Customer loyalty is a powerful asset for lenders. In a competitive environment that’s constantly faced with disruption, strategies for building long-term customer relationships are becoming increasingly important. But loyalty is a complex, multidimensional issue.
How do we begin to understand the thought processes behind it? Bonita Panchal, Senior Business Consultant, Analytics & Business Consulting at TransUnion, suggests a more practical approach: focusing on the actions, rather than the motivation, of loyal customers. Multiple account dynamics reveal a quantifiable loyalty effect on behaviour that can help lenders refine their customer retention and decisioning strategies.
Financial organizations are operating in a Consumer First Era. The balance of power has shifted away from lenders and towards consumers, who now have a wider range of choices, higher expectations and easier access to alternatives should their providers fail to deliver.
With more power in the hands of consumers, lenders have to work that much harder for their share of wallet. Customer loyalty is hard to gain — but, as our analysis of multiple account dynamics shows, it’s worth the effort.
A TransUnion analysis of consumer credit products between 2012 and 2019 showed an interesting trend towards consolidating accounts with fewer lenders. This was true even for low-risk consumers (ranked as Prime or better using the CreditVision® Risk Score), who generally have more options when it comes to accessing credit products.
Figure 1: Multiple credit accounts held with different lenders, 2012 to 2019
Figure 2: Average number of consumers with three or more credit accounts, by risk type
Our analysis also showed that younger and older consumers tend to have fewer credit products, albeit for different reasons: older generations are deleveraging while consumers in younger cohorts are still building credit, as shown in Figure 3.
Figure 3: Consumer distribution by age and number of accounts
Controlling for these variances in risk and age, we then looked at how consumers act when they have multiple accounts with the same lender. What we found is that the ‘loyalty effect’ has a positive impact on both new account openings and delinquency.
The more products a consumer had with a particular lender, the more likely they were to:
We took our analysis a step further and built a statistical model to analyze the likelihood of a consumer being loyal over two years. We created a dual-score matrix that showed both loyalty and risk.
This enabled us to establish what a consumer’s equivalent CreditVision® Risk Score would be when their loyalty factor was taken into account —and revealed opportunities for lenders to boost acquisition within a given risk tolerance.
Let’s say a lender’s current policy is to approve applicants with a CreditVision® Risk Score of 660 or higher. A consumer with a score of 640 would automatically be declined … but looking at their loyalty score, we see their expected performance is equivalent to 670 — which means the lender has an opportunity to expand their target population.
Our analysis took only a few factors into account to demonstrate the positive effect of loyalty on consumer behaviour. Lenders that dive deeper will be able to create a valuable framework for understanding the current and lifetime value of their customers.
Complementing customer data with credit bureau data will allow for a more comprehensive analysis of those customers. This will enable supporting decisions that may involve a trade-off. For example, will raising a fee on one product put the entire relationship at risk?
5 key questions for lenders:
Lenders should take a rigorous analytical approach to understanding these complex relationships and consider the impact of loyalty when making financial decisions.
The approach we took is one of many that can be used to build a loyalty framework that answers key questions about customer behaviour and helps lenders build their portfolios without necessarily having to adjust their risk tolerance. We see many opportunities to advance this model further, partnering with lenders to enhance their programs with even more variables, based on consumer data, to gain additional, valuable insight.
Learn how your business can benefit from the loyalty effect today.
1For Canadian consumers in Prime and above