Onboarding good new customers in a very competitive market is difficult and not always that profitable. That is why prudent credit managers often look to account management strategies to reap the greater rewards. Once a customer is on-boarded and has proved herself to be an exemplary re-payer, offering her money is more of a sure thing for repayment.
Behavioural scorecards offer far better Ginis than application scorecard. This means you can afford to be more aggressive in account management.
This blog (and our next blog) will look at different areas in account management and a third blog will look at how to deploy an account management strategy.
Different account management strategies
Whilst there are many account management strategies, some decision areas are not relevant to certain products.
Credit Limit Management
Credit limits generally pertain to revolving products (like card and overdraft), but some loan products also utilise credit limits for the purposes of loan top-ups. We will look at cards for now. Credit limit management is divided into credit limit increases (typically these are offers or automated annual increases) and credit limit decreases.
The idea around credit limit increases is that it helps increase spend for those good customers who utilise their card a lot. Note that many low-risk customers have low balances (i.e. low utilisation) and increasing limits may have no effect on spend. Note for credit cards, unutilised balances actually cost the bank more in provisions (this is true for open-book interpretation of IFRS9). In most advanced territories, offering limit increases requires an affordability check which means these offers are “subject to…”.
Credit limit decreases are enacted on the book in two scenarios. The first being reducing the limits of high-risk customers. Often you will find these limits reduced to, for example, 105% of balance ensuring that you are not pushing these customers over-limit in the reduction process. The second scenario is reducing limits on accounts with small utilisation so to reduce the amount of unutilised limits. Some individuals may use secondary credit cards during a holiday period so it is important to reduce the limit in line with what they may spend during peak periods.
Beyond standard credit limits there are other limits that are used such as cash limits and temporary holiday limits. Some card issuers limit the amount of cash withdrawals (typically 50% of total limit). Some card issuers offer different holiday limits on credit cards allowing customers to spend more during key holiday periods such as Eid or Christmas.
Authorisations is the management of transactions, especially customer spending above the limit. Authorisations are not only potentially profitable allowing good risk customers to spend slightly over their limit, but they also prevent attrition due to the annoyance and embarrassment factor. A VISA study showed that attrition was particularly prevalent with high spenders who had a credit card transaction declined. It is worth noting that there are different types of authorisations: “cushion” and “fit”. Cushion allows for purchases within a certain percentage cushion, e.g. 10%, above the credit limit. Fit allows for purchases of a certain size being allowed subject to the customer being below the limit.
In allowing authorisations, the issuer benefits from over-limit fees and interchange fees plus ensuring the customer is happy. The issuer may restrict certain accounts (e.g. delinquent accounts) and certain transactions based on MCC (merchant codes). In some countries purchases made at, for example, casinos or jewellers are seen as higher risk than, for example purchases of clothing or consumer electronics.
We will continue the discussion around account management strategies in our next blog. In the meantime, if you would like to ask us a question about account management strategies send us an email and we will publish a Q&A blog shortly.
To find out how Principa can assist you with implementing account management strategies, get in touch with us.