Crisis. The view is shifting from a health crisis with an intelligent ‘lockdown’ to an economic crisis ahead. The IMF claims that this crisis will be as bad as ‘The Great Depression’. Is this the right time for you as lender to innovate, generate client value and make impact in society?
Impact on our societal and economic reality will remain present for a long time
The ‘new way of working’ has also made its way to the mortgage market because of the corona crisis. Mortgage lenders and advisors have paid a lot of attention to their own ‘corona protocols’ and the creation of a safe work environment in accordance with RIVM’s guidelines these past months. While the occupancy rate on intensive cares is decreasing, people in the Netherlands are looking forward to the 1st of June to grab a beer at the terrace in the new 1,5-meter society. The virus will remain in our midst until the development of a vaccine or medication. Therefore, the impact on our societal and economic reality will continue to remain large.
Lenders risk credit losses and need to prove client value
The size of the economic impact is still unsure, but the effects have already emerged in several fields. For instance, expenses for travelling and leisure related activities have decreased significantly these past two months. From a macro perspective, the Dutch economy is expected to shrink with 5% till 8% in 2020. This has a direct impact on jobs and therefore the securities that employees have accumulated.
Whereas the mortgage market was an important cause of the previous economic crisis, mortgage lenders now have the right resources at hand to help their clients in this health crisis. As a mortgage lender or advisor, you can prove your added value now by helping your clients with questions and problems they are facing. Above all, now is the time to identify, limit and/or prevent potential financial problems of clients.
Contacting the right clients is of utmost importance
As the economic outlook darkens and corona guidelines remain, client situations may change. Part of the clients will remain unaffected by the corona crisis. Another part is likely to lose their job but will manage to find temporary employment or have accumulated sufficient money to continue mortgage repayments. Especially elderly have often saved more money, on which they can rely on in these difficult times. And a part will lose their job and must deal with payment difficulties because of their fixed costs. These people might work in the travel or hospitality industry, possibly hired on a self-employed basis. As a mortgage lender, you can prove your added value to these groups by facilitating contact proactively and reactively.
Belief that you achieve more when you differentiate and personalise contact
The need for information and support for mortgage payments differs strongly, which is why it is important to get in touch with the right clients. In practice, we see that a combination of data insights and principles from behavioural economics are very effective for setting up a differentiated client contact approach. A way of working based on data also helps to generate controllable management information.
Which clients need support and how do you efficiently use your resources
You need to know which clients to approach. Clients in the group that faces payment difficulties, ask for a different approach than the group that still has the savings needed to fulfil their payment obligations. Identifying who you are talking to helps to bring across the right message. It also matters how successful you are in helping clients with mitigating measures. In this way, mortgage advisors and lenders can use their limited time efficiently by sending an aimed message to the right clients. An example of how to combine both is shown in figure 1.
Figure 1: Example segmentation with data driven insight for clients with payment difficulties
Use machine learning for identification of the right client communication
The clients with an urge for help and the highest chance of success are in the red area (figure 1). Machine learning techniques are very effective to identify the right clients, whether it is for clients with payment difficulties or to identify the chance of success when mitigating measures are applied.
Machine learning can use a combination of historical datasets and expert judgement to make an estimation. In this way, characteristics can be identified of clients with a risk for payment difficulties, combined with the success of mitigating measures and this can be plotted against your client portfolio. This is no absolute truth, but it does estimate chances better with a factor of 2 to 3 compared to estimations solely from experts. Subsequently, you can develop feedback loops to keep approaching the right clients with great accuracy and a personalised message that fits their needs and activates them.
Client activation: using insights from behavioural economics
When the right clients are identified, activating them is the next important step. We can use principles from Behavioural Economics to achieve this. These principles are already successfully being implemented in several places, for instance by our prime minister in his corona speeches. Behavioural Economics uses our knowledge of human psyche to push us in the direction of a preferred action. When it comes to client activation for mitigating potential payment difficulties, there are numerous possibilities. Examples on how to convince clients to perform a certain action are offering a limited amount of options, the majority principle or the ‘profit-or-loss’ framework. The feedback loop and the above-mentioned machine learning algorithms help to gain continuously improving insights into which actions and techniques are most likely to be successful for specific clients.
Conclusion: taking control and generating client value to win
As a mortgage lender, you can take control in these times, generate client value and avoid or limit payment difficulties. You can do this by using the techniques mentioned in this article, from both machine learning and behavioural economics. By approaching the right clients proactively about their potential problems, you stress your added value as mortgage lender or advisor and truly play to win.
Director at IG&H
T: 06 2035 2438