Rethinking Teaser Rates
It’s time for retail banks and credit unions to apply “teaser rate” thinking to refinance more customer/member loans held elsewhere in a manner fully consistent with Fair Lending Laws. Offering attractive refinancing rates to acquire more loans customers/members hold elsewhere rewards loyalty by lowering their borrowing costs. For the financial institution, acquiring more loan assets customers/members hold elsewhere increases assets, reduces attrition risk, and generates goodwill… a powerful trio.
Increasing Refinancing Pool Size
All else being equal, the lower the rate, the more likely a given pool of creditworthy customers will qualify for savings from refinancing debt held elsewhere. Here’s an example from a recent campaign and the impact of rate on a single prescreen auto loan refinancing campaign.
[table id=1 /]Prescreen loan offer volume can increase by up to 40% by lowering refinancing rates by 75 bps. While profit per loan will diminish, the net new loans will always add revenue and reduce customer churn.
Retention
All else being equal, the odds of bank customer attrition are multiplied by about 0.42 with a direct deposit relationship and 0.73 with each additional product or service added. For example, suppose the odds of attrition are 1% per month for the overall customer base. In that case, the odds of attrition for direct deposit customers is 0.42 x 1% or 0.42% and correspondingly 0.73% for customers with one additional service compared to the average customer, who may have 2 products. And these attrition risk multipliers are cumulative. “If a customer adds both direct deposit and an additional loan, holding all other variables constant, her risk of attrition is now 1% x 0.42 x 0.73 = 0.31%, or one-third the attrition risk of the average customer.” says Devon Kinkead, CEO, and Founder of Micronotes. “Aggressive refinancing rates increase the odds of underwriting more loans and reduce the risk of churn for creditworthy customers. That’s smart business when the competition is intensifying efforts to get your creditworthy customers’ loan business.”
Goodwill
Micronotes’ AI-driven engagement and cross-sell solutions combine machine learning with the closing power of sales interviews to turn the digital banking channels into revenue generators. Imagine the goodwill created by systematically finding and lowering your customers’ borrowing costs. For example, a happy and energized customer who just saved $70/mo refinancing a loan with your bank can automatically be encouraged to write a review on social media, driving more new customer acquisition.
Summarily, aggressive refinancing rates should be part of any prescreen campaign to find and refinance mispriced loans held elsewhere. As total prescreen loan offer volume increases, more loans are written generating more revenue, more assets, reducing churn, and creating goodwill. It’s time to sharpen the pencil and get aggressive for everyone’s benefit.
