South African banks and lenders are missing the opportunity to build loyalty with their customers in a ‘consumer-first’ era – and it may ultimately cost them a range of economic benefits.
There’s no doubt that customer loyalty is a powerful asset for lenders in a competitive and challenging environment, where strategies for building stronger customer relationships are increasingly important. But loyalty is a complex and multidimensional concept to measure.
Do consumers feel an affinity to the bank that gave them their first card? Are they loyal because their bank offers greater value for money, convenience, superior customer service? Or are they loyal because of their lender’s stance on wider ethical or social issues? Often, consumers are loyal for specific reasons that don’t include loving the brand. For example, I regularly go to a local family restaurant: not because I like the food, service, or value for money, but because it has a kiddies play area that gives me and my husband some ‘us’ time.
The point is that people are sometimes loyal for reasons that credit providers may not even have thought of. So, how do we begin to understand the thought processes behind loyalty? An ongoing study by TransUnion researches the loyalty effect of multiple account dynamics—the impact on future behaviour of having multiple relationships with a lender—on the South African consumer wallet. This study suggests a more practical approach: focusing on the outcome, rather than the motivation, of loyal customers.
The study addresses two key business questions: first, are consumers with a greater number of products with a lender more likely to choose the same lender when opening subsequent products? And secondly, do consumers who have multiple products with the same lender perform better in terms of lower default rates? To answer these questions, we analysed depersonalized information on South Africa consumer credit wallets – and some of the results were surprising.
The more relationships, the higher the chance to cross-sell
South African consumers tend to have fewer credit accounts compared to other emerging markets. More than half (53%) of credit-active consumers have only one credit product in their wallets. One in four (24.5%) have two credit products. Only one in 10 (10.4%) have four or more. In Colombia, which is a like-for-like comparison in terms of population size and market characteristics, only 40% of credit-active consumers have one credit account, and nearly a quarter (23.5%) have four or more.
There is a considerable opportunity to focus on cross-selling for South African lenders. Consumers who have four or more credit accounts tend to hold these accounts with multiple lenders. Nearly half of these consumers (46%) hold their accounts across four or more lenders—and for many consumers with multiple lending products, they hold each with a different lender. Importantly for lenders, these are often low-risk consumers concentrated within the prime (20.5%), prime plus (10.4%) and super prime (16.7%) risk tiers*, making them attractive targets for expanding relationships.
Our analysis suggests that as the credit needs rise with the age of a consumer, there is an opportunity to cross-sell and gain loyalty. Of consumers holding more than four accounts, 11.4% are Millennials (born between 1981 and 1996) and 16.9% are Gen Xers (born between 1965 and 1980). The youngest and oldest consumers tend to have fewer credit products, for different reasons: older generations are de-leveraging while consumers in younger cohorts are still building credit. This means there’s an opportunity for lenders to build loyalty during early years of a consumer’s credit lifecycle.
Our study found that the more products a consumer holds with a lender, the more likely they are to open the next new credit product with that lender. Multi-product consumers with less than 25% of their credit products with one specific lender are only 10% likely to open another account with that same lender; if they hold between 26-50% of their credit relationships, the propensity rises to 24% likelihood to open another relationship with that same lender; and consumers who hold between 76-100% of their credit accounts with one lender are 52% likely to open another account with that lender. This is an important insight at a time when lenders are having to work harder than ever to manage and maintain their share of existing consumer wallet.
More relationships equal better performance
When we analyzed risk performance and its correlation to multiple relationships with a specific lender, we found that the more accounts a consumer has with a lender, the better their performance. On an average, 6.9% of personal loan borrowers defaulted on that account if that was the only account they had with a lender, whereas if they had multiple accounts with a lender in addition to the personal loan, the default rate dropped to 4.9%**. We observed the same trend with auto loans and mortgages. Interestingly, credit cards resist the trend: only 2.7% of the single account holders defaulted, as opposed to 2.8% for multiple account holders. This makes sense as separate studies on payment hierarchy show that consumers tend to prioritize paying credit cards behind personal loans, auto and housing loans.
The average time with the lender is also an important factor in explaining the performance with that lender. The longer you’re with a bank, the less likely you are to default.
What does this mean for loyalty?
Our study suggests three major findings – all of which offer a way forward for lenders looking to drive greater loyalty in a competitive market. One, it’s complex to measure loyalty, but using the behaviour of consumers with multiple accounts with one lender, we proved that the ‘loyalty effect’ is real – and lenders should be looking to measure loyalty amongst existing consumers and use these insights to build deeper relationships with their consumers.
The second insight is that multiple accounts not only indicate lender loyalty, but an increased likelihood to choose a specific lender for new credit. Finally, having more than one account with a lender generally drives improved credit performance across different dynamics, and all generational and risk tiers.
Until recently, local lenders have focused mainly on generating growth through new accounts. As a result, there is a considerable opportunity to grow within existing portfolios by identifying consumers likely to open the next new product. At a time when there is relatively lower demand with pessimistic consumer sentiment and constrained supply because of lower risk appetite impacted by the economic impact of COVID-19, the opportunity and incentive for lenders to cross-sell and upsell within their existing customer base has never been greater.
The key for credit providers to better understanding their customers lies in the multiple account opportunity segmentation across the entire customer lifecycle. By using trended and alternative external data sources to anticipate consumer needs, lenders should consider all engagements with a consumer as an opportunity to cement their loyalty. Trade-offs in a holistic relationship for preferential service and pricing should also be considered. Finding consumers where they are digitally present and creating fully automated frictionless processes has proven successful locally and internationally.
Our insights solidify the significant opportunity for lenders to build stronger relationships with consumers while managing risk during these unprecedented times.
Customer loyalty is hard to gain and may be even harder to maintain. But it’s worth the effort.
Elrika Haasbroek is director of data strategy at TransUnion Africa
* TransUnion CreditVision score risk tier ranges: Subprime 0-609; Near prime 610-664; Prime 665-724; Prime plus 725-754; Super prime 755–999
** We included all consumers with at least one open and active credit account in good standing in Q1 2019 and evaluated these accounts 12 months later in Q1 2020 to determine the proportion of consumers who had defaulted on their accounts during that period
By Elrika Haasbroek, director of data strategy at TransUnion Africa