Friday, February 20, 2009

Consumer Finance - the way forward.

A colleague who follows my blog suggested that I share my views on Consumer Finance (CF) industry. Consumer finance companies across the globe today hold the second largest share of consumer installment credit (after commercial banks).

Having keenly followed- the consumer credit processes and trends in the Indian market, key forces shaping the region’s consumer credit business, and understanding the functional capabilities of a successful business model; I decided to take a 'helicopter view' in terms of what went wrong with Consumer Credit Industry (India story in particular)? But more importantly, the way forward?

So let me do a quick brain-dump of questions/challenges (I rather see them as opportunities) for the Consumer credit industry…… (Not in any order of importance)
  • Reality check: What is the current state of the industry, what are the challenges to expect and where are the opportunities for growth? Defining the strategy for profitability, surviving and thriving in the midst of market volatility and slowing global economy. How will the industry shape up in the future?
  • Problem Identification- It is critical to understand correctly the factors currently impeding growth and operational capabilities required to become a first –class consumer credit player.
  • Managing risk: Understanding the risks that CF industry is potentially exposed to in today’s economy -The rising default rates, How much risk is worth taking?;  Especially in the absence/presence of ‘developing’ credit bureau(s). Also, regulatory risks should be factored in.
  • Addressing atrophy –reluctance to change. Question the past practices and reinvent the business strategies. This requires finding people who believe in re-inventing the business. Re-evaluate the entire business model.
  • Revisiting the cost structure of the company (if big business has no cost advantage, there will be more firms of various sizes unless the entry is artificially restricted). 
  • Cost management: Where do you slash costs? How do you determine what is unnecessary?
  • Erosion of Market segmentation in consumer financial services in recent years inevitably raises the issue of future industry structures( Commercial Banks and Microfinance players)
  • Creating winning strategies/Positioning- move from Product to solutions. (The customer wants ‘why’ not ‘what’, different solution for different people). Niche markets, customized product offerings. Fee-based vs. interest income. Maintaining profitability in difficult times, Re-positioning portfolio and maximizing revenues. Different strategies for different businesses- cards, mortgage, Auto finance, sales finance, Cash loans, etc.
  • Focus on the lifecycle of the customer- (not loan tenor) What are different ways to acquire customers,  more importantly, to retain the client? Revenue contribution? X-sell process and cost structures. Engaging the customer: Increasing share of wallet and constructing a stronger relationship with their clients.
  • Leveraging technology: How speed, convenience, and technology translate to higher revenues and greater customer loyalty. The world is moving online: How changing demographics, advances in technology turn the potential into reality.
It is time to study the current scenario and develop a solution plan. As President Obama said during his inauguration speech, on January 21, 2009: “It's time to pick ourselves up, dust ourselves off, and begin the work of remaking ...”

I will write some more posts related to this very shortly and will also try to share my research paper on the same .... Next post will be on Banking 2.0
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Preetam said...

Great overview... looking forward to read your next posts on CF, research paper, Banking 2.0....

Anonymous said...


I've been researching on this topic and your overview very aptly articulates the subject. But I can't seem to access the subsequent posts which supposedly delve into each of the questions you've raised here.

Could you share the link(s). Thanks