Who do you lend what to, and when?

Picture1The UK credit card market is facing unprecedented challenges, particularly for established high street lenders.

Due to the strain on the economy post-crisis, many lenders have refocused their strategies on lower risk and, for some, franchised customers. While safe, these ‘low-risk’ clients have put increased pressure on the key drivers of profit and have stagnated lenders’ share of wallet.

The intense competition for the same customers has led to even longer term balance transfers with lower transfer fees, and more ‘reward’ products in an attempt to seduce them away from their current lenders.

New competitors such as short-term lenders are winning traditional credit card business and ‘low & grow’ card competitors are taking advantage of increased demand from the higher risk segments.

Now, due to the ever increasing competitive landscape, as well as the improvement in the economy, an urgent priority for many credit card lenders is to increase their scale and market share. But moving towards higher risk segments needs to be carefully managed to avoid a return to high delinquency rates and bad debt.

Tightening regulation is also likely to extend from mortgages to other lending products, such as credit cards and asset finance. The focus will be on affordability and potential areas of conduct risk, threatening key profit drivers further – such as balance transfer missed payment penalties and high purchase rates. Particularly under these circumstances, inappropriately high credit limits can drive up capital costs unnecessarily, while limits that are too low discourage spending and lead to attrition.

All lenders’ strategies have evolved to address some of these challenges, but often these are becoming cumbersome and overly complex. The challenge is to simplify and optimise lending plans by creating a suite of enhanced tactics across the lifecycle of a credit card.

Applying a consistent methodology to credit limits can help overcome many of these hurdles and ensure that you, as a compliant lender, are able to offer the right credit limit, to the right customer at the right time. In addition, there is a need to consider the likely future impact should interest rates rise or the customer’s circumstances change (e.g. if they start a family, move job – or lose their job). Whether this is at the point of application, or offering additional products throughout the customer journey, optimising a strategy can offer flexibility to support the strategy development process. This includes all of the reporting required to forecast results, analyse the impact of alternative decisions and provide information to your stakeholders in a timely and accurate strategic objectives and long-term aspirations.

What if the strategy of balancing each of these deciding factors were managed for you?

Optimising your limit management strategy maximises the value of decisions and supports both your risk and operational objectives, such as profit, bad debt and exposure.

Experian’s optimisation solution was used to optimise credit limit increase strategies by a UK retail bank and showed a;

  • 48% increase in 2-year contribution
  • 6% increase in revenues
  • 4% reduction in credit losses

It is often understanding the trade-offs between each of these that can be challenging, resulting in lenders being unable to maximise profitability without taking unacceptable risks.

Find out more about how we can help you with optimising your strategy.