The consumer lending function concentrates on providing finance to Individual and household consumers to fulfill their personal, family, or household financial needs. Auto loans, Personal loans, credit cards are a few examples of consumer lending done by financial institutions. Consumer lending, however, does not include debts taken for the purchase of real estate or investments accounts. For example, Mortgages are excluded from consumer lending.
Nowadays, consumers have numerous options to choose from when it comes to getting consumer loans. Therefore, it is essential for credit unions and financial institutions to differentiate themselves from their competitors. This is done by providing competitive products, world-class services, and a superb digital channel experience & adoption.
Banks/ Credit unions need to digitize properly to provide a rich customer experience. Support from new technologies available will make customer engagement faster and more straightforward. For example, a digital loan makes borrowing a quick and painless process. It ensures that minimal manual inputs are made, and they can provide and sign documents electronically from any device. This will help in attracting prospective customers.
To ensure credit unions are on the right track, they need to measure their performance at regular intervals. It can be done with the help of Key Performance Indicators (KPIs).
KPIs help credit unions and financial institutions measure various parameters such as productivity, quality, cost of products offered, risk, or customer service. In addition, KPIs measure the profitability and product performance of various consumer lending products offered. This, in turn, helps to ensure that the goals of a credit union/bank are completed smoothly in the long run.
Consumer Lending KPIs that should be measured are -:
1. Conversion Funnel
Today a consumer looking out for a loan or credit card can easily search for the best available product on the Internet within a few seconds. Further, a consumer can get approval within a few minutes. This process helps credit unions to reach more borrowers.
However, the same medium can be the medium to lose customers to competitors. Therefore, the conversion funnel is one of the most significant key performance indicators for consumer lending. Using a conversion funnel, a credit union can identify when does it lose a customer.
It can answer a question – even when there is sufficient traffic on the website; they still don't get converted into a customer. It can identify the point at which a prospective borrower/customer is exactly lost.
2. Application Pull through Rate/ Loan Conversion Rate
This KPI would measure the percentage of loans applied for by applicants that are closed and funded by the lending institution. In addition, it measures the efficiency of managing the pipeline by dividing the closed loans with total locked loans.
This KPI measures effort wasted when lending wasn't done, overall process efficiency, and customer service within the consumer lending function. It helps in identifying inefficiencies in the entire process.
This metric would be of low value if :
- Time taken to complete the entire process is too high.
- There is a lack of transparency.
- Potential borrowers do not enjoy competitive rates.
- Lack of incentives
3. Cross-Sell & Upsell Support
This KPI will help a credit union to understand if personalized communication was targeted at the right consumer or not. In addition, technology has enabled cross-selling wherein credit unions to use the data about their customers and cross-sell them other products. For example, a customer having an account is cross-selling an Auto loan.
If Credit unions provide a flawed solution to a customer, then the entire cross-selling effort would be a waste. For example, selling a home loan to a homeowner.
Cross-sell or Upsell support KPI becomes essential as the failure of a credit union to provide relevant solutions on time would result in it being irrelevant to a customer. This would make the prospective consumer move to the competitor.
4. Product Usage
It is one of the essential KPIs used by credit unions/Banks to ensure customers use the products regularly after they have bought them. For example, if a bank issues a credit card to the customer, it would be earning only when the customer makes a credit card transaction. However, if post issuing of a credit card customer hardly uses it, banks won't be earning much on it.
Similarly, when the bank issues loans such as auto loans or personal loans, they earn only when the customer continues with the loans & pays EMI on them. If, however, within a few months of availing the loan, the customer pays off the loan, then banks would lose out on interest and may also not be able to recover the loan origination cost.
5. Time to Decision
Time is taken from the day the customer visits the website to the time the consumer lending process is completed essential to calculate. Credit Unions/ Banks need to measure this to understand the efficiency of the entire workflow and take adequate steps to improve discrepancies found in the workflow.
Similarly, when a customer is at the auto dealer to purchase a car, he would be interested in getting a financing decision right away. When a customer is at a car dealer, it will have multiple banks to choose from for an auto loan. Hence it becomes necessary for banks to provide a faster decision at competitive rates to win the customer.
6. Automatic Approval Rate
Credit Unions/Banks also need to measure the loan auto decision rate. It measures the number of loan applications or credit card requests that prospective customers submit over a period, says a year, and runs through an automated platform for conditional approval or denial divided by the total number of applications received in the same period in percentage.
This automated screening process would help lower the acquisition cost, increase the speed of decision-making, and provide more objective and consistent decisions.
7. Average Response Time/Average Resolution Time
Credit unions need to understand the time taken to respond to a customer query/ complaint and the time taken to resolve it.
When measuring response time, the time taken to acknowledge the issue raised by the customer is measured. Therefore, it is measured from the time the issue is raised until the customer is told that their issue or query has been received and is being addressed.
Resolution time is the time taken to resolve the query or issue raised by the customer. It is measured from the time the query or issue is raised to the time t has been resolved.
8. Net Promoter Score (NPS)
Net Promoter Score was developed by Satmetrix, Fred Reichheld, and Bain & Company. This KPI helps to measure the loyalty of customers towards the credit union. This KPI is vital as loyal customers cost less to the credit unions.
As they complain less, are ready to try new products offered, and encourage people around them to get associated with the credit union. So, in one way, they help Credit unions to increase their customers through word of mouth publicity.
To understand this KPI, consider this example, suppose a credit union incurs an average cost of $500 to acquire a new customer and the average profit is $100. In this scenario, the payback period on acquisition cost would be five years. Hence credit unions would aim at reducing the distractors.
As per the industry standards, if the Net Promoter Score is greater than 60, the credit unions would experience 26% higher operating income. (Src - Hubspot whitepaper).
credit unions need to utilize technology and digital media smartly to increase customer loyalty, thereby increasing the NPS.
9. Customer lifetime value (CLV)
Credit cards are used widely and have reached a point of saturation in developed economies. Due to high acquisition costs and tough competition, it becomes important that a customer is retained. Hence Credit Unions/Banks need to be customer-centric by providing the right promotions at the right time to the right customer.
Customer lifetime value measures the value of the customer. The present value of the future cash flows or the value of business attributed to the customer during their entire relationship with the Credit Union/Bank.
If the customer has a high CLV, they can be prioritized over others. CLV is generally used to select customers, design a proper targeted marketing program, and make decisions accordingly.
CLV is measured by -:
- Calculating value contributed by a segment of customers says HNWI or a particular customer.
- Calculating the value contributed by the customer at the time of acquisition or retention.
When a Credit Union/Bank uses CLV and selects customers, it earns more profits than otherwise. It helps make informed decisions on various parameters such as money to be spent on Social media platforms such as Facebook ads, Google Adwords, etc., or which medium of advertisement is to be used.
Credit unions and Banks today operate in a highly competitive environment. As a result, they are forced to cope with unique challenges daily. These challenges come in the form of fraud, regulatory requirements, keeping up with technology, and disruptive innovation happening in the industry.
In such a scenario, it becomes essential that they track the right KPIs. Both financial and non-financial KPIs become vital as they help to understand if the Credit Unions/Banks' goals are met or not.