Financial institutions take risks as a routine part of daily business.
Mortgage products that were heavily promoted before the global financial crisis, including interest-only loans and option ARMS, were heralded as great innovations but had disastrous outcomes for many. At a recent banking conference innovation in consumer finance was said to have caused a lack of trust in the industry, but is also what might bring it back.
One of the most important lessons banks have learned over the past several years is that it is critical to listen to what your customers really want and deliver on that because it is impossible to win if your customers feel like they are losing.
Consumers understand that businesses need to make money. What they dont like is being taken advantage of - free checking that really isnt free or low airfares that double once all the extra fees are added in. While shopping for a car last month I walked out of a dealership because I was sitting in the finance office ready to buy and the salesman kept asking What can I do to earn your business today? but was unwilling to negotiate on price. It seemed like a trick question because I was giving him an answer, he just didnt offer any concessions (on price or otherwise).
As customers we need to be shown the value, not be expected to guess about why a company deserves our business. It doesnt matter whether you are buying a car or a banking product, the terms should be transparent and fair. Banks faced this truth in the wake of the subprime mortgage crisis when non-traditional loan products created a 7 trillion dollar housing bubble. Banks that responded to the swipe-fee cap in the Dodd-Frank financial reform act by charging monthly fees for debit card usage only added fuel to the fire.
While these may have been innovative ideas for banks, consumers best interests were not always taken into consideration. If innovation caused the lack of trust in the financial system, then innovating to bring that trust back will require a new path. There are more opportunities in 2013 than ever before to do this, with less risk and greater customer satisfaction.
Advancements in credit analytics and automation bring consistency that yields a fair process. Optimization and a greater variety of data are helping shape smart risk taking strategies while giving customers the products they really want.
Optimization allows banks to ensure consumers are being matched with the right products while still being profitable. It brings a scientific approach to finding the right product, price and terms for each customer. Use of this technology enables customer service representatives to sell in a consistent and repeatable way - but not by offering the identical product to everyone who walks through the door. Some customers are willing to pay an annual fee for a credit card if its rewards program is meaningful to them. Others are opposed to fees across the board. Banks have a wealth of historical data to draw upon to understand what their customers value and make offers based upon that knowledge.
Trust is earned by listening to what customers want and need, designing products that meet those needs and delivering those products effectively. Consider my car shopping example, a different dealership earned my business that day because they listened to my offer and we agreed upon terms acceptable to both parties.
There was no guesswork and I saw the value in my investment. In any industry, providing products that are good for consumers with terms that are both transparent and fair will yield higher returns. Banks today are making decisions better, faster and at a lower cost. Innovation may just be what brings consumer trust back around.
Karen Gordon is public relations strategist for Zoot Enterprises Inc., a provider of loan origination, account acquisition and credit risk management solutions for large financial institutions. You can follow her on Twitter @karenrgordon.