To grab market share from traditional banks, innovative non-bank alternatives such as Rocket Mortgage, Better, and Figure, are streamlining and digitizing the mortgage application process. In response, banks have set up “customer journey teams” to reimagine the home buying process and, within it, the financing process. But few have tackled the hardest part of the problem: the challenge of simplifying and aligning product and pricing with the customer’s needs, through their buying journey and beyond. How can they transition to this new approach?
It’s looking like a low interest rate environment is the new norm. Again.
We’re well into Q4 of 2019 and the overall macro-economic picture is troubling. Given the recent moves by the Fed, it seems inevitable that a protracted low-interest environment lies ahead, which means further margin compression for lenders. We’re witnessing a flattening and possibly even inversion of the yield curve. Consumer confidence appears to be fading from recent highs, and this caution is fueled by fears of slowing economic growth and the potential for a recession.
It’s not all doom and gloom, of course. There are some encouraging signs. While consumer confidence may be is down, bank profitability has been buoyed by a strong housing price index (HPI). Total household debt is on a steady upward trend, with the bulk of that accounted for by a significant proportion of mortgage debt. Also, home equity has been growing and, as a proportion of that mortgage debt, is at a very healthy level.
And while net interest margin has certainly been compressing, over the past couple of quarters banks have been able to grow their loan portfolios and their net interest income. The credit market is strong, total outstanding loans are up, yet we are in a new normal of lower yields and frequently inverting yield curves.
Address the challenge of profitably growing loan balances in a low rate environment
What’s the best strategy to remain profitable in this cycle? We need to focus on a customer-first approach if we want to sustain loan growth without driving margins to zero in this tight environment.
Take for example the home equity market. Right now, this potentially lucrative lending product is caught in the middle between two competing loan products. It is being attacked on the high end by cash-out mortgage refis, which are as slow as HELOCs to originate but are often much cheaper—and are also tax-deductible. Meanwhile, on the low end, HELOC volume is being nibbled by personal loans that are faster and cheaper to originate—and are priced at much higher interest rates. (Of course, this picture will change quickly if mortgage rates rise.)
Think in terms of solutions, not products
My point is that banks have got themselves into a mindset of designing products that align with specific customer situations but have fairly rigid rules for application. But the reality is that customers have needs that require flexible solutions, not rigid products. Let’s play “what if” for a moment.
- What if you could reduce a customer’s LTV to lock in a better rate for 30 years by giving them an attractively priced personal loan?
- What if, instead of offering a $45K HELOC, you instead offer a personal loan for $20K to money now, with a $25K HELOC for later use? If we rethink and link the pricing assumptions on these two products, we can overcome the potential for losing money on a low-value HELOC.
- What if you structured a cash out $50k mortgage refi along with a $10K cash-out refi of a mature auto loan? The customer gets the $60K they need and a lower rate on both the auto and the mortgage.
In other words, how can we ‘solution-sell’ by offering attractively priced products that address customer needs and are coherent with your bank’s profitability goals?
Rethink your pricing calculus and make the transition to demand-side pricing
Bank product and pricing decisions are typically reactive and address short-term problems such as capacity. They are also driven by competitive pressures and quarterly financial objectives. These short-term-focused pressures and objectives will only intensify over time, and so the only framework for sustained growth and profitability is to be customer-centric (not product-centric).
This new way of thinking is enabled through the application of decision-making tools that position you to deliver a better customer experience at a lower fulfillment cost. This creates a win-win situation in which you can command a price premium through a superior customer experience (or, alternately pass this cost savings on to the customer).
Becoming customer-centric and an unyielding advocate for the customer is good for business and profit in the long term. Happy customers—even at lower rates—lead to referrals. And referrals are the least expensive form of new business. New business leads to more revenue, which in turn positions you to reinvest in the technology that powers these customer-centric decisions.
If adopted as a proactive long-term strategy, a customer-centric pricing approach—enabled by being smarter through improved customer insights so that you can offer the customer the right price—leads to a better customer experience and reinforces the cycle of happy customers and profitability.
Looking for more? Listen to my latest webcast with CBA on demand for a deeper dive.