CONSUMER CREDIT: A RAPIDLY CHANGING LANDSCAPE

REPORT

CONSUMER CREDIT:
A RAPIDLY CHANGING LANDSCAPE
September 2012

CONSUMER CREDIT: A RAPIDLY CHANGING LANDSCAPE

Contents
Preface..........................................................................................................................3

Executive summary. ........................................................................................................4
.

Chapter 1: trends, threats and opportunities on the consumer credit market...........................5
.

I. Regulatory changes in Europe. .............................................................................5
.

II. Changing consumer expectations.........................................................................6

III. Market changes and the impact on consumer credit...............................................7

IV. The threats to the consumer credit business model.
...............................................12

V. The opportunities of the consumer credit business model......................................12
.

Chapter 2: changes to the business model of specialist consumer finance companies............13

I. The strategic levers for emerging from the crisis. ...................................................13
.

II. Actions to optimise business models....................................................................13

III. Actions implemented as part of a change strategy...............................................19

IV. Renewed governance. .....................................................................................22
.

Chapter 3: increasing customer value. ............................................................................24
.

I. Innovation and development of new offerings for retailers......................................24

II. Innovation and development of new offerings for consumers..................................26
Chapter 4: towards greater operational efficiency............................................................30
.

I. Switch to variable costs and reduce middle and back office costs. ..........................30
.

II. Managing debt collection to master the cost of credit risk......................................33

III. Urbanising the information system and reducing the total cost of ownership............36

About us......................................................................................................................40

Acknowledgements.......................................................................................................42

What the Think Tank members said.................................................................................43

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Preface
Sopra Group and Efma are proud to present their analysis entitled “Consumer
credit: a rapidly changing landscape”. This analysis marks the end of the Think
Tank on “Consumer Finance” coordinated by Sopra Group in collaboration with
Efma conducted in may 2012. This analysis aims to examine changes in consumer
credit business models, which have been heavily impacted by the crisis, the recent
regulatory changes and the actions taken in response by specialist consumer credit
companies in order to continue to grow their business while restoring profits to pre-
2007 levels.

The contributions of the participants in the Think Tank organised in conjunction with
the Efma conferences have been integrated into the Sopra Group’s analysis.
The themes covered in this survey are:
• he impact on consumer credit of regulatory changes and changes in
T
consumer behaviour.
• he threats and opportunities for the consumer credit market.
T
• he strategic and operational levers for optimising and reinventing the
T
business model in the framework of a renewed system of governance.
• he actions to increase customer value.
T
• he ways of increasing operational efficiency.
T

This latter theme has further been explored by Sopra Group during the
Brussels Efma conference of June 2012 in its intervention entitled: “Improving
operational efficiency: the next challenges facing consumer credit information
systems in Europe”.

Jean-Yves Bruna Patrick Desmarès
Executive Director Strategic Development Secretary General
Sopra Banking Software Efma

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Executive summary
Consumer credit outstanding fell by 3% in Europe in 2010 and 2011. However, this average masks
large differences between most Eastern European countries (where households still have relatively
little debt) and the other more mature countries. This trend has led to the disappearance of local
players, the withdrawal of international brands from certain countries and the emergence of new
players from, for example, the telecoms and Internet sectors, some of which have developed a new
approach to credit, such as direct peer-to-peer lending.

In response to these challenges to their business model and to counter new entrants, specialist
consumer finance companies have abandoned their “bigger is better approach” and are refocusing
their activities on the markets where they have significant strategic positions. This shift in focus
reflects two underlying trends: optimising the business model and breaking with the existing model,
depending on each company’s specific situation.

The Think Tank on consumer credit of May 2012 allowed Sopra Group to identify three levers used
by specialist consumer finance companies to optimise their business model:
1. Value creation: acquiring new customers and developing new loyalty processes.
2. perational efficiency: rationalising activities by country, developing closer synergies with
O
retail banking when the parent company is a bank, and reducing information system costs and
operating expenses.
3. ighter risks controls: developing default prevention processes and more efficient and better
T
segmented debt collection processes.

However, given the extent to which the business model has deteriorated on some markets, these
levers may be deemed insufficient, in which case the only viable alternative may be to break with the
traditional model, by implementing change strategies, based on four areas:
1. iversifying towards a bancassurance model in order to increase the number of products .
D
per customer.
2. xiting certain markets/countries where the potential and the market position are .
E
considered unsatisfactory.
3. efocusing on the business of distributing credit by outsourcing back offices and IS or
R
alternatively constructing loan servicing platforms for third parties.
4. Moving into niche markets, such as P2P lending communities.

Finally, whatever transformation approach is adopted the criteria for creating lasting value for the
profession (other than the fundamental principles of risk management and operational efficiency)
must include the following actions:
• onstructing a value proposition that is better suited to the needs of increasingly mobile
C
customers, in particular by integrating social media.
• Capitalising fully on the Internet, for the management of both partners and consumers.
• ontinuing to invest in innovation: for example, dematerialisation at the point of sale helps to
C
shorten considerably the loan origination and approval processes.
• ntegrating the corporate social responsibility expectations of consumers and the regulator, by
I
ensuring a duty of advice in terms of approval practices and customer services.

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Chapter 1: trends, threats and opportunities
on the consumer credit market
I. Regulatory changes in Europe

1. Increased borrower protection

Since 2008, numerous regulatory changes have been introduced in Europe in order to increase
protection for borrowers.

The European Commission’s regulatory initiatives resulted in the Consumer Credit Directive, adopted
on 23 April 2008. This directive…
• egulates credit advertising, by requiring adequate explanations to be provided to consumers;
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• nhances the information to be provided by specialist consumer finance companies to
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consumers, by proposing Standard European Consumer Credit Information and a representative
example of pre-contractual information to be provided to customers;
• equires companies to assess the creditworthiness of borrowers via a database before validating
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the offer and to link the sales contract to the credit agreement;
• equires companies to explain to customers why they have been refused credit;
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• equires companies to inform customers about the interest rate, costs, the method used to
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calculate interest and any changes throughout the life of the agreement;
• einforces consumer protection by improving consumer rights (right of withdrawal, right of early
r
repayment, etc.) and by clearly formalising the obligations or each of the parties to the agreement;
• stablishes the need for transparency regarding intermediaries (costs, obligations, etc.).
e

The transposition and implementation of this new directive in each European country via a series of
national laws have now been completed according to the specific characteristics of the countries.
In the United Kingdom, France, Turkey and Italy, the transposition of the European directive has
targeted in particular revolving credit.

The framework for granting credit with the assessment of the borrower’s creditworthiness has been
generally reinforced by the European directive, resulting even in regulations governing the credit
approval process (for example Regulation T in Poland). In France, the Lagarde law enshrines the
principle for lenders to set up and consult a central consumer credit database. A report on the
arrangements for the implementation of this register was drawn up by the Constans Commission and
published in August 2011, but it has not yet been transposed into law.

In some States, a law has been enacted on credit intermediaries in order to redefine and
supervise their role. Two major measures have been decided for credit intermediaries. First,
retailers and distributors have been given increased responsibility as regards training and point
of sale information with a view to enabling consumers to choose the type of consumer finance
that corresponds to their personal situation. Secondly, in order to underscore the liability of
intermediaries, lenders now have the possibility to take legal action against an intermediary that fails
to comply with its obligations.

For specialist consumer finance companies, these wide-ranging regulatory changes make the
management of both borrowers and retail partners more complicated.

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2. Higher liquidity costs

At the same time, a new regulatory framework was introduced in September 2010 on the basis of
the work of the Basel Committee on Banking Supervision. Basel III imposes more challenging capital
and liquidity ratios on financial institutions, by specifying both short-term (30 day, Liquidity Coverage
Ratio) and long term (over one year, Net Stable Funding Ratio) liquidity ratios to be respected. As
financial institutions have up to 2019 to implement Basel III, pressure on the consumer credit costs is
likely to increase over the next seven years, while the supply of consumer credit is likely to fall at the
same time. Moreover, budgetary tightening measures adopted to contain the risks of the sovereign
debt crisis in Europe will also have a direct impact on consumer credit.

In order to maintain their profitability, banks in certain European countries are prioritising among
their business lines that consume the most liquidity. Specialist consumer finance companies are also
choosing between their product lines and targeting the lowest risk consumers in a flight to quality,
thereby increasing the possibility of a subsequent contraction of balance sheets.

II. Changing consumer expectations

For many years before 2008, consumer associations had denounced the dangers of revolving credit
in several European countries. In particular consumers had the feeling that they were…
• adly informed about their projects and “forced” to opt for a revolving credit, in most cases linked to
b
a credit card, systematically proposed by specialist consumer finance companies at the point of sale;
• adly informed about the loan’s characteristics (total cost, interest rate, etc.).
b

The post-crisis period is likely to be characterised by a more cautious and better balanced use of
credit according to a FICO/Efma survey carried out in May 2011.
• ustomers declared that they are less likely to borrow and are more interested in building up
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their savings.
• onsumers are more cautious and want to reduce their use of credit although they are sensitive
C
to the efforts of specialist consumer finance companies to revitalize their offerings.
• ustomers have improved their credit management skills: consumers now prioritise their
C
payments and pay down credit card debt in the same way as other obligations, including
mortgage payments.
• esponsible borrowing and lending expectations are increasingly important and transparency
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requirements are higher as regards both lenders and borrowers.

In conclusion, notwithstanding regulatory changes intended to promote more responsible lending
and borrowing practices in an enlarged market (“fewer excesses, more access”), credit continues to
be perceived negatively by consumers in general, with in particular a significant loss of interest in
revolving credit.

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III. Market changes and the impact on consumer credit

1. A fall in consumer credit outstanding

The gloomy economic environment, credit restrictions, tighter regulatory requirements and a lack of
liquidity have contributed to the fall in outstanding consumer loans in all European countries.

GROWTH RATE OF CONSUMER CREDIT OUTSTANDING BETWEEN 2009 AND 2011

Northern Europe
56% of EU’s outstanding

Southern Europe

Eastern Europe

2010 2011

-5

Source: ASF 2011

In 2011, for the second consecutive year, the European consumer credit market fell. Sofinco’s
annual consumer credit review published in March 2012 shows that consumer credit outstanding
fell by 2.9% in Europe between the end of 2010 and the end of 2011. This decline affected all
European regions: Southern Europe fell by 4.9%; Eastern Europe by 3.2% and Northern Europe by
1.5%. Some countries have even recorded stronger falls, such as Spain (-14%) and Ireland (-12%).
Overall, consumer credit levels fell in 20 out of 27 EU counties and there was therefore a very sharp
contraction in loan production.

2. A mixed situation on the consumer credit market

a. Significant geographical differences
The European Union represents almost a quarter of the world consumer credit market and total
consumer credit outstanding in the EU amounted to 1 071 billion euros in 2011. However, its
distribution is very uneven between European regions. There is a strong concentration of lending
in Northern Europe and Southern Europe, since these two regions account for 56% and 37%
respectively of total consumer credit outstanding, while they represent 41% and 39% respectively of
the European Union’s population. On the other hand, volumes are relatively low in Eastern Europe
since this region accounts for 7% of total consumer credit outstanding, whereas it represents 20% of

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the European Union’s population. Five countries stand out in Northern Europe and Southern Europe:
the United Kingdom, Germany, France, Italy and Spain, since they account for 75% of total loans
outstanding and represent 63% of the European Union’s population.

b. Consumer credit growth potential is higher in Eastern European countries
Despite significant geographical differences in total outstanding consumer loans, three indicators
point to a higher consumer credit growth potential in Eastern European countries:
• he growth rate of household debt between 2009 and 2011 (see chart below) which reached
T
around 30% in Eastern European countries, such as Turkey, while it is very low (around 0%) in
Northern and Southern European countries.
• he proportion of consumer credit in total household debt is still very low in Eastern European
T
countries, compared with 16% for the European Union as a whole.
• he “household debt ratio” which translates total consumer loans outstanding in relation to the
T
total household consumption of a country (see chart on page 9) is far lower in Eastern European
countries compared with a European average of 14.6% in 2011.

The consumer credit market therefore has significant growth potential in Eastern European countries in
comparison with Northern European and Southern European countries where the markets are mature.

INCREASE IN HOUSEHOLD DEBT OUTSTANDING

90
CAGR 2002-09 (Compound Annual Growth Rate) CAGR 2009-11
60

30

0

-30
Ukraine
Romania
Russia
Turkey

Bulgaria
Hungary
Czech Rep
Poland
Slovakia
Greece
Slovenia
Spain

Ireland
Austria
Denmark
France
Italy

UK
Belgium

Portugal
Nettherlands
Germany

Source: IHS Global Insight, based information from European central banks

8

RATIO OF HOUSEHOLD DEBT OUTSTANDING TO GROSS DOMESTIC PRODUCT IN 2011
by type of loan

160
Mortgage Loans Consumer Loans Other Loans

120

80

40

0
Romania
Poland
Czech Rep
Hungary

Russia
Ukraine
Bulgaria
Turkey
UK
Denmark
Austria
Belgium

France
Germany
Greece
Ireland
Italy

Netherlands
Portugal

Slovakia
Slovenia
Spain
Source: IHS Global Insight, based on information from European central banks

3. Differences by type of product between European countries

a. A stagnation of outstandings and a fall in the production of revolving credit in certain regions
The development of revolving credit, which was previously heavily promoted by specialist consumer
finance companies because of its high returns and contribution to customer retention, is a model
which is gradually being called into question in all European countries. The production of revolving
credit decreased sharply between 2008 and 2009 and revolving credit outstanding has stabilised in
countries in groups 2 and 3 (see chart on page 10), especially in France and Italy.

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EVOLUTION OF REVOLVING CREDIT OUTSTANDING BETWEEN 2008 AND 2011
BY GROUP OF COUNTRIES

200
Group 1 Group 2 Group 3

150

100

50

0
2008 2009 2010 2011

Group 1: UK, Netherlands, Turkey, Portugal; Group 2: Austria, Denmark, France, Germany, Czech Republic, Slovakia;
Group 3: Belgium, Italy, Ireland, Slovenia, Spain, Bulgaria, Ukraine, Russia, Hungary, Poland, Romania

Source: IHS Global Insight

This slowdown can be attributed to several factors:
• From the customer’s point of view:
– Worsening product perceptions.
– A growing awareness of its cost.
– The unstable economic environment.
• From the point of view of specialist consumer finance companies:
– ower returns: an increase in the cost of risk and regulatory changes in certain countries, .
L
such as France.
– The implementation of responsible lending principles and practices which favour instalment loans.

b. A core business of specialist consumer finance companies which is under attack
In mature countries, the core business of specialist consumer finance companies, which differ from banks
by their specific revolving credit know-how and distribution partnerships, is therefore under attack.
Furthermore, the possibilities for these lenders to switch to other consumer credit products are limited:
• ecause instalment credit has a lower cost of risk than revolving credit, the former is increasingly
B
distributed by account managers in bank networks and, accordingly, the pressure on margins on
this type of lending has increased since 2008.
• ebt consolidation requires significant customer knowledge and mortgage expertise. The
D
involvement of specialist consumer finance companies in this activity therefore remains marginal.
This activity was previously the domain of specialised financial institutions that distributed their
products via brokers. However, the major banking networks, which have the advantage of good
overall customer knowledge, mortgage expertise and the possibility to monitor borrowers, whose
salary is paid directly into their bank account, are increasingly moving into this market segment.
Their risk perspectives are better than those of specialist consumer finance companies.

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4. The competitive landscape of the consumer credit market

Since 2007, the competitive landscape has changed radically:
• cquisitions by banks of non-bank specialised credit providers, with a view to boosting liquidity
A
and capital.
• he increased influence of bank shareholders in joint ventures with distributors. The
T
disappearance or withdrawal of certain players and specialised subsidiaries (Internet pure
players and direct credit subsidiaries) for liquidity and risk reasons.
• eturns have trended down for all consumer credit players, even if 2010 was marked by an
R
upturn in profits. Nonetheless, profits are still far below the pre-crisis levels. According to IHS,
profitability levels should stabilise between 2012 and 2015 and outstanding consumer loans
are likely to increase only moderately. Credit production is not expected to return to 2008 levels
before 2015.
• he end of the race to achieve critical mass, with traditional players repositioning themselves and
T
refocusing on the markets where they have significant, profitable market shares, and in some cases
withdrawing from countries where the cost of risk is too high or their market share is inadequate.
• he arrival of new entrants on the consumer credit market (P2P, Telco, Utilities).
T

EVOLUTION OF AGGREGATED LOANS OUTSTANDING (€BN) AND PROFITABILITY (%)
on the basis of a panel selected by IHS

Outstanding loans After-tax result/shareholders’ equity
16% €400

12% €300

8% €200

4% €100

0 0
2006 2007 2008 2009 2010

Source: IHS Global Insight

This new competitive landscape is forcing traditional consumer credit providers to rethink their
business model.

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IV. The threats to the consumer credit business model

There are three major threats hanging over the consumer credit business model: pressure on margins,
pressure on overheads and pressure on the cost of risk.
The pressure on net banking income (volume and margin) is linked to…
• the decrease in the consumption of capital goods;
• credit restrictions leading to a reduction in the customer base of eligible customers;
• increased competition between lenders competing for customers with the best risk profile;
• the arrival of new entrants on the market.

In addition, certain countries may continue to reduce their usury rates in the coming years.
The upward trend in overhead costs is due to…
• he radicalisation of local regulations, with increased protection for borrowers, resulting in more
t
comprehensive documentation and more preliminary credit controls;
• stabilisation or increase in commissions paid to distribution networks and business introducers
a
in a context of falling interest rates.

Finally, it is more difficult to manage the cost of risk because of…
• he increase in overindebtedness in mature countries and in certain emerging countries such .
t
as Poland;
• he lasting effects of economic stagnation and the rise in unemployment undermine the
t
creditworthiness of borrowers during the life of the credit (prime to nearprime, near to subprime);
• he increased difficulties in recovering non-performing credits, leading to an increase in LGD
t
(Loss Given Defaults), with an adverse financial impact on provision calculation models.

V. The opportunities for the consumer credit business model

Faced with this bleak outlook, it would be a mistake for market participants to ignore the
opportunities open to them if they can adapt to these new expectations and needs.
• ap into demand in emerging markets where a middle class is emerging:.
T
In 2012, 50% of the population in emerging countries belongs to the middle classes. According
to INSEE’s projections, 80% of the population of emerging countries will belong to the middle
classes in 2030. However, penetration rates for durable goods remain low.
• dapt products to changing demand:.
A
The challenge is to launch simpler and more practical products based on new means of payment that
come from e-commerce and m-commerce. These new offers are developed for more mobile and often
younger consumers, also targeted by the major Internet players and mobile telephone operators.
• inance new needs for new customers:.
F
Long-term societal changes are likely to lead to changes in the way credit is promoted, with
specialist consumer finance companies placing the emphasis on projecting a strong image of
corporate responsibility to their customers. Pensioners, whose numbers are increasingly strongly
in the old Europe, could conceivably make greater use of credit to finance their projects, while
young adults are increasingly employed under fixed-term contracts or on a part-time basis.

In conclusion, the traditional consumer credit business model, based on the acquisition of new
customers, in particular thanks to in-store distribution partnerships, and on customer retention via
revolving credit card accounts, has been under threat since 2008. Specialist consumer finance
companies are reacting by optimising or reinventing their business model.

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Chapter 2: changes to the business model
of specialist consumer finance companies
I. The strategic levers for emerging from the crisis

Four major strategic levers have been identified in this survey to enable specialist consumer finance
companies to return to profitability. The actions to be taken as part of the implementation of these strategic
levers need to be coordinated with actions intended to renew the governance of these companies.

DESCRIPTION OF FOUR STRATEGIC LEVERS TO EMERGE FROM THE CRISIS

Optimisation Change

Lever 1 - Optimisation of the exisiting model Lever 2 - New business models
Adjust loyalty strategies Enlarge the offer of consumer credit
Transformation Levers

Enlarge the number of customers eligible for Diversify into peer-to-peer lending
consumer credit Capitalise on the Internet and mobile canal
Redistribute activities between countries: Explore opportunities to exit some
focus on countries with high potential and proven loss-making countries
business models

Lever 3 - Optimisation of the operational model Lever 4 - New operational models
Create European (nearshore) and international Switch to variable costs through outsourcing and
(offshore) industrial platforms Software as a service (SaaS)/Business process as
Develop synergies between specialist consumer a service (BpaaS) model
finance companies and retail banks

Upgrade governance
Reinforce the control frameworks and the role of central (vs. local)
Transpose social responsibility issue into responsible lending

Source: SOPRA Group

II. Actions to optimise business models

1. Adjusting customer loyalty strategies

The business model currently in use in specialist consumer finance companies was based mainly on
customer acquisition. However, the gloomy economic outlook and recent regulatory changes have
increased customer acquisition costs. As these costs are increasingly high, it is becoming more cost-
effective for specialist consumer finance companies to deploy loyalty strategies (from mass marketing
to one-to-one market thanks to behavioural segmentation), especially as they are now less expensive
thanks to the development of new technologies and the Internet.

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Customer retention strategies mean that it is necessary to adapt the customer lifecycle, by…
• multiplying customer contract opportunities thanks to the sale of additional products;
• mproving prevention processes by detecting more rapidly potential customer defaults (silent risky);
i
• calling customers in the case of late payment to propose solutions to prevent overindebtedness.

2. Combating the downward trend in the customer base of eligible borrowers

a. The downward trend in the pool of eligible borrowers
At the current time, the customer base of eligible borrowers is declining in mature countries in
Northern Europe and Southern Europe due to three major societal changes:
1. opulation ageing, which may be expected to encourage specialist consumer finance companies
P
to finance more projects for seniors: according to Eurostat’s forecasts, the percentage of people
aged 60 or over in Europe will reach 29.5% in 2030, versus 17.4% at the current time.
2. he weakening of the family structure, which is likely to lead to lenders reconsidering the
T
growing importance of people living on their own and single-parent families: according to
Eurostat data, the number of single-parent families in Europe in 2011 varies between 15% and
20% depending on the country, and this number is increasing constantly.
3. rowing labour market instability which concerns all categories of the population. This should
G
in particular encourage specialist consumer finance companies to review the way they profile
young people: according to Eurostat, fixed-term contracts represent 50% of all new employment
contracts concluded in the European Union. This increase in fixed-term contracts has been
accompanied by a reduction in job tenure and a fall in labour market entry ages. But the
majority of young adults go from one fixed-term contract to another and some lenders have
succeeded in characterising and segmenting this type of customer in order to grant them loans
tailored to their specific professional situation.

This decrease in the customer base of eligible borrowers linked to societal changes has been
intensified by the introduction of more stringent customer selection criteria because of a fall in the
profitability of consumer credit.

b. The need to expand the customer base by adjusting population targeting criteria
In order to halt the decline in the customer portfolios of specialist consumer finance companies,
Sopra Group considers that the criteria for targeting eligible borrowers need to be revisited in the
light of these societal changes and the new challenges facing the industry.

PROPOSED NEW ADDITIONAL CUSTOMER TARGETING CRITERIA

Prioritisation Parameters used New parameters to Proposed change in
take into account the customer selection rule
1 Job tenure of less than Sector in which the The more the sector is dynamic in
1 year individual works terms of job creation, the lower the
job tenure risk
2 Single-parent families The familiy’s assets The higher the assets, the lower the
risk of overindebtedness

Source: SOPRA Group

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Some previously discriminating loan application criteria, such as job tenure and single-parent family
status, could be reconsidered on the basis of more in-depth customer knowledge and by introducing
offerings adapted to their situation in order to re-integrate previously ineligible profiles.

3. Redistributing the activities of specialist consumer finance companies between countries and creating
European industrial platforms

In order to optimise their profitability, specialist consumer finance companies are rethinking their
international investments by:
• ocusing their investments on high-potential countries and withdrawing from countries where they
F
generate insufficient profits or have not yet reached critical mass. For example, in the revolving
credit segment, specialist consumer finance companies may be inclined to develop their activities
on the booming Eastern European markets.
• eorganising, even pooling some activities between countries (creation of pan-European
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industrial platforms).
• ooling certain components of the value chain (CRM, information systems, debt collection, etc.) with the
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retail bank of the same country, which is often the parent company of the consumer credit provider

UNICREDIT’S MULTICHANNEL, MULTI-COUNTRY STRATEGY
MultiChannel readiness rnline banking usage

Development of
GPD growth 2015
multichannel banking
50

40
Germany 1
Austria Multichannel
30 Champion
Turkey Slovenia

Czech Rep Poland
20 2
Hungary Italy
Step-up
10 multichannel
Serbia
Russia Bulgaira offering
Romania

100 200 300 400 500 600
Branch density per million inhabitants

Optimisation 3 4
of cost Reduction of Selective growth based
structure cost-to-serve on mkt attractiveness and
UniCredit postitioning

Source: Unicredit – Driving a Pan-European Multichannel Strategy

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To develop its activities, Unicredit has taken account of the specific characteristics of each of the
countries where it operates, by distinguishing countries with a multichannel development potential
from countries where cost optimisation is possible.

This analysis has enabled Unicredit to refine its overall strategy and redistribute its activities to take
the specific characteristics of countries into account. For example, Unicredit has pooled its call
centers in low-cost countries such as Turkey and has reinforced the weight of digital channels in those
countries where the quality of the customer experience is essential, such as Germany.

UNICREDIT’S MULTICHANNEL, MULTI-COUNTRY STRATEGY

Multichannel* Example of strategy implementation
1 2 3 4

Italy “Branch network • Cashless spoke branches
transformation and • Call center boost/upgrade
sales increase” • Online banking sales enablement boost
• Best-in-class mobile offering

Germany “Shift to predominantly • Smart banking services
multi-channel model” • Remote video sales/advice, extended opening hours
• Further enablement of direct sales in multi channels

Turkey “Fund growth from • Expand distribution smartly, introduce remote unattended branches
cost savings” • Leverage advanced call center
• Step up Web/Online banking

Czech Rep “Focus on Multichannel • Boost web, social media, e-payments, self service
exploiting the huge as aquistion methods
= Focus internet users base” • Smart network expansion

* Multichannels: 1 Multichannel Champion; 2 Step-up multichannel offering; 3 Reduction of cost-to-service; 4 Selective physical network development
Source: Unicredit – Driving a Pan-European Multichannel Strategy

The redistribution of multi-country activities will inevitably lead specialist consumer finance companies
to explore the benefits of creating international rather than simply European platforms (see chapter 4:
Operational efficiency).

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4. Developing synergies between specialist consumer finance companies and retail banks

The distinction between specialist consumer finance companies and retail banks is becoming increasingly
blurred. For several years, specialist consumer finance companies have also been providing banking
products and services while, vice versa, banks have been distributing consumer credit products.

CHANGES IN THE ACTIVITIES OF SPECIALIST CONSUMER FINANCE COMPANIES

Phase 1 Phase 2 Phase 3
Specialist credit institutions Service providers Banking product providers

Credit acceptance Servicing Savings

Credit management Insurance
(and customer care)

Soft collection
(call center, debt rescheduling,...)

Hard and legal collection

Source: SOPRA Group

Specialist consumer finance companies and retail banks are now facing the same challenges:
winning back consumer confidence, reducing the risk of overindebtedness among their customers
and protecting their profit margins despite increased constraints on volumes and costs.

Some specialist consumer finance companies have already multiplied synergies with their parent company.

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ADVANTAGES OF DEVELOPING SYNERGIES BETWEEN SPECIALIST CONSUMER
FINANCE COMPANIES AND RETAIL BANKS

Advantages for specialist consumer finance companies
Banks are in a position to provide liquidity to specialist consumer finance companies, including on local markets.
Cross-selling credit and banking products makes it possible to expand the network of partners, increase the customer
portfolio and enhance customer loyalty
Banks have specific risk management expertise and specific knowledge of traditional banking products from which specialist
consumer finance companies are increasingly benefiting

Advantages for retail banks
Consumer credit is a profitable business (the projected ROE of banks is between 10% and15% on average, compared with
18% to 20% for specialist consumer finance companies).
Specialist consumer finance companies have specific expertise in certain activities such as scoring, customer monitoring,
collection, e-credit and have IT platforms which could be shared by retail banks
Specialist consumer finance companies can be laboratories to test new practices, such as e-credit and dematerialisation
Specialist consumer finance companies have developed extensive partnership networks and would enable banks to be
present at points of sale

Example of synergies within the Société Générale group
In France, the personal loans of Société Générale’s retail bank are managed by the group specialist consumer credit arm
Franfinance under the Sogefinancement brand.
In Russia, Rusfinance and Rosbank have a joint system for contacting car dealers for car loans.
In the Czech Republic, Komercni Banca and Essox share the same call centers for collection purposes.

Source: SOPRA Group

The development of synergies between specialist consumer finance companies and retail banks helps to
reduce the pressure on margins with a more streamlined organisation thanks to a better division of work,
a focus on value added activities, a reinforcement of risk management procedures, the acquisition of new
consumers, a better customer follow-up, a wider range of services, an access to more liquidity, an access
to partnerships put in place (in particular at points of sale) and a reduction in overhead costs.

The successful implementation of synergies between retail banks and specialist consumer finance
companies presupposes that…
• he role of each party is clearly defined at central and local levels;
t
• he independence of the specialist consumer finance company is guaranteed:
t
- inancial autonomy which assumes that it has the necessary liquidity thanks to a diversified
– F
offering and the optimisation of its customer portfolio.
-– The possibility to develop synergies outside the group.
– he possibility for specialist consumer finance companies to offer banking services and take
- T
deposits.

18

III. Actions implemented as part of a change strategy

1. Diversifying the consumer credit offering

Specialist consumer finance companies can diversify their offerings in various ways:

FIVE AREAS OF DIVERSIFICATION FOR CONSUMER CREDIT OFFERINGS
Universe 2
1 Un
rse 2 ive
e rse
U niv 1 3

Life Insurance Home
3
Payment
Savings Auto
Universes
1. Savings business diversification
Credit
consommation 2. Payment business diversification
3. Insurance business diversification
Debt 4. Credit business diversification
consolidation loan
5. Loan mortgage debt
Micro Credit consolidation diversification
4
Mortgage

Uni 5
vers 5
e4 erse
Univ

Source: SOPRA Group

1. iversification by boosting balance sheet deposits (collecting deposits, savings accounts) as a
D
way of reducing the cost of liquidity and retaining customers when they have repaid a loan.
2. iversification into payment services as a way of developing into high-potential markets, such as
D
m-payments and e-payments, especially in emerging countries.
3. iversification into non-life insurance products, such as motor insurance and home insurance
D
would enable specialist consumer finance companies to engage in cross-selling and retain
their customers via insurance products closely linked to car loans or loans to finance home
improvement work.
4. iversification into the credit market consists for specialist consumer finance companies in extending
D
their activities to microcredit in emerging countries. Microcredit is not a traditional activity for
specialist consumer finance companies since it targets a market of entrepreneurs and individuals,
but it could be profitable given their expertise in project risk analysis and their networks in the
field (distributors decentralised from micro-financing institutions). This diversification would enable
specialist consumer finance companies to target specific customers in emerging countries, while
participating in the fight against social exclusion and promoting responsible lending.
5. ebt consolidation (mortgages and other debt) is increasingly becoming the domain of banks
D
which use it as a signature product. In this regard, specialist consumer finance companies could
adopt a distributor model (business introducer) for their parent company or banking partners.

19


2. Positioning on peer-to-peer lending communities

Peer-to-peer lending communities bring together lenders and borrowers in P2P transactions via an
Internet platform. The intermediary which operates the Internet platform does not bear the the risk
(except for its own contribution) since the risk is assumed directly by the community of lenders.

CREDIT APPROVAL PROCESS IN PEER-TO-PEER LENDING

Traditional activity Activities relative to intermediary
acceptance of funds
from private lenders
Management of the

The traditional value chain of credit institutions is doubled because of the management of lenders...

Lender Acceptance Validation
subscription

Borrower
Acceptance Validation Utilization Recovery
subscription

Online Assessing Customer
subscription instantly the Final decision management Return on debt
creditworthiness

Repayment
Creation of Instant response Funds collection (private borrowers
customer file and provision to private lenders)

Management of the provision Management of customers
of funds based on investment repayment based on a model
orders from lenders of risk sharing

Source: SOPRA Group

P2P lending communities can be an additional lever for traditional specialist consumer finance companies:
• irst, the offering is attractive. For lenders, P2P community lending offers a more attractive risk/
F
return trade-off than a market investment, while for borrowers the rate of P2P loans is lower than
the market rate.
• econdly, the model is cost-effective and relatively risk-free. The commission (or application fee)
S
charged by the intermediary is deducted directly from the amount disbursed to the borrower at the
time of the transaction. The liquidity costs are lower because of the limited amount lent in its own
name by the specialist consumer finance company: the total lent directly by the specialist consumer
finance company on the platform is determined in advance. This amount may be low since it is
intended above all to reassure customers about the quality of the loans. The risk cost for the specialist
consumer finance company is low because the risk is directly borne by the lenders.
• inally, P2P lending communities can be set up rapidly by these companies because they are
F
very familiar with ALM regulations for lenders and the credit chain for borrowers (scoring, credit
bureaus and eligibility criteria).

20

The marketing of P2P lending communities supposes, on the one hand, the creation of a new brand
(because of the difference in lending rates between a traditional credit offering and P2P lending
and to avoid confusion among consumers) and, on the other hand, an exclusively online distribution
model to keep costs low. For specialist consumer finance companies this involves, therefore, putting
in place multi-brand and multi-product management procedures and closely monitoring customer and
lender acquisition costs.

3. Capitalising on the opportunities created by Internet and mobile channels for traditional
credit providers

Unlike other industries, the consumer credit sector has not been marked by an influx of new entrants
with attractive pricing models offering little or no service. A pure player could cut its distribution and
management costs thanks to its Internet and mobile positioning. However, such a model is not really
feasible for new entrants since the credit management costs are low in comparison with the cost
of liquidity and risk: there is limited scope for making substantial cuts in the interest rates charged
to borrowers. Moreover, a low-cost (full web or full mobile) distribution model, without any human
interaction, would encounter problems because of the high risk cost (especially during the loan
approval and collection phases).

Nonetheless, specialist consumer finance companies could reinforce their multichannel strategy, in
particular on the Internet (e-credit, m-credit), and set up partnerships with new e-commerce players
and the retail sector which is undergoing a revolution (see Chapter 3).

4. Assessing whether it would be appropriate to withdraw from certain countries

When market conditions are unfavourable, the alternative to finding synergies with banks, reducing
costs or making a modest investment in low-potential countries is to exit the country in question.

The underlying principle behind this strategy is therefore for specialist consumer finance companies
to refocus on those activities where they are the most successful (“do more what you do best”) on
growth markets. These actions need to be carried out in consultation with the parent company
(retailer or bank) for which consumer credit is only part of its overall offering.

5. Switching to variable costs via outsourcing

In order to change their business model and cut their costs, specialist consumer finance companies
have the possibility to outsource or industrialise their back office and their information system.
Outsourcing enables specialist consumer finance companies to refocus on an activity of distributing
credit, while industrialisation enables them to remain producers and even become service providers
for third parties (see Chapter 4).

21


IV. Renewed governance

1. Reinforcing control frameworks and the role of central versus local

The role of central versus local has been reinforced in recent years, with closer monitoring of
acceptable credit risk levels and tighter controls on operational risk management and more generally
on all profitability levers.

ROLE OF CENTRAL (VS. LOCAL) BEFORE AND AFTER THE CRISIS

Pre-crisis Post-crisis

More synergies as a result of closer
Relative independence of
integration between retail banks
credit institutions owned by retail banks
and consumer finance companies

Operational control by the parent company of
Strong local autonomy in terms of strategy, the companies concerned: product and price
target customers, information systems and strategy; credit risks; costs cutting; operational
organisation as long as the credit institutions efficiency (internal platforms) and compliance
were profitable requirements (responsible lending, etc.).

Source: SOPRA Group

2. Transposing corporate social responsibility issues into responsible lending
Responsible lending is a means of…

• mproving the reputation of consumer credit which has suffered as result of the subprime crisis;
i
• mproving the pool of eligible consumer credit borrowers by changing segmentation criteria
i
(fixed-term contracts of employment and seniors);
• reating market opportunities by linking the financing of purchases of durable goods and
c
traditional credit offerings (bonuses for the purchase of low carbon-emission cars, etc.);
• nvesting in the quality of the long-term consumer relationships.
i

For specialist consumer finance companies, responsible lending means complying with the processes
described below.

22

CHANGES TO THE CREDIT BUSINESS MODEL LINKED TO THE IMPLEMENTATION
OF A RESPONSIBLE LENDING APPROACH

Putting a responsible Dialoguing with Dialoguing with Adapting processes Training all the
lending approach at customers stakeholders staff involved in
the centre of the (consumer the value chain
company’s project associations)

Being more Spending time To improve credit To offer a high-quality
transparent and qualifying customers offerings and market experience to new
providing indicators Explaining to customers acceptance consumers
such as rejection rates why their loan request
has been rejected and
how they could
become eligible

Managing performance according to corporate social responsibility standards

• Managing customers by identifying events which indicate a potential future problem
• Adapting operational performance criteria

Source: SOPRA Group

A responsible lending approach involves publishing completely transparent new indicators, such as
the monthly refusal rate, adopting new practices, such as explaining the reasons why consumer loan
applications are rejected, and defining wider eligibility rules.

In conclusion, responsible lending is not a revolution, but is part of the transformation of the business
model when it is linked to (or combined with) regulatory changes and societal changes.

23


Chapter 3: increasing customer value
To grow NBI per customer it is necessary to increase customer and partner satisfaction via a renewed
customer experience, better suited to the new media and new consumer behaviour patterns. The
drivers of increased customer value are examined below:
• nnovation and the development of new offerings for retailers and business introducers;
I
• nnovation and the development of new offerings for consumers, in particular multichannel
I
relations and a responsible credit offering, by improving the quality of the customer experience.

I. Innovation and development of new offerings for retailers

1. Dematerialisation at the point of sale helps to cut costs and save time

Recent changes in the European regulatory framework have made credit processing and approval
processes more burdensome. Paperless procedures, for example obtaining the customer’s signature
on a tablet, would facilitate and accelerate part of the formalities and thereby reduce costs:
• etailers save on paper.
R
• he company saves time and considerably reduces the costs involved in transmitting paper
T
documents, form-filling and archiving.

DEMATERIALISATION OF THE CREDIT ORIGINATION AND APPROVAL PROCESS IN FRANCE

Instruction process following new regulation Simplified process after dematerialization

in
ation
Illustr nce Personal information file A single document containing
Fra
customer’s agreement to have all
3 documents to his/her files dematerialized
be signed by the Dialogue file
customer
RESULTS
Contract

Front Office Processing Middle Office (Bank)
time nearly divided Transmission and
by 2 at POS* archiving time divided
approximately by 4*

* Based upon a pilot of 400 retailers produced by a bank

Source: SOPRA Group

In France, several point-of-sale paperless initiatives have already been piloted and are likely to be
rolled out on a wider scale in the international subsidiaries of the major players.

24

2. Capitalising on e-commerce and m-commerce to develop new offerings for retailers

Despite the buoyant growth of e-commerce between 2009 and 2011, with an increase of 18.2%
versus 2010, and a European e-commerce market valued at more than 200 billion euros in 2011
(according to the London-based Center For Retail Research), specialist consumer finance companies
have not fundamentally changed their value proposition next to their partners. E-retailers wanting
to install a mean of payment linked to a credit offering must contact the specialist consumer finance
company via a traditional approach (involving meetings with sales teams) and will be offered a
solution which consists in offering customers the possibility to pay in several times thanks to their
credit card. Specialist consumer finance companies therefore could maintain sales teams to market
their products to large and medium-sized retailers but it would not be cost-effective under these
conditions to target the vast number of small e-retailers.

However, in order not to miss out on the exceptional market opportunities created by e-commerce, some
companies have developed innovative solutions. Two types of solutions aimed at retailers are noteworthy:
• pecific solutions designed for large retail chains: for example, Crédit Agricole Consumer
S
Finance has supported La Redoute (leading French e-commerce operator which concludes the
bulk of its sales online) by developing a digital wallet service, which simplifies and accelerates
payments, and enables customers to benefit from credit terms when making payment. This wallet
replaces the traditional physical credit card.
• ackaged solutions which are accessible to any retailer that wants to offer credit terms to its
P
online customers and thereby increase significantly its sales. These solutions do not require
customers to have a physical credit card. The e-retailer submits its partnership application directly
online and receives a reply from the specialist consumer finance company which then sends it the
packaged solution to be downloaded and installed on the e-retailer’s website. This solution does
not involve organising meetings with the specialist consumer finance company and therefore
generates significant time savings.

INTERNET PLATFORM (1EURO.COM) DESIGNED BY A FRENCH SPECIALIST CONSUMER
FINANCE COMPANY (COFIDIS) TO OFFER AN E-CREDIT SOLUTION TO E-RETAILERS

For the specialist consumer finance company
An Internet credit platform enabling it to:
• increase its visibility via e-commerce partnerships
• capture new customers, not captured via credit cards, at a lower cost
• reduce marketing costs and develop partnerships at a lower cost
• target both large and small e-retailers

For e-consumers For e-retailers
Payment options in several instalments without the Possibility to offer payment facilities and
need to have a revolving credit card self-financing solutions which enable them to
increase their online sales

Source: SOPRA Group

25


II. Innovation and development of new offerings for consumers

The economic crisis and new consumption patterns have impacted on consumer expectations.

BORROWER EXPECTATIONS AND MEANS OF SATISFYING THESE EXPECTATIONS

Borrower expectations Means

A better quality customer experience • Low prices
• Transparent and flexible offerings
• Simplified, secure access to services
More responsible consumption • A
value proposition segmented by type
of consumers, taking recent societal
changes into account
To interact with specialist consumer finance • dvice tailored to the customer’s needs
A
companies on their offerings and to contribute and the coordination of communities
to the development of products and services via social networks
• ore points of contact with customers
M
(via social networks, mobile devices,
To have multi-channel access to services, telephone, the Internet, etc.)
in particular via mobile channels

Source: SOPRA Group

1. Improving the quality of the customer experience

Customers want to optimise their purchasing experience based on…
• ccess to information before purchasing that enables them to make the right choice;
a
• he possibility to consult their online networks to obtain feedback on the products and services
t
that they are considering buying;
• ccess to the necessary means to make purchases wherever they are;
a
• eceiving suitable advice either at the point of sale or via remote channels;
r
• n enhanced check-out experience thanks to better designed and more welcoming physical
a
points of sale.

Specialist consumer finance companies need to transform the traditional transactional model into
a relationship-driven model, use digital channels to optimise and personalise the customer lifecycle
(from customer acquisition to supporting customers in the management of their loans – see illustration
13) and improve the physical structures distributing their products (see illustration on page 27).

26

OPTIMISED CUSTOMER ACQUISITION AND SUPPORT PLAN

@ home with family/friends While moving @ the office

I’m in the
I’m watching TV, public
listening to the transportation
radio during my or in my car
breakfast while I’m in the office and I’m
checking weather surfing on the Internet
during my lunch time
forecasts and travel

I’m watching TV, I’m in my I’m looking for my lunch at
surfing on the convenience store the food corner ( lunch time)
Internet or calling
friends
I’m in the public
transportation or in
my car
When shopping

Source: BNP PF - Efma Conference – Changing models in the credit sector

THE CONCEPT-STORES DEVELOPED BY METRO BANK
Mutichannel sales
Maintaining a local presence via local branches while increasing access via digital channels
Capitalising on all contact opportunities (emails, social networks, video, etc.)

Innovative branches
Rolling out innovative branch models as a way of changing customer perceptions of the banking sector: fun atmosphere, etc.
Increasing value added interactions with branch staff by freeing up time for sales and advice
Recruiting staff on the basis of their customer service skills rather than their knowledge of financial services skills

An innovative customer vision
Developing emotional ties between consumers and their bank by focusing on brand attachment
Interconnecting all channels in order to trace the history of all customer interactions
Automated intelligence for following up all channel/customer interactions

Practical experience and services
Introducing simple but convincing services

Source: SOPRA Group

This is how Metro Bank illustrates the transformation to be implemented. Metro Bank’s analysis is based
on the conviction that consumers attach more importance to the quality of service than to the interest
rate. The pillars of Metro Bank’s strategy to develop a new customer experience are therefore…

27


Metro Bank’s growth model is based on a high level of customer satisfaction.

Another innovative example is also based on a multichannel offering: the specialist consumer finance
company Sberbank (ex Deniz Bank), based in Turkey, has focused on reactivity and undertakes to
respond to a customer loan request within 5 or 10 minutes via an ATM, SMS or by telephone. This
value proposition is based on a very high-quality central consumer credit database.

2. Developing responsible credit offerings

Wrongly or rightly, specialist consumer finance companies have been blamed for the excessive debt
problems of part of their customers. This explains why consumer organisations and the public authorities
have called for more responsible lending practices. In most sectors, corporate social responsibility is focused
on key issues such as the environment, health and well-being. In the financial services sector, these issues
also include the need to inform and educate customers and prevent problems of overindebtedness.

Companies have undertaken numerous initiatives to demonstrate their responsible behaviour...
• dapting their offerings to make them less risky and easier to understand for customers;
a
• ncreasing their efforts as regards information, financial education and raising customer
i
awareness about the financial impact of loans;
• upporting their customers throughout their lifecycle;
s
• eveloping new offerings that respond to customer environmental concerns and responsible
d
consumption expectations.

To educate their customers, several companies have launched variable rate credit cards which
reward the repayment performance of their customers: consumers who meet the repayment schedule
are rewarded by an interest rate reduction, which can even result in the last repayment instalments
beings waived. On the other hand, in the event of a payment default, the interest rate is increased.

In order to integrate corporate social responsibility criteria, ING has launched an environmentally
responsible loan which enables consumers who take out a car loan to benefit from an advantageous
rate if they buy a low-carbon emission car. The aim of this initiative is to stimulate the “green” car
market, for both new and second-hand cars.

3. Capitalising on the new distribution channels

a. E-credit and m-credit
Although e-commerce and m-commerce are growing rapidly at European level, the fact remains that
penetration rates vary considerably from one country to another: for example, in Europe, online sales
in Italy represent 2% of retail sales versus 11% in the United Kingdom.

From e-commerce to e-credit, it is just a few easy steps… that consumers are reluctant to take. The
first obstacle to e-credit is linked to consumer fears about online payment. That is why Compass,
a specialist consumer finance company in Italy, has developed a physical credit card with an
integrated mini-keyboard and screen. This system ensures maximal security for customers and
enables the company to guarantee transactions even in the case of fraud. Financing requests are
submitted directly online via the consumer’s personal space or via a dedicated smartphone app.
A loan simulator enables consumers to view the financing plan corresponding to their online loan
application. The second obstacle to e-credit is linked to the type of credit (for example, revolving
credit) which calls for advice and high degree of expertise.

28

There are also stumbling blocks for finance companies, namely the high risk level of the customers
captured and questions regarding the validity of electronic signatures for credit offers.

Each country has responded in its own way to these obstacles: putting in place a central consumer
credit database, legislation recognising online electronic signatures and secure e-payments with
market standards.

Noteworthy specific company initiatives include...
• acilitating seamless access to transactional services (viewing account balances, transfers, etc.)
f
via mobile apps;
• roposing products specifically online;
p
• eveloping partnerships with mobile virtual network operators (MVNO) in order to close the gap
d
between e-credit and m-credit and expand the brand territory. For example, Cofidis, a specialist
consumer finance company in France, distributes straightforward, commitment-free, budget-
priced mobile packages, adapted to its customers.

b. Social media
Today, almost 75% of teenagers and young adults (18-25 year olds) use social networks in Europe
(Facebook, Twitter, Linkedin, etc.). In this regard, it is preferable to use the wider concept of social
media, which includes not only social networks but also forums, blogs, collaborative platforms (such as
Wikipedia) and multimedia platforms (such as YouTube). According to Gartner’s projections, by 2015,
50% of Internet sales will be generated by a presence on social media. Social media have therefore
become not only a key challenge for specialist consumer finance companies, but also an opportunity to...
• nteract with customers constantly connected about the services offered and about prevention,
i
without the specialist consumer finance company intruding into the life of consumers;
• atisfy consumer demand for a multichannel experience;
s
• mprove their online reputation provided that they really listen to consumers and that consumers
i
can obtain rapid and appropriate answers;
• nhance customer loyalty, since satisfied consumers will spontaneously defend their bank in
e
response to negative comments about it.

Specialist consumer finance companies are still in the initial stages of adopting this channel: they
monitor comments posted about them on social media in order to defend their e-reputation and
define their value creation strategy. The challenge is to improve their business performance via a
carefully considered and consistent presence on the various social media.
To move to the next level, specialist consumer finance companies should ideally respect several rules:
• dopt the same overall strategy on social media as on their other channels, while attempting to
A
maintain the same image and disseminating homogenous information.
• ommunicate with consumers by involving employees, who are the best spokespersons of their
C
company, and by training staff in the use of these new media.
• ffer new services to consumers (for example, warning them via Twitter about account movements).
O
• nvolve consumers in the development of products and services.
I

In conclusion, although specialist consumer finance companies are very much aware that they need
to become more involved on social networks, they are still undecided about the best way to social
media as a source of business in their own right.

29


Chapter 4: towards greater operational efficiency
I. Switch to variable costs and reduce middle and back office costs

1. Switching to variable costs via outsourcing

Specialist consumer finance companies are increasingly outsourcing or industrialising their back office and
their information and operating systems, depending on the strategy adopted, in order to optimise their
operational efficiency. Outsourcing enables financial institutions to refocus on an activity of distributing
credit, while industrialisation enables them to remain producers and even become service providers for
third parties (including for competitors), and to reduce the unit cost of their credit management.

FRAMEWORK OF ACTIVITIES WHICH COULD BE INDUSTRIALISED OR OUTSOURCED
Business activity Support functions

Industrialisation Internalisation

Contract management Credit Acceptance policy
Business Credit servicing underwriting risk management
Specific
Assets
Marketing Debt collection

Outsourcing Internalisation

Litigation HR Administration Organisation Finance
Non
Specific
Assets Information system Accounting

Production support activities Strategic activities
Source: SOPRA Group

Furthermore, some support functions, which are not business-specific or strategic, are ideally suited
to outsourcing: notably, accounting, facilities management (property management, purchasing,
mail, etc.), as well as human resources (industrialisation of payroll, etc.), provided that the specific
regulatory constraints of the countries concerned are taken into account.

2. Pooling back offices to enhance the quality of service by creating international industrial platforms

a. Advantages of pooling activities for the consumer credit industry
Consumer credit, which is one of the most industrial segments of the banking and parabanking sector,
is structurally geared to capturing the advantages of pooling namely: economies of scale, thanks to the
centralisation of the activity; improved productivity; and cost-sharing as regards the implementation of
changes (regulatory, etc.). It also enables companies to deliver a standardised quality of service, by
benchmarking best practices, achieving crucial mass for back offices and centralising expertise. Lastly,
it enables companies to improve their operational risk controls by...
• mproving anomaly detection and processing (better qualification and capitalisation on other
i
experiences, etc.);
• acilitating the implementation of regulatory and product changes;
f
• mplementing in-depth controls.
i

30

b. Advantages of international pooling
International pooling involves grouping core business activities (middle and back-office), sharing
information systems via centralised platforms and, sometimes, constructing regional hubs to handle
support activities (HR, accounting, regulatory matters).

This pooling is fully in line with the challenges facing specialist consumer finance companies which
want to reduce their costs and rationalise their international networks, which are based on a mixture
of acquisitions and specifically formed foreign entities. Nonetheless, there has been little pooling as
yet of back offices in the consumer credit industry in Europe and most of the initiatives in this area
have concerned intra-country back office mergers (for example the pooling of credit management
and collection implemented by BNP PF and Société Générale in the countries where retail banks and
specialist consumer finance companies co-exist).

c. International pooling: the obstacles and drivers
The current low level of pooling in Europe can be attributed to the importance of the obstacles which
companies face, since international pooling cannot be implemented across all activities in all countries:
• he lack of integration of credit legislation within the EU complicates matters. Although Brussels
T
wants to harmonise the practices of specialist consumer finance companies at European level,
the fact remains that national regulators tend to change their laws according to their country’s
specific issues.
• ot all activities can be pooled geographically because of very significant differences as
N
regards market research costs and IT development.

INTERNATIONAL POOLING: DRIVERS AND OBSTACLES

Local level National level National level

Key drivers • Physical proximity • High volumes • High volumes
• Need for reactivity • High fixed costs • High fixed costs
• High investments • High investments
• Rare expertise • Rare expertise
• Little need for customer physical • Little need for closeness to the customer,
proximity at B/Office level the workforce and management

Obstacles • Complexity • Complexity
– Adaptation of the back-office – Adaptation of the back-office to diverse
to diverse product offerings product offerings
– Different IS to – Different IS
• Low reactivity – National banking regulation
– Protection of customer data
– Different languages and cultures
– Different payroll costs
• Low reactivity

Financial gains

Source: SOPRA Group

31


d. Activities which can be pooled internationally by specialist consumer finance companies
The objective of pooling activities internationally is to industrialise them while respecting each
country’s specific characteristics. Some activities lend themselves more readily to pooling than others:
• ore business activities: credit origination and management, soft collection via call centers
C
provided that this is not detrimental to the customer relationship (see chart below).
• upport functions: network assistance, accounting, facilities management and HR (see chart on page 33).
S

SPOTLIGHT ON THE CHARACTERISTICS OF THE ACTIVITIES OF SPECIALIST
CONSUMER FINANCE COMPANIES

Activities Critical Industrialisation process Need for Customer Strategic National
size expertise sensitivity importance constraint
Credit acceptance +++ High Average High High Average
Credit management ++ High Average Average Average Average
Soft collection ++ Strong industrialisation in process Average High High Average
Hard and legal collection ++ High Average Average Average High
Savings + High Average High Average Average

Driver of pooling Neutral Obstacle of pooling

Activities Possibility of international pooling
Credit Acceptance Yes, while leaving activities under the country’s responsibility (scoring, etc.)
Credit Management Yes
Soft Collection Yes, but without undermining the customer relationship
Hard and Legal Collection Not recommended because of the need for close contact with the parties involved (bailiffs, etc.)
Savings Not recommended because of the lack of critical size

Source: SOPRA Group

32

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