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New Directions in Unsecured Consumer Credit


At a time when retail banks are particularly hungry for growth, one of the brightest opportunities is the cross-sale of credit to depositors, including consumers and small businesses. But fresh approaches will be needed to build real momentum.

Retail banks long have been dominant players in customer payments and related accounts, typically handling more than 80% of the transaction volume and payments value for core customers. Yet they usually claim less than 45% of the associated revenue streams, mainly because they are under-represented in unsecured consumer credit.

This imbalance has been recognized for years, but was far less of an issue before the banking payments domain was rocked by fee-crunching regulations, sagging product economics and customer online migration away from the branch.

Fortunately the industry now has specific possibilities to begin closing the gap, including the unsecured line of credit and the dynamic liquidity line. The same informational advantages and techniques used to advance these products can also be helpful in ramping up credit card origination and balance formation.

Rebuilding the Product Set

The case for rebuilding the product set for unsecured credit is clear. At the long-term end of the borrowing spectrum, home equity lending has faltered with the housing crash. At the short-term end, checking overdraft coverage (a form of contingency borrowing for many households) has slumped under the weight of new regulation.

Another challenge is reformulating the customer outreach. With dwindling returns from one-off product promotions following the recession, the new emphasis is on gaining share of wallet in a tight market. Offerings need to be closely tied to the needs of established customers, particularly in the area of cash management.

There are three product-related initiatives that regional banks can use to fuel consumer loan growth going into next year. Innovations include the unsecured line of credit, or ULOC, a substitute for the home equity loan which has seen rapid growth in Canada; and the so-called “dynamic liquidity line,” or DLL, which provides a backup borrowing facility tied to the checking account. A third avenue is reenergizing the credit card line of business, a distinct possibility for regional banks given their brand presence and customer ties.

Compared with monoline card issuers and other specialty lenders, regional banks have enormous competitive advantages in pursing these opportunities, based on their deep relationships with core customers These relationship advantages include: 1) rich customer data that can be culled from accounts and transaction patterns; 2) favorable customer behaviors (sticky balances, less price sensitivity, better loan repayment) associated with primary banking relationships; and 3) superior customer access and customer receptivity to offers.

These strengths, on top of a pressing need for growth in a changed market, provide ample justification for developmental efforts with unsecured consumer credit. The key is to organize offers around essential customer needs.

Unsecured line of credit – The ULOC fits between the credit card and the home equity product. It is positioned as an alternative to the home equity line of credit (HELOC) that can be used for common purposes such as home improvement and debt consolidation. Rates are higher than the HELOC but lower than the credit card. It offers a fixed line of credit that is usually lower than the HELOC but higher than the credit card.

In Canada, banks have been quite successful in the cross-sale of ULOCs, and personal lines of credit have grown at a 13% compound annual rate over the last four years. The product is primarily sold through branches to established customers, and often bundled with credit insurance. In marketing the personal line of credit, for example, TD Canada Trust promotes “access to funds whenever and wherever you want them.” The bank offers flexible payment options on credit lines ranging from $5,000 to $50,000, including an ability to lock outstanding balances into a fixed rate installment loan.

Dynamic liquidity line – At the other end of the product spectrum, the DLL fits between the credit card and overdraft coverage. It is not intended to finance larger projects, as with the ULOC, but rather functions as a short-term household cash management tool.

By virtue of being pre-arranged, the DLL avoids the penalty context of overdraft fees. Bundled with the checking account, the DLL also enfranchises a large segment of customers who either may not qualify for a credit card or simply do not want the spending temptation that goes with it.

There are numerous examples of how a credit facility can be tied with consumer payments products, independent of the credit card. At CaixaBank in Barcelona, Spain, the “Fraccionamiento” facility allows consumers to split the repayment of any individual purchase into three, six or 12 equal monthly installments, providing repayment flexibility for customers who are averse to using revolving credit.

In the U.S., PayPal’s “Bill Me Later” facility has racked up more than $1 billion in balances by offering a “fast, simple and secure way to pay online without using a credit card at more than 1,000 stores.” American Express Co. illustrates this same concept on a somewhat larger scale by selectively offering extended payment flexibility on Amex charge card products. Importantly, it manages to do this while maintaining the differentiated positioning of the charge card as a pay-in-full product, not to be confused with a revolving credit card.

The DLL represents a potential game-changing credit facility for retail banks. Linked to the checking account and having no preset spending limit, this product confers a marketing advantage relative to credit card issuers, which are perennially locked in a costly battle to win customers with high credit lines. It takes advantage of the superior customer relationship and transactional information enjoyed by banks. And it offers substantial benefits for customers.

Bank-branded credit cards – While the focus of this article is on new products, banks should not lose sight of a core opportunity with credit cards. Most regional banks could strongly improve their credit card businesses by taking much fuller advantage of customer relationship strengths. In targeting, customer access, underwriting and risk management, they have many advantages over monoline card issuers and there is no reason for these strengths to lie fallow.

Mr. Spitler is a managing partner and Mr. Bramlett a partner in the New York office of Novantas LLC, a management consultancy. Mr. Spitler can be reached at [email protected] and Mr. Bramlett at [email protected].