.(better.qualification.and.capitalisation.on.other.
experiences,.etc.);..•...facilitating.the.implementation.of.regulatory.and.product.changes;..•...implementing.in-depth.controls.
Chapter 4: towards greater operational efficiency
Industrialisation
Contract management & Credit servicing
Internalisation
Credit underwriting
Acceptance policy & risk management
Internalisation
Organisation FinanceLitigation
Information system Accounting
HR Administration
Outsourcing
Marketing Debt collection
Business activity Support functions
BusinessSpecificAssets
NonSpecificAssets
Production & support activities Strategic activities
FRAMEWORK OF ACTIVITIES WHICH COULD BE INDUSTRIALISED OR OUTSOURCED
Source: SOPRA Group
31
b. Advantages of international poolingInternational.pooling.involves.grouping.core.business.activities.(middle.and.back-office),.sharing.information.systems.via.centralised.platforms.and,.sometimes,.constructing.regional.hubs.to.handle.support.activities.(HR,.accounting,.regulatory.matters).
This.pooling.is.fully.in.line.with.the.challenges.facing.specialist.consumer.finance.companies.which.want.to.reduce.their.costs.and.rationalise.their.international.networks,.which.are.based.on.a.mixture.of.acquisitions.and.specifically.formed.foreign.entities..Nonetheless,.there.has.been.little.pooling.as.yet.of.back.offices.in.the.consumer.credit.industry.in.Europe.and.most.of.the.initiatives.in.this.area.have.concerned.intra-country.back.office.mergers.(for.example.the.pooling.of.credit.management.and.collection.implemented.by.BNP.PF.and.Société.Générale.in.the.countries.where.retail.banks.and.specialist.consumer.finance.companies.co-exist).
c. International pooling: the obstacles and driversThe.current.low.level.of.pooling.in.Europe.can.be.attributed.to.the.importance.of.the.obstacles.which.companies.face,.since.international.pooling.cannot.be.implemented.across.all.activities.in.all.countries:...•...The.lack.of.integration.of.credit.legislation.within.the.EU.complicates.matters..Although.Brussels.
wants.to.harmonise.the.practices.of.specialist.consumer.finance.companies.at.European.level,.the.fact.remains.that.national.regulators.tend.to.change.their.laws.according.to.their.country’s.specific.issues.
..•...Not.all.activities.can.be.pooled.geographically.because.of.very.significant.differences.as.regards.market.research.costs.and.IT.development.
.
Key drivers
National levelLocal level
• Physical proximity• Need for reactivity
• High volumes• High fixed costs• High investments• Rare expertise• Little need for customer physical proximity at B/Office level
National level
• High volumes• High fixed costs• High investments• Rare expertise• Little need for closeness to the customer, the workforce and management
• Complexity – Adaptation of the back-office to diverse product offerings – Different IS to • Low reactivity
• Complexity – Adaptation of the back-office to diverse product offerings – Different IS – National banking regulation – Protection of customer data – Different languages and cultures – Different payroll costs• Low reactivity
Obstacles
Financial gains
INTERNATIONAL POOLING: DRIVERS AND OBSTACLES
Source: SOPRA Group
32
CONSUMER CREDIT: A RAPIDLY CHANGING LANDSCAPE
d. Activities which can be pooled internationally by specialist consumer finance companiesThe.objective.of.pooling.activities.internationally.is.to.industrialise.them.while.respecting.each.country’s.specific.characteristics..Some.activities.lend.themselves.more.readily.to.pooling.than.others:..•...Core.business.activities:.credit.origination.and.management,.soft.collection.via.call.centers.
provided.that.this.is.not.detrimental.to.the.customer.relationship.(see.chart.below)...•...Support.functions:.network.assistance,.accounting,.facilities.management.and.HR.(see.chart.on.page.33)..
SPOTLIGHT ON THE CHARACTERISTICS OF THE ACTIVITIES OF SPECIALIST CONSUMER FINANCE COMPANIES
Activities Critical Industrialisation process Need for Customer Strategic National size expertise sensitivity importance constraint
Credit acceptance +++ High Average High High Average
Credit management ++ High Average Average Average Average
Soft collection ++ Strong industrialisation in process Average High High Average
Hard and legal collection ++ High Average Average Average High
Savings + High Average High Average Average
Activities Possibility of international pooling
Credit Acceptance Yes, while leaving activities under the country’s responsibility (scoring, etc.)
Credit Management Yes
Soft Collection Yes, but without undermining the customer relationship
Hard and Legal Collection Not recommended because of the need for close contact with the parties involved (bailiffs, etc.)
Savings Not recommended because of the lack of critical size
Source: SOPRA Group
Driver of pooling Neutral Obstacle of pooling
33
Sopra.Group.is.convinced.that.the.international.pooling.potential.has.not.been.sufficiently.explored..Credit.management.should.evolve,.in.the.same.way.as.payment.and.payment.terminal.activities,.towards.regional.platforms,.with.projects.beginning.in.a.limited.scope.in.the.framework.of.a.more.ambitious.medium-term.vision..
II. Managing debt collection to master the cost of credit risk
1. Radically transforming the collection activity
Although.the.urgent.measures.adopted.during.the.crisis.focused.on.credit.origination.and.approval,.in.order.to.reduce.the.cost.of.risk.on.a.lasting.basis,.companies.will.need.above.all.to.upgrade.and.radically.transform.their.collection.processes.to.guarantee.short-term.debt.collection.rates.and.ensure.their.sustainability.over.the.medium.term.
Significant.performance.differences.can.exist.between.companies:
SPOTLIGHT ON THE CHARACTERISTICS OF THE SUPPORT FUNCTIONS OF SPECIALIST CONSUMER FINANCE COMPANIES
Activities Critical Industrialisation process Need for Customer Strategic National size expertise sensitivity importance constraint
Newtork assistance +++ High High High Average Low
Accounting +++ High High Average Average High
Facilities management ++ Average Average Low Average Low(property management; purchases; mail)
HR ++ High Average Low Average High for payroll
Finance + Average High High Average Average
Organisation and project + Average High Average Average Lowmanagement
Marketing + Low Average High High High
Activities Possibility of international pooling
Network assistance Yes, but without undermining the customer relationship
Accounting Yes, subject to taking regulatory constraints into account
Facilities management Yes
HR Yes, subject to taking regulatory constraints into account
Finance Not recommended because of the lack of critical size
Organisation and Not recommended because of the lack of critical size Project Management
Marketing Not recommended because of the strategic importance and market knowledge
Driver of pooling Neutral Obstacle of pooling
Source: SOPRA Group
34
CONSUMER CREDIT: A RAPIDLY CHANGING LANDSCAPE
The.downward.trend.in.the.cost.of.risk.means.that.companies.must.master.debt.collection.rates:.the.effectiveness.of.collection.processes.has.a.direct.impact.on.the.level.of.risk.provisions.calculated.on.a.monthly.basis.in.accordance.with.IFRS.standards..This.effectiveness.influences.transfers.from.one.past-due.bucket.to.another.and.therefore.the.level.of.outstandings.per.past-due.bucket..It.is.to.be.noted.that.each.past-due.category.is.subject.to.a.different.level.of.provisions..Any.improvement.in.the.debt.collection.rate.results.in.an.immediate.fall.in.the.level.of.provisions.(and.vice.versa).
Debt.collection.rates.impact.on.development.strategies:.the.effectiveness.of.collection.processes.influences.to.some.extent.the.approval.strategy.and.therefore.the.projected.level.of.production..The.effectiveness.of.debt.collection.also.affects.the.profitability.of.the.business.models.and.the.related.development.choices.via.calculations.of.capital.consumption.in.accordance.with.Basel.II.standards..Although.the.probability.of.default.(PD).depends.in.part.on.the.loan.approval.policy.and.in.part.on.the.effectiveness.of.debt.collection,.estimating.the.final.loss.given.default.(LGD).mainly.reflects.the.effectiveness.of.collection.processes..
soft 2.5 months
75%
83%90%
pre-litigation 2.5 months litigation 36 months
soft 1.5 months
67%
phase III 2 months
71.6%
Phase IV 1.5 months
72.2%
litigation 36 months
80%
COMPARISON OF THE DEBT COLLECTION RATES OF TWO FINANCIAL INSTITUTIONS WITH SIMILAR BUSINESS MODELSamounts recovered as % of amounts due
Source: SOPRA Group
35
Debt.collection.rates.depend.on.the.optimisation.of.all.the.collection.process.levers:
Debt.collection.rates.depend.on.the.twofold.requirements.of.operational.excellence.and.strategic.analysis.capacity:...•...Operational.excellence:.......-.–....The.debt.collection.rate.depends.on.the.company’s.capability.to.process.large.volumes.on.an.
industrial.scale,.while.ensuring.that.quality.and.efficiency.requirements.are.satisfied.on.a.daily.basis.
......-.–...The.problems.handled.are.very.similar.to.those.of.a.contact.center.or.a.back.office..
..•....Strategic.analysis.capacity:
......-.–....The.diversification.of.segments,.products.and.channels,.combined.with.the.impact.of.the.economic.crisis,.require.companies.to.implement.increasingly.sophisticated.approaches,.backed.up.by.modelling.capabilities.for.past-due.customer.portfolios;.
......-.–....Specialist.consumer.finance.companies.must.implement.specific.actions,.and.measure.their.effectiveness,.for.each.past-due.bucket.in.order.to.avoid.“crazy.diagonal”.effects,.that.is.to.say.“systematic”.monthly.switches.from.one.bucket.to.the.next,.leading.to.legal.recovery.proceedings.being.instituted.six.months.after.the.default;.
......-.–....Specialist.consumer.finance.companies.are.increasingly.focusing.on.preventive.actions.to.detect.defaults.linked.to.“accidents.of.life”.involving.financially.“healthy”.customers..The.challenge.in.this.case.is.to.detect.weak.signals.of.a.possible.default.
LEVERS FOR IMPROVING DEBT COLLECTION RATES
Source: SOPRA Group
Organisation Processes
Information system HR profiles & sizing
Management Controls
Decision-making bodies
PERFORMANCE EVALUATION
36
CONSUMER CREDIT: A RAPIDLY CHANGING LANDSCAPE
2. Covering all the components of the value chain
A.typical.action.plan.for.upgrading.the.collection.processes.must.cover.all.the.components.of.the.value.chain:.
III. Urbanising the information system and reducing the total cost of ownership
1. Strong TCO differences
The.TCO.(Total.Cost.of.Ownership,.i.e..applications,.operations.and.the.IT.infrastructure).of.information.systems.varies.considerably.from.one.company.to.another,.depending.not.only.on.the.degree.of.urbanisation.and.the.obsolescence.of.applications,.but.also.on.the.strategic.positioning.of.the.consumer.credit.activity.(specialised.activity.or.retail.banking.product).
THE ISSUES TO BE SOLVED BY THE COLLECTION UPGRADE PLAN
Area Problems
Collection strategies • Differentiation of collection strategies by past-due bucket, customer segment, product & acquisition channel
• Changes in credit risk scores ( detection of weak signals)
• Implementation of debt rescheduling plans
Organisation • Organisational principles: soft, pre-litigation, legal/by past-due level
• Organisation of the supervision and coaching of debt collectors
• Outsourcing: calls after initial late payment, hard collection, etc.
Processes • Processing cases of “address unknown”
• Commitment and rescheduling processes
• Liaising with court officers
• Doorstep collection
Information system • Implementation of collection strategies
• Improved productivity and effectiveness of actions
• Automated checks
HR profiles & Sizing • Size of team per organisational entity and by past-due bucket
• Matching profiles with needs of key positions: team managers, supervisors, debt collectors
• Consistency of individual and collective performance indicators
• Aligning remuneration systems with performance needs
Management • Coordinating the debt collection rate (amounts collected) and risk provisions calculated according to IFRS standards (estimated and actual)
• Determining individual and collective performance indicators (monthly, weekly, daily)
• Drawing up a projected work schedule: matching the projected volume of activity and the level of necessary ressources
• Operational performance indicators: flow rates, promises of payment, promises kept, cash collected, etc.
Controls • 1st and 2nd level controls: commitments, rescheduling, outsourcing, allocation of customer payments
• Compliance: IFRS, Basel 2, bank regulations
Source: SOPRA Group
37
2. Positioning the company on the “Producer – Distributor” model
In.the.framework.of.their.strategies.to.develop.or.change.their.operational.model,.specialist.consumer.finance.companies.must.position.themselves.along.the.“Producer.versus.Distributor”.model.which.will.structure.their.strategy..
Monoline/SpecialistConsumerFinance
Company
Multiline/RetailBank
• Specific in-house core system enhanced with external bricks requiring large teams in internal IS departments• In-house hosting of operations and infrastructures• No pooling with the IS of the retail bank in the same country
Average TCO per loan or card of this group =(€10-€20 with the least efficient in excess of €20
• No urbanisation of the retail bank’s IS• Different legacy systems require considerable integration work• International network consisting of “small subsidaries” without and outsourcing or pooling of infrastructures or applications
Average TCO average per loan or card higherthan €10
• Specialised integrated software package covering all the functions in the chain with small-scale specific adaptations• Hosting and operated by the retail bank shareholder in the same country or outsourcing
Average TCO per loan or card of this group = €5with the most efficient round €2
• Credit platforms of large banks grouping together the loans of retail networks and specialist consumer finance companies and using multi-country, multi-entity and multi-currency software packages• IS split between distribution and production functions
Average targeted TCO less than €5 for creditplatforms under construction
High TCO per loan or card
Optimised TCO per loan or card
TCO PER LOAN OR CARD
Source: SOPRA Group
DISTRIBUTOR AND PRODUCER FUNCTIONS AND OBJECTIVES
Source: SOPRA Group
The Distributor-Producer model
The DistributorFocus on Business
• Customer relationship• Marketing and Distribution of Offerings• Time to Market• Prevention and management of Credit risks
The ProducerAchieve economies of scale and
mobilise productivity gains in order to attain the lowest possible unit cost for
the management of loans/cards
• Optimise processes • Industrialise management
• Manage the operational risk • Improve the quality of service
38
CONSUMER CREDIT: A RAPIDLY CHANGING LANDSCAPE
The.adoption.of.a.producer.or.distributor.model,.which.may.be.different.for.a.major.bank.depending.on.geographical.considerations,.has.a.strategic.influence.on.the.adoption.of.industrialisation.or.outsourcing.strategies..The.corresponding.business.plan.may.be.determined.by.the.development.strategy,.the.market.positioning.and.the.intangible.assets.of.the.consumer.finance.company,.as.summarised.in.the.table.below.
Loan.processing.platforms.under.construction.are.designed.according.to.the.“Producer-Multi-Distributors”.model.and.need.to.rely.on.an.urbanised.information.system.
POOLING OF IS: INDUSTRIALISATION OR OUTSOURCING?
Source: SOPRA Group
Construction of an internal Credit platform Outsourcing to industrial IS operators in Software as a Service mode
• Sufficient volumes and maturity of the activity (no “stop and go”)
• Several subsidiaries in mature countries (with high salaries) belonging to the same group and sharing the same high level of compliance requirements
• Urbanisation of the information system enabling the production and distribution functions to be decoupled
• Platform equipped with specialised multi-currency, multi-country & multi-entity software package
• Build-up (external growth) or organic growth strategy
• New entrant , start-up , non-traditional players launching a credit activity
• Emerging markets• Stop and go activities, subsidiaries in run-off
status or available for sale• Companies where credit is not a core
business (large retailers, Telco, etc.)• Low volumes • Weak internal expertise in consumer credit
specific information systems
39
3..Architecting.the.IS.on.the.basis.of.the.business.processes.Sopra.Group.is.convinced.that.the.software.packages.used.as.the.basis.of.information.systems.supporting.loan.processing.platforms.will.be.increasingly.architected.and.developed.on.the.basis.of.business.process.management.(BPM).and.decoupled.
Specialist financial institution
End customer/Partners Distributor of credit outosourcing the managment
B2C Credit
Internet Branch Mobile AgentsInternet Branch Mobile Agents
B2B Credit
Distribution
Financial subsidiary of a mass retailer
Internet Branch Mobile Agents
Distribution
Credit platform of a financial institution Credit processing platform constructed from an urbanised IS
Multi-markets; Multi-entities; Credit management
SaaS
THE PRODUCER-MULTI-DISTRIBUTORS MODEL
Source: SOPRA Group
• Simulations• Processing• Approval decision• Disbursement of funds
• Current servicing• Specific servicing• Periodic servicing
• Soft collection• Hard collection• Outsourcing to third party debt collectors
The solution is:
Credit management
Credit risk management
Processing & Origination Servicing Collection
• Management of guarantees • Customer liabilities database • Calculation and management of provisions
• Based on business processes • Supporting on multi-distributor credit platfrom • Configurable
ARCHITECTURE OF A SOFTWARE PACKAGE SOLUTION ENABLING “BUSINESS/IS” ALIGNMENT
Source: SOPRA Group
40
CONSUMER CREDIT: A RAPIDLY CHANGING LANDSCAPE
A.leader.in.the.European.consulting,.IT.services.and.software.development.markets,.Sopra.Group.generated.revenue.of.1.05.billion.Euros.in.2011.and.employs.over.13,000.people.
Thanks.to.a.longstanding.culture.of.excellence.and.strong.sector-specific,.functional.and.technological.know-how,.the.Group.offers.its.clients.an.end.to.end.approach.based.on.a.well-honed.business.model..Sopra.Group’s.ambition.is.to.allow.its.clients.to.successfully.execute.transformation.projects.that.will.give.them.a.competitive.edge.and.help.them.drive.growth..
Sopra.Group’s.savoir-faire.encompasses.prior.strategic.reflection.through.to.the.supervision.and.implementation.of.major.programmes..
For.more.information,.please.visit.our.website:.www.soprabanking.com
Sopra Group & Sopra Banking SoftwareGeneral.Management9.bis,.rue.de.Presbourg75116.-.PARISTel.:.+33.(0)1.40.67.29.29
.
Efma,.a.not-for-profit.association.formed.in.1971.by.bankers.and.insurers,.specialises.in.retail.financial.marketing.and.distribution..Today,.more.than.3,000.brands.in.130.countries.are.Efma.members.including.over.80%.of.Europe’s.largest.retail.financial.institutions.
Efma.offers.the.retail.financial.service.community.exclusive.access.to.a.multitude.of.resources,.databases,.studies,.articles,.news.feeds.and.publications..Efma.also.provides.numerous.networking.opportunities.through.work.groups,.online.communities.and.international.meetings.
For.more.information:.www.efma.com.
Efma8,.rue.Bayen,.75017.ParisFranceTel..+33.1.47.42.52.72
About us
41
On.1.July.2012,.the.subsidiary.Sopra.Banking.Software.was.established,.for.the.specific.purpose.of.providing.Banking.and.Finance.sector.players.with.high.added.value.software.solutions,.capable.of.meeting.their.requirements.
Sopra.Banking.Software.delivers.an.extensive.range.of.software.products,.enjoying.solid.and.positive.market.recognition,.and.federating.the.software.solutions.created.by.Sopra.Group,.Callataÿ.&.Wouters.and.Delta.Informatique..Indeed,.Sopra.Banking.Software.with.over.1500.specialists.is.already.delivering.products.and.services.to.over.700.customers.in.70.countries.
Sopra Banking SoftwareTour.Manhattan,5,.Place.de.l’Iris92926.Paris.La.défense.CedexTél.:.+33.(0).1.55.91.72.72
For.more.information:.www.soprabanking.com
42
CONSUMER CREDIT: A RAPIDLY CHANGING LANDSCAPE
Sopra.Group.wishes.to.thank.IHS.Global.Insight.for.having.allowed.it.to.use.certain.IHS.data.contained.in.this.report..
Sopra.Group.wishes.to.thank.as.well.the.participants.of.the.Efma/SOPRA.Think.Tank.“Consumer.Finance”.who.have.contributed.to.share.their.well-informed.views.on.the.consumer.credit.market.in.various.European.countries:.Patrick.Abadie,.Dimitry.Aleksandrov,.Jean-Philippe.Aractingi,.Samuel.Champanhet,.Massimiliano.Ciuffo,.François-Xavier.Coyras,.Roberto.Ferrari,.Luca.Gasparini,.Valérie.Goutard,.Zoltan.Major,.Sibel.Mayo,.Ahmed.Michia,.François.Miqueu,.Lukasz.Molenda,.Razvan.Munteanu,.Andrzej.Olejnik,.Jan.Ondras,.Jan.Ottoy,.Johannes.Riha,.Gianluca.Soma,.Bart.Vanhaeren,.Petros.Zabetas.and.Andrew.Zeller.
Acknowledgements
43
“The.regulation.strengthening.on.credit.is.significantly.impacting.overall.consumer.credit.profitability”
“The.growth.of.e-commerce.is.an.opportunity”
“.Digital.identification.and.signature.must.evolve.otherwise.consumer.credit.institutions.will.not.be.fully.capable.to.follow.consumers.into.their.digital.journey”
“How.to.react.quickly.to.consumer.requirements.as.processes.are.mostly.outsourced?”
“Should.priority.be.given.on.m-commerce.rather.than.e-commerce?”
What the Think Tank members said...
For.more.information,.please.contact:.www.sopragroup.com
Jean-Yves BrunaExecutive.Director.strategic.developmentjean-yves.bruna@soprabanking.com+.33.1.55.91.02.32+.33.6.40.36.67.62.Philippe BourgeoisSolution.Management.Director.philippe.bourgeois@soprabanking.com+.33.1.55.91.40.91
Olivier [email protected]+.33.1.55.91.71.05+.33.6.38.70.38.77
For.press.and.marketing.inquiries,.please.contact:
Coralie [email protected]+.33.1.55.91.71.68.Muriel Arthaud [email protected]+.33.1.55.91.71.39.84
Karine [email protected].+33.1.47.42.69.82
Copyright.©2012.Sopra.Group.and.Efma.
All.rights.reserved..This.report.may.not.be.reproduced.or.redistributed,.in.whole.or.in.part,.without.the.written.permission.of.Sopra.Group.&.Efma..Sopra.Group.&.Efma.accept.no.liability.whatsoever.for.the.actions.of.third.parties.in.this.respect.
CONSUMER CREDIT: A RAPIDLY CHANGING LANDSCAPE
September 2012