CONSUMER CREDIT: A RAPIDLY CHANGING LANDSCAPE

CONSUMER CREDIT: A RAPIDLY CHANGING LANDSCAPESeptember 2012

REPORT

2

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

3

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:..•...The.impact.on.consumer.credit.of.regulatory.changes.and.changes.in.

consumer.behaviour...•...The.threats.and.opportunities.for.the.consumer.credit.market...•...The.strategic.and.operational.levers.for.optimising.and.reinventing.the.

business.model.in.the.framework.of.a.renewed.system.of.governance...•...The.actions.to.increase.customer.value...•...The.ways.of.increasing.operational.efficiency.

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 BrunaExecutive.Director.Strategic.DevelopmentSopra.Banking.Software

.

Patrick DesmarèsSecretary.General.Efma

4


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.....Operational.efficiency:.rationalising.activities.by.country,.developing.closer.synergies.with.

retail.banking.when.the.parent.company.is.a.bank,.and.reducing.information.system.costs.and.operating.expenses.

..3....Tighter.risks.controls:.developing.default.prevention.processes.and.more.efficient.and.better.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....Diversifying.towards.a.bancassurance.model.in.order.to.increase.the.number.of.products..

per.customer...2....Exiting.certain.markets/countries.where.the.potential.and.the.market.position.are..

considered.unsatisfactory...3.....Refocusing.on.the.business.of.distributing.credit.by.outsourcing.back.offices.and.IS.or.

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:..•...Constructing.a.value.proposition.that.is.better.suited.to.the.needs.of.increasingly.mobile.

customers,.in.particular.by.integrating.social.media...•..Capitalising.fully.on.the.Internet,.for.the.management.of.both.partners.and.consumers...•...Continuing.to.invest.in.innovation:.for.example,.dematerialisation.at.the.point.of.sale.helps.to.

shorten.considerably.the.loan.origination.and.approval.processes...•...Integrating.the.corporate.social.responsibility.expectations.of.consumers.and.the.regulator,.by.

ensuring.a.duty.of.advice.in.terms.of.approval.practices.and.customer.services.

5

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…..•...regulates.credit.advertising,.by.requiring.adequate.explanations.to.be.provided.to.consumers;..•...enhances.the.information.to.be.provided.by.specialist.consumer.finance.companies.to.

consumers,.by.proposing.Standard.European.Consumer.Credit.Information.and.a.representative.example.of.pre-contractual.information.to.be.provided.to.customers;

..•...requires.companies.to.assess.the.creditworthiness.of.borrowers.via.a.database.before.validating.the.offer.and.to.link.the.sales.contract.to.the.credit.agreement;

..•...requires.companies.to.explain.to.customers.why.they.have.been.refused.credit;

..•...requires.companies.to.inform.customers.about.the.interest.rate,.costs,.the.method.used.to.calculate.interest.and.any.changes.throughout.the.life.of.the.agreement;

..•...reinforces.consumer.protection.by.improving.consumer.rights.(right.of.withdrawal,.right.of.early.repayment,.etc.).and.by.clearly.formalising.the.obligations.or.each.of.the.parties.to.the.agreement;

..•...establishes.the.need.for.transparency.regarding.intermediaries.(costs,.obligations,.etc.).

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..

6


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…..•...badly.informed.about.their.projects.and.“forced”.to.opt.for.a.revolving.credit,.in.most.cases.linked.to.

a.credit.card,.systematically.proposed.by.specialist.consumer.finance.companies.at.the.point.of.sale;..•...badly.informed.about.the.loan’s.characteristics.(total.cost,.interest.rate,.etc.).

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...•...Customers.declared.that.they.are.less.likely.to.borrow.and.are.more.interested.in.building.up.

their.savings...•...Consumers.are.more.cautious.and.want.to.reduce.their.use.of.credit.although.they.are.sensitive.

to.the.efforts.of.specialist.consumer.finance.companies.to.revitalize.their.offerings...•...Customers.have.improved.their.credit.management.skills:.consumers.now.prioritise.their.

payments.and.pay.down.credit.card.debt.in.the.same.way.as.other.obligations,.including.mortgage.payments.

..•...Responsible.borrowing.and.lending.expectations.are.increasingly.important.and.transparency.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.

7

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.

.

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 differencesThe.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.

Northern Europe56% of EU’s outstanding

Southern Europe37% of EU’s outstanding

Eastern Europe7% of EU’s outstanding

2010 2011

-5

GROWTH RATE OF CONSUMER CREDIT OUTSTANDING BETWEEN 2009 AND 2011

Source: ASF 2011

8


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 countriesDespite.significant.geographical.differences.in.total.outstanding.consumer.loans,.three.indicators.point.to.a.higher.consumer.credit.growth.potential.in.Eastern.European.countries:..•...The.growth.rate.of.household.debt.between.2009.and.2011.(see.chart.below).which.reached.

around.30%.in.Eastern.European.countries,.such.as.Turkey,.while.it.is.very.low.(around.0%).in.Northern.and.Southern.European.countries.

..•...The.proportion.of.consumer.credit.in.total.household.debt.is.still.very.low.in.Eastern.European.countries,.compared.with.16%.for.the.European.Union.as.a.whole.

..•...The.“household.debt.ratio”.which.translates.total.consumer.loans.outstanding.in.relation.to.the.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..

.

.

-30

Ukr

aine

Rom

ania

Russ

ia

Turk

ey

Bulg

aria

Hun

gary

Cze

ch R

ep

Pola

nd

Slov

akia

Gre

ece

Slov

enia

Spai

n

Irela

nd

Austr

ia

Denm

ark

Fran

ce Italy UK

Belg

ium

Portu

gal

Net

ther

land

s

Ger

man

y

0

30

60

90

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

INCREASE IN HOUSEHOLD DEBT OUTSTANDING

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

9

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 regionsThe.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..

0

Rom

ania

Pola

nd

Cze

ch R

ep

Hun

gary

Russ

ia

Ukr

aine

Bulg

aria

Turk

ey UK

Denm

ark

Austr

ia

Belg

ium

Fran

ce

Ger

man

y

Gre

ece

Irela

nd Italy

Net

herla

nds

Portu

gal

Slov

akia

Slov

enia

Spai

n

40

80

120

160Mortgage Loans Consumer Loans Other Loans

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

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

10


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:.....–..Lower.returns:.an.increase.in.the.cost.of.risk.and.regulatory.changes.in.certain.countries,..

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 attackIn.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:...•...Because.instalment.credit.has.a.lower.cost.of.risk.than.revolving.credit,.the.former.is.increasingly.

distributed.by.account.managers.in.bank.networks.and,.accordingly,.the.pressure.on.margins.on.this.type.of.lending.has.increased.since.2008.

..•...Debt.consolidation.requires.significant.customer.knowledge.and.mortgage.expertise..The.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.

02008

50

100

150

200

2009 2010 2011

Group 1 Group 2 Group 3

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

Source: IHS Global Insight

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

11

4. The competitive landscape of the consumer credit market

Since.2007,.the.competitive.landscape.has.changed.radically:..•...Acquisitions.by.banks.of.non-bank.specialised.credit.providers,.with.a.view.to.boosting.liquidity.

and.capital...•...The.increased.influence.of.bank.shareholders.in.joint.ventures.with.distributors..The.

disappearance.or.withdrawal.of.certain.players.and.specialised.subsidiaries.(Internet.pure.players.and.direct.credit.subsidiaries).for.liquidity.and.risk.reasons..

..•...Returns.have.trended.down.for.all.consumer.credit.players,.even.if.2010.was.marked.by.an.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..

..•...The.end.of.the.race.to.achieve.critical.mass,.with.traditional.players.repositioning.themselves.and.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..

..•...The.arrival.of.new.entrants.on.the.consumer.credit.market.(P2P,.Telco,.Utilities).

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

02006

4%

8%

12%

16%

0

€100

€200

€300

€400

2007 2008 2009 2010

Outstanding loans After-tax result/shareholders’ equity

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

Source: IHS Global Insight

12


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…..•...the.radicalisation.of.local.regulations,.with.increased.protection.for.borrowers,.resulting.in.more.

comprehensive.documentation.and.more.preliminary.credit.controls;..•...a.stabilisation.or.increase.in.commissions.paid.to.distribution.networks.and.business.introducers.

in.a.context.of.falling.interest.rates.

Finally,.it.is.more.difficult.to.manage.the.cost.of.risk.because.of…..•...the.increase.in.overindebtedness.in.mature.countries.and.in.certain.emerging.countries.such..

as.Poland;..•...the.lasting.effects.of.economic.stagnation.and.the.rise.in.unemployment.undermine.the.

creditworthiness.of.borrowers.during.the.life.of.the.credit.(prime.to.nearprime,.near.to.subprime);..•...the.increased.difficulties.in.recovering.non-performing.credits,.leading.to.an.increase.in.LGD.

(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...•...Tap.into.demand.in.emerging.markets.where.a.middle.class.is.emerging:.

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.

..•...Adapt.products.to.changing.demand:.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..

..•...Finance.new.needs.for.new.customers:.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..

13

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.

.

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.

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

DESCRIPTION OF FOUR STRATEGIC LEVERS TO EMERGE FROM THE CRISIS

Source: SOPRA Group

Optimisation ChangeTr

ans

form

atio

n Le

vers

Upgrade governanceReinforce the control frameworks and the role of central (vs. local)

Transpose social responsibility issue into responsible lending

Lever 1 - Optimisation of the exisiting model

Adjust loyalty strategies

Enlarge the number of customers eligible for consumer credit

Redistribute activities between countries: focus on countries with high potential and proven business models

Lever 3 - Optimisation of the operational model

Create European (nearshore) and international (offshore) industrial platforms

Develop synergies between specialist consumer finance companies and retail banks

Lever 2 - New business models

Enlarge the offer of consumer credit

Diversify into peer-to-peer lending

Capitalise on the Internet and mobile canal

Explore opportunities to exit some loss-making countries

Lever 4 - New operational models

Switch to variable costs through outsourcing and Software as a service (SaaS)/Business process as a service (BpaaS) model

14


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;..•...improving.prevention.processes.by.detecting.more.rapidly.potential.customer.defaults.(silent risky);..•..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 borrowersAt.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.....Population.ageing,.which.may.be.expected.to.encourage.specialist.consumer.finance.companies.

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.....The.weakening.of.the.family.structure,.which.is.likely.to.lead.to.lenders.reconsidering.the.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.....Growing.labour.market.instability.which.concerns.all.categories.of.the.population..This.should.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 criteriaIn.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

Source: SOPRA Group

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

15

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:...•...Focusing.their.investments.on.high-potential.countries.and.withdrawing.from.countries.where.they.

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.

..•...Reorganising,.even.pooling.some.activities.between.countries.(creation.of.pan-European.industrial.platforms).

..•...Pooling.certain.components.of.the.value.chain.(CRM,.information.systems,.debt.collection,.etc.).with.the.retail.bank.of.the.same.country,.which.is.often.the.parent.company.of.the.consumer.credit.provider

100

10

20

30

40

50

200 300 400 600

Turkey

Czech Rep

Slovenia

PolandHungary

RussiaRomania Bulgaira

Serbia

Germany

Austria

Italy

GPD growth 2015

Mul

tiCha

nnel

read

ines

s rn

line

bank

ing

usag

e Development ofmultichannel banking

Optimisationof coststructure

3 Reduction ofcost-to-serve

4 Selective growth based

on mkt attractiveness and UniCredit postitioning

1MultichannelChampion

2Step-up

multichanneloffering

500Branch density per million inhabitants

UNICREDIT’S MULTICHANNEL, MULTI-COUNTRY STRATEGY

Source: Unicredit – Driving a Pan-European Multichannel Strategy

16


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.

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)..

Italy

1 2 3 4Example of strategy implementationMultichannel*

• Cashless spoke branches• Call center boost/upgrade• Online banking sales enablement boost• Best-in-class mobile offering

Germany • Smart banking services• Remote video sales/advice, extended opening hours• Further enablement of direct sales in multi channels

Turkey • Expand distribution smartly, introduce remote unattended branches• Leverage advanced call center• Step up Web/Online banking

Czech Rep • Boost web, social media, e-payments, self service as aquistion methods• Smart network expansion

“Branch network transformation and sales increase”

“Shift to predominantly multi-channel model”

“Fund growth from cost savings”

“Focus on Multichannel exploiting the huge internet users base”= Focus

UNICREDIT’S MULTICHANNEL, MULTI-COUNTRY STRATEGY

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

17

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..

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..

CHANGES IN THE ACTIVITIES OF SPECIALIST CONSUMER FINANCE COMPANIES

Source: SOPRA Group

Phase 1Specialist credit institutions

Credit acceptance

Hard and legal collection

Credit management(and customer care)

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

Servicing Savings

Insurance

Phase 2Service providers

Phase 3Banking product providers

18


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

Advantages for specialist consumer finance companiesBanks 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 banksConsumer 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 groupIn 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…...•....the.role.of.each.party.is.clearly.defined.at.central.and.local.levels;...•....the.independence.of.the.specialist.consumer.finance.company.is.guaranteed:.....-.–....Financial.autonomy.which.assumes.that.it.has.the.necessary.liquidity.thanks.to.a.diversified.

offering.and.the.optimisation.of.its.customer.portfolio......-–..The.possibility.to.develop.synergies.outside.the.group.......-–...The.possibility.for.specialist.consumer.finance.companies.to.offer.banking.services.and.take.

deposits.

19

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:.

..1....Diversification.by.boosting.balance.sheet.deposits.(collecting.deposits,.savings.accounts).as.a.way.of.reducing.the.cost.of.liquidity.and.retaining.customers.when.they.have.repaid.a.loan..

..2....Diversification.into.payment.services.as.a.way.of.developing.into.high-potential.markets,.such.as.m-payments.and.e-payments,.especially.in.emerging.countries.

..3....Diversification.into.non-life.insurance.products,.such.as.motor.insurance.and.home.insurance.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....Diversification.into.the.credit.market.consists.for.specialist.consumer.finance.companies.in.extending.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....Debt.consolidation.(mortgages.and.other.debt).is.increasingly.becoming.the.domain.of.banks.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.

Universes1. Savings business diversification2. Payment business diversification3. Insurance business diversification4. Credit business diversification5. Loan & mortgage debt consolidation diversification

Credit consommation

Life Insurance

SavingsPayment

Mortgage

Home

Auto

Debt consolidation loan

Micro Credit

Universe

1Universe 2

Universe 3

Universe 4 Universe 5

12

3

4

5

FIVE AREAS OF DIVERSIFICATION FOR CONSUMER CREDIT OFFERINGS

Source: SOPRA Group

20


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.

P2P.lending.communities.can.be.an.additional.lever.for.traditional.specialist.consumer.finance.companies:..•....First,.the.offering.is.attractive..For.lenders,.P2P.community.lending.offers.a.more.attractive.risk/

return.trade-off.than.a.market.investment,.while.for.borrowers.the.rate..of.P2P.loans.is.lower.than.the.market.rate..

..•....Secondly,.the.model.is.cost-effective.and.relatively.risk-free..The.commission.(or.application.fee).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.

..•....Finally,.P2P.lending.communities.can.be.set.up.rapidly.by.these.companies.because.they.are.very.familiar.with.ALM.regulations.for.lenders.and.the.credit.chain.for.borrowers.(scoring,.credit.bureaus.and.eligibility.criteria).

Man

agem

ent o

f the

ac

cept

ance

of f

unds

from

priv

ate

lend

ers

Management of the provision of funds based on investment

orders from lenders

Management of customers repayment based on a model of risk sharing

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

Lendersubscription Acceptance Validation

Borrowersubscription Acceptance Validation Utilization Recovery

Onlinesubscription

Assessing instantly the creditworthiness

Final decision Customer management Return on debt

Creation of customer file Instant response Funds collection

and provision

Repayment (private borrowers to private lenders)

Traditional activity Activities relative to intermediary

CREDIT APPROVAL PROCESS IN PEER-TO-PEER LENDING

Source: SOPRA Group

21

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).

22


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.

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

..•...improving.the.reputation.of.consumer.credit.which.has.suffered.as.result.of.the.subprime.crisis;

..•....improving.the.pool.of.eligible.consumer.credit.borrowers.by.changing.segmentation.criteria.(fixed-term.contracts.of.employment.and.seniors);

..•....creating.market.opportunities.by.linking.the.financing.of.purchases.of.durable.goods.and.traditional.credit.offerings.(bonuses.for.the.purchase.of.low.carbon-emission.cars,.etc.);

..•....investing.in.the.quality.of.the.long-term.consumer.relationships.

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

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

Source: SOPRA Group

Pre-crisis Post-crisis

Relative independence of credit institutions owned by retail banks

Strong local autonomy in terms of strategy, target customers, information systems and

organisation as long as the credit institutions were profitable

More synergies as a result of closer integration between retail banks

and consumer finance companies

Operational control by the parent company of the companies concerned: product and price strategy; credit risks; costs cutting; operational efficiency (internal platforms) and compliance

requirements (responsible lending, etc.).

23

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..

Putting a responsible lending approach at the centre of the company’s project

Managing performance according to corporate social responsibility standards

Dialoguing with customers

Dialoguing with stakeholders(consumer associations)

Adapting processes Training all the staff involved in the value chain

Being more transparent and providing indicators such as rejection rates

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

To improve credit offerings and market acceptance

To offer a high-quality experience to new consumers

Spending time qualifying customersExplaining to customers why their loan request has been rejected and how they could become eligible

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

Source: SOPRA Group

24


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:..•....Innovation.and.the.development.of.new.offerings.for.retailers.and.business.introducers;..•....Innovation.and.the.development.of.new.offerings.for.consumers,.in.particular.multichannel.

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:...•....Retailers.save.on.paper...•...The.company.saves.time.and.considerably.reduces.the.costs.involved.in.transmitting.paper.

documents,.form-filling.and.archiving.

.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.

Chapter 3: increasing customer value

DEMATERIALISATION OF THE CREDIT ORIGINATION AND APPROVAL PROCESS IN FRANCE

Source: SOPRA Group

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

Instruction process following new regulation Simplified process after dematerialization

3 documents to be signed by the

customer

A single document containing customer’s agreement to have all

his/her files dematerialized

Front Office Processing time nearly divided

by 2 at POS*

Middle Office (Bank)Transmission and

archiving time divided approximately by 4*

RESULTS

Personal information file

Dialogue file

Contract

Illustration in

France

25

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:...•...Specific.solutions.designed.for.large.retail.chains:.for.example,.Crédit.Agricole.Consumer.

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.

..•...Packaged.solutions.which.are.accessible.to.any.retailer.that.wants.to.offer.credit.terms.to.its.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

Source: SOPRA Group

For the specialist consumer finance companyAn 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-consumersPayment options in several instalments without the

need to have a revolving credit card

For e-retailersPossibility to offer payment facilities and

self-financing solutions which enable them to increase their online sales

26


II. Innovation and development of new offerings for consumers

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

1. Improving the quality of the customer experience

Customers.want.to.optimise.their.purchasing.experience.based.on…..•...access.to.information.before.purchasing.that.enables.them.to.make.the.right.choice;..•....the.possibility.to.consult.their.online.networks.to.obtain.feedback.on.the.products.and.services.

that.they.are.considering.buying;..•...access.to.the.necessary.means.to.make.purchases.wherever.they.are;..•...receiving.suitable.advice.either.at.the.point.of.sale.or.via.remote.channels;..•...an.enhanced.check-out.experience.thanks.to.better.designed.and.more.welcoming.physical.

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)...

BORROWER EXPECTATIONS AND MEANS OF SATISFYING THESE EXPECTATIONS

Source: SOPRA Group

Borrower expectations Means

A better quality customer experience

More responsible consumption

To interact with specialist consumer finance companies on their offerings and to contribute to the development of products and services

To have multi-channel access to services, in particular via mobile channels

• Low prices• Transparent and flexible offerings• Simplified, secure access to services• A value proposition segmented by type

of consumers, taking recent societal changes into account

• Advice tailored to the customer’s needs and the coordination of communities via social networks

• More points of contact with customers (via social networks, mobile devices, telephone, the Internet, etc.)

27

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…

OPTIMISED CUSTOMER ACQUISITION AND SUPPORT PLAN

THE CONCEPT-STORES DEVELOPED BY METRO BANK

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

Mutichannel salesMaintaining a local presence via local branches while increasing access via digital channels

Capitalising on all contact opportunities (emails, social networks, video, etc.)

An innovative customer visionDeveloping 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 servicesIntroducing simple but convincing services

Innovative branchesRolling 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

Source: SOPRA Group

@ home with family/friends @ the office

When shopping

While moving

I’m watching TV, listening to the

radio during my breakfast while

checking weather forecasts and travel

I’m watching TV, surfing on the

Internet or calling friends

I’m in my convenience store

I’m in the public transportation or in

my car

I’m in the public

transportation or in my car I’m in the office and I’m

surfing on the Internet during my lunch time

I’m looking for my lunch at the food corner ( lunch time)

28


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......•...adapting.their.offerings.to.make.them.less.risky.and.easier.to.understand.for.customers;...•....increasing.their.efforts.as.regards.information,.financial.education.and.raising.customer.

awareness.about.the.financial.impact.of.loans;..•...supporting.their.customers.throughout.their.lifecycle;..•....developing.new.offerings.that.respond.to.customer.environmental.concerns.and.responsible.

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..

29

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.....•...facilitating.seamless.access.to.transactional.services.(viewing.account.balances,.transfers,.etc.).

via.mobile.apps;...•...proposing.products.specifically.online;...•...developing.partnerships.with.mobile.virtual.network.operators.(MVNO).in.order.to.close.the.gap.

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 mediaToday,.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.....•...interact.with.customers.constantly.connected.about.the.services.offered.and.about.prevention,.

without.the.specialist.consumer.finance.company.intruding.into.the.life.of.consumers;..•...satisfy.consumer.demand.for.a.multichannel.experience;...•...improve.their.online.reputation.provided.that.they.really.listen.to.consumers.and.that.consumers.

can.obtain.rapid.and.appropriate.answers;..•...enhance.customer.loyalty,.since.satisfied.consumers.will.spontaneously.defend.their.bank.in.

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:...•...Adopt.the.same.overall.strategy.on.social.media.as.on.their.other.channels,.while.attempting.to.

maintain.the.same.image.and.disseminating.homogenous.information...•....Communicate.with.consumers.by.involving.employees,.who.are.the.best.spokespersons.of.their.

company,.and.by.training.staff.in.the.use.of.these.new.media...•...Offer.new.services.to.consumers.(for.example,.warning.them.via.Twitter.about.account.movements)...•....Involve.consumers.in.the.development.of.products.and.services..

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...

30


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.

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.....•...improving.anomaly.detection.and.processing.(better.qualification.and.capitalisation.on.other.

experiences,.etc.);..•...facilitating.the.implementation.of.regulatory.and.product.changes;..•...implementing.in-depth.controls.

Chapter 4: towards greater operational efficiency

Industrialisation

Contract management & Credit servicing

Internalisation

Credit underwriting

Acceptance policy & risk management

Internalisation

Organisation FinanceLitigation

Information system Accounting

HR Administration

Outsourcing

Marketing Debt collection

Business activity Support functions

BusinessSpecificAssets

NonSpecificAssets

Production & support activities Strategic activities

FRAMEWORK OF ACTIVITIES WHICH COULD BE INDUSTRIALISED OR OUTSOURCED

Source: SOPRA Group

31

b. Advantages of international poolingInternational.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 driversThe.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:...•...The.lack.of.integration.of.credit.legislation.within.the.EU.complicates.matters..Although.Brussels.

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.

..•...Not.all.activities.can.be.pooled.geographically.because.of.very.significant.differences.as.regards.market.research.costs.and.IT.development.

.

Key drivers

National levelLocal level

• Physical proximity• Need for reactivity

• High volumes• High fixed costs• High investments• Rare expertise• Little need for customer physical proximity at B/Office level

National level

• High volumes• High fixed costs• High investments• Rare expertise• Little need for closeness to the customer, the workforce and management

• Complexity – Adaptation of the back-office to diverse product offerings – Different IS to • Low reactivity

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

Obstacles

Financial gains

INTERNATIONAL POOLING: DRIVERS AND OBSTACLES

Source: SOPRA Group

32


d. Activities which can be pooled internationally by specialist consumer finance companiesThe.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:..•...Core.business.activities:.credit.origination.and.management,.soft.collection.via.call.centers.

provided.that.this.is.not.detrimental.to.the.customer.relationship.(see.chart.below)...•...Support.functions:.network.assistance,.accounting,.facilities.management.and.HR.(see.chart.on.page.33)..

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

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

Driver of pooling Neutral Obstacle of pooling

33

Sopra.Group.is.convinced.that.the.international.pooling.potential.has.not.been.sufficiently.explored..Credit.management.should.evolve,.in.the.same.way.as.payment.and.payment.terminal.activities,.towards.regional.platforms,.with.projects.beginning.in.a.limited.scope.in.the.framework.of.a.more.ambitious.medium-term.vision..

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

1. Radically transforming the collection activity

Although.the.urgent.measures.adopted.during.the.crisis.focused.on.credit.origination.and.approval,.in.order.to.reduce.the.cost.of.risk.on.a.lasting.basis,.companies.will.need.above.all.to.upgrade.and.radically.transform.their.collection.processes.to.guarantee.short-term.debt.collection.rates.and.ensure.their.sustainability.over.the.medium.term.

Significant.performance.differences.can.exist.between.companies:

SPOTLIGHT ON THE CHARACTERISTICS OF THE SUPPORT FUNCTIONS OF SPECIALIST CONSUMER FINANCE COMPANIES

Activities Critical Industrialisation process Need for Customer Strategic National size expertise sensitivity importance constraint

Newtork assistance +++ High High High Average Low

Accounting +++ High High Average Average High

Facilities management ++ Average Average Low Average Low(property management; purchases; mail)

HR ++ High Average Low Average High for payroll

Finance + Average High High Average Average

Organisation and project + Average High Average Average Lowmanagement

Marketing + Low Average High High High

Activities Possibility of international pooling

Network assistance Yes, but without undermining the customer relationship

Accounting Yes, subject to taking regulatory constraints into account

Facilities management Yes

HR Yes, subject to taking regulatory constraints into account

Finance Not recommended because of the lack of critical size

Organisation and Not recommended because of the lack of critical size Project Management

Marketing Not recommended because of the strategic importance and market knowledge

Driver of pooling Neutral Obstacle of pooling

Source: SOPRA Group

34


The.downward.trend.in.the.cost.of.risk.means.that.companies.must.master.debt.collection.rates:.the.effectiveness.of.collection.processes.has.a.direct.impact.on.the.level.of.risk.provisions.calculated.on.a.monthly.basis.in.accordance.with.IFRS.standards..This.effectiveness.influences.transfers.from.one.past-due.bucket.to.another.and.therefore.the.level.of.outstandings.per.past-due.bucket..It.is.to.be.noted.that.each.past-due.category.is.subject.to.a.different.level.of.provisions..Any.improvement.in.the.debt.collection.rate.results.in.an.immediate.fall.in.the.level.of.provisions.(and.vice.versa).

Debt.collection.rates.impact.on.development.strategies:.the.effectiveness.of.collection.processes.influences.to.some.extent.the.approval.strategy.and.therefore.the.projected.level.of.production..The.effectiveness.of.debt.collection.also.affects.the.profitability.of.the.business.models.and.the.related.development.choices.via.calculations.of.capital.consumption.in.accordance.with.Basel.II.standards..Although.the.probability.of.default.(PD).depends.in.part.on.the.loan.approval.policy.and.in.part.on.the.effectiveness.of.debt.collection,.estimating.the.final.loss.given.default.(LGD).mainly.reflects.the.effectiveness.of.collection.processes..

soft 2.5 months

75%

83%90%

pre-litigation 2.5 months litigation 36 months

soft 1.5 months

67%

phase III 2 months

71.6%

Phase IV 1.5 months

72.2%

litigation 36 months

80%

COMPARISON OF THE DEBT COLLECTION RATES OF TWO FINANCIAL INSTITUTIONS WITH SIMILAR BUSINESS MODELSamounts recovered as % of amounts due

Source: SOPRA Group

35

Debt.collection.rates.depend.on.the.optimisation.of.all.the.collection.process.levers:

Debt.collection.rates.depend.on.the.twofold.requirements.of.operational.excellence.and.strategic.analysis.capacity:...•...Operational.excellence:.......-.–....The.debt.collection.rate.depends.on.the.company’s.capability.to.process.large.volumes.on.an.

industrial.scale,.while.ensuring.that.quality.and.efficiency.requirements.are.satisfied.on.a.daily.basis.

......-.–...The.problems.handled.are.very.similar.to.those.of.a.contact.center.or.a.back.office..

..•....Strategic.analysis.capacity:

......-.–....The.diversification.of.segments,.products.and.channels,.combined.with.the.impact.of.the.economic.crisis,.require.companies.to.implement.increasingly.sophisticated.approaches,.backed.up.by.modelling.capabilities.for.past-due.customer.portfolios;.

......-.–....Specialist.consumer.finance.companies.must.implement.specific.actions,.and.measure.their.effectiveness,.for.each.past-due.bucket.in.order.to.avoid.“crazy.diagonal”.effects,.that.is.to.say.“systematic”.monthly.switches.from.one.bucket.to.the.next,.leading.to.legal.recovery.proceedings.being.instituted.six.months.after.the.default;.

......-.–....Specialist.consumer.finance.companies.are.increasingly.focusing.on.preventive.actions.to.detect.defaults.linked.to.“accidents.of.life”.involving.financially.“healthy”.customers..The.challenge.in.this.case.is.to.detect.weak.signals.of.a.possible.default.

LEVERS FOR IMPROVING DEBT COLLECTION RATES

Source: SOPRA Group

Organisation Processes

Information system HR profiles & sizing

Management Controls

Decision-making bodies

PERFORMANCE EVALUATION

36


2. Covering all the components of the value chain

A.typical.action.plan.for.upgrading.the.collection.processes.must.cover.all.the.components.of.the.value.chain:.

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

1. Strong TCO differences

The.TCO.(Total.Cost.of.Ownership,.i.e..applications,.operations.and.the.IT.infrastructure).of.information.systems.varies.considerably.from.one.company.to.another,.depending.not.only.on.the.degree.of.urbanisation.and.the.obsolescence.of.applications,.but.also.on.the.strategic.positioning.of.the.consumer.credit.activity.(specialised.activity.or.retail.banking.product).

THE ISSUES TO BE SOLVED BY THE COLLECTION UPGRADE PLAN

Area Problems

Collection strategies • Differentiation of collection strategies by past-due bucket, customer segment, product & acquisition channel

• Changes in credit risk scores ( detection of weak signals)

• Implementation of debt rescheduling plans

Organisation • Organisational principles: soft, pre-litigation, legal/by past-due level

• Organisation of the supervision and coaching of debt collectors

• Outsourcing: calls after initial late payment, hard collection, etc.

Processes • Processing cases of “address unknown”

• Commitment and rescheduling processes

• Liaising with court officers

• Doorstep collection

Information system • Implementation of collection strategies

• Improved productivity and effectiveness of actions

• Automated checks

HR profiles & Sizing • Size of team per organisational entity and by past-due bucket

• Matching profiles with needs of key positions: team managers, supervisors, debt collectors

• Consistency of individual and collective performance indicators

• Aligning remuneration systems with performance needs

Management • Coordinating the debt collection rate (amounts collected) and risk provisions calculated according to IFRS standards (estimated and actual)

• Determining individual and collective performance indicators (monthly, weekly, daily)

• Drawing up a projected work schedule: matching the projected volume of activity and the level of necessary ressources

• Operational performance indicators: flow rates, promises of payment, promises kept, cash collected, etc.

Controls • 1st and 2nd level controls: commitments, rescheduling, outsourcing, allocation of customer payments

• Compliance: IFRS, Basel 2, bank regulations

Source: SOPRA Group

37

2. Positioning the company on the “Producer – Distributor” model

In.the.framework.of.their.strategies.to.develop.or.change.their.operational.model,.specialist.consumer.finance.companies.must.position.themselves.along.the.“Producer.versus.Distributor”.model.which.will.structure.their.strategy..

Monoline/SpecialistConsumerFinance

Company

Multiline/RetailBank

• Specific in-house core system enhanced with external bricks requiring large teams in internal IS departments• In-house hosting of operations and infrastructures• No pooling with the IS of the retail bank in the same country

Average TCO per loan or card of this group =(€10-€20 with the least efficient in excess of €20

• No urbanisation of the retail bank’s IS• Different legacy systems require considerable integration work• International network consisting of “small subsidaries” without and outsourcing or pooling of infrastructures or applications

Average TCO average per loan or card higherthan €10

• Specialised integrated software package covering all the functions in the chain with small-scale specific adaptations• Hosting and operated by the retail bank shareholder in the same country or outsourcing

Average TCO per loan or card of this group = €5with the most efficient round €2

• Credit platforms of large banks grouping together the loans of retail networks and specialist consumer finance companies and using multi-country, multi-entity and multi-currency software packages• IS split between distribution and production functions

Average targeted TCO less than €5 for creditplatforms under construction

High TCO per loan or card

Optimised TCO per loan or card

TCO PER LOAN OR CARD

Source: SOPRA Group

DISTRIBUTOR AND PRODUCER FUNCTIONS AND OBJECTIVES

Source: SOPRA Group

The Distributor-Producer model

The DistributorFocus on Business

• Customer relationship• Marketing and Distribution of Offerings• Time to Market• Prevention and management of Credit risks

The ProducerAchieve economies of scale and

mobilise productivity gains in order to attain the lowest possible unit cost for

the management of loans/cards

• Optimise processes • Industrialise management

• Manage the operational risk • Improve the quality of service

38


The.adoption.of.a.producer.or.distributor.model,.which.may.be.different.for.a.major.bank.depending.on.geographical.considerations,.has.a.strategic.influence.on.the.adoption.of.industrialisation.or.outsourcing.strategies..The.corresponding.business.plan.may.be.determined.by.the.development.strategy,.the.market.positioning.and.the.intangible.assets.of.the.consumer.finance.company,.as.summarised.in.the.table.below.

Loan.processing.platforms.under.construction.are.designed.according.to.the.“Producer-Multi-Distributors”.model.and.need.to.rely.on.an.urbanised.information.system.

POOLING OF IS: INDUSTRIALISATION OR OUTSOURCING?

Source: SOPRA Group

Construction of an internal Credit platform Outsourcing to industrial IS operators in Software as a Service mode

• Sufficient volumes and maturity of the activity (no “stop and go”)

• Several subsidiaries in mature countries (with high salaries) belonging to the same group and sharing the same high level of compliance requirements

• Urbanisation of the information system enabling the production and distribution functions to be decoupled

• Platform equipped with specialised multi-currency, multi-country & multi-entity software package

• Build-up (external growth) or organic growth strategy

• New entrant , start-up , non-traditional players launching a credit activity

• Emerging markets• Stop and go activities, subsidiaries in run-off

status or available for sale• Companies where credit is not a core

business (large retailers, Telco, etc.)• Low volumes • Weak internal expertise in consumer credit

specific information systems

39

3..Architecting.the.IS.on.the.basis.of.the.business.processes.Sopra.Group.is.convinced.that.the.software.packages.used.as.the.basis.of.information.systems.supporting.loan.processing.platforms.will.be.increasingly.architected.and.developed.on.the.basis.of.business.process.management.(BPM).and.decoupled.

Specialist financial institution

End customer/Partners Distributor of credit outosourcing the managment

B2C Credit

Internet Branch Mobile AgentsInternet Branch Mobile Agents

B2B Credit

Distribution

Financial subsidiary of a mass retailer

Internet Branch Mobile Agents

Distribution

Credit platform of a financial institution Credit processing platform constructed from an urbanised IS

Multi-markets; Multi-entities; Credit management

SaaS

THE PRODUCER-MULTI-DISTRIBUTORS MODEL

Source: SOPRA Group

• Simulations• Processing• Approval decision• Disbursement of funds

• Current servicing• Specific servicing• Periodic servicing

• Soft collection• Hard collection• Outsourcing to third party debt collectors

The solution is:

Credit management

Credit risk management

Processing & Origination Servicing Collection

• Management of guarantees • Customer liabilities database • Calculation and management of provisions

• Based on business processes • Supporting on multi-distributor credit platfrom • Configurable

ARCHITECTURE OF A SOFTWARE PACKAGE SOLUTION ENABLING “BUSINESS/IS” ALIGNMENT

Source: SOPRA Group

40


A.leader.in.the.European.consulting,.IT.services.and.software.development.markets,.Sopra.Group.generated.revenue.of.1.05.billion.Euros.in.2011.and.employs.over.13,000.people.

Thanks.to.a.longstanding.culture.of.excellence.and.strong.sector-specific,.functional.and.technological.know-how,.the.Group.offers.its.clients.an.end.to.end.approach.based.on.a.well-honed.business.model..Sopra.Group’s.ambition.is.to.allow.its.clients.to.successfully.execute.transformation.projects.that.will.give.them.a.competitive.edge.and.help.them.drive.growth..

Sopra.Group’s.savoir-faire.encompasses.prior.strategic.reflection.through.to.the.supervision.and.implementation.of.major.programmes..

For.more.information,.please.visit.our.website:.www.soprabanking.com

Sopra Group & Sopra Banking SoftwareGeneral.Management9.bis,.rue.de.Presbourg75116.-.PARISTel.:.+33.(0)1.40.67.29.29

.

Efma,.a.not-for-profit.association.formed.in.1971.by.bankers.and.insurers,.specialises.in.retail.financial.marketing.and.distribution..Today,.more.than.3,000.brands.in.130.countries.are.Efma.members.including.over.80%.of.Europe’s.largest.retail.financial.institutions.

Efma.offers.the.retail.financial.service.community.exclusive.access.to.a.multitude.of.resources,.databases,.studies,.articles,.news.feeds.and.publications..Efma.also.provides.numerous.networking.opportunities.through.work.groups,.online.communities.and.international.meetings.

For.more.information:.www.efma.com.

Efma8,.rue.Bayen,.75017.ParisFranceTel..+33.1.47.42.52.72

About us

41

On.1.July.2012,.the.subsidiary.Sopra.Banking.Software.was.established,.for.the.specific.purpose.of.providing.Banking.and.Finance.sector.players.with.high.added.value.software.solutions,.capable.of.meeting.their.requirements.

Sopra.Banking.Software.delivers.an.extensive.range.of.software.products,.enjoying.solid.and.positive.market.recognition,.and.federating.the.software.solutions.created.by.Sopra.Group,.Callataÿ.&.Wouters.and.Delta.Informatique..Indeed,.Sopra.Banking.Software.with.over.1500.specialists.is.already.delivering.products.and.services.to.over.700.customers.in.70.countries.

Sopra Banking SoftwareTour.Manhattan,5,.Place.de.l’Iris92926.Paris.La.défense.CedexTél.:.+33.(0).1.55.91.72.72

For.more.information:.www.soprabanking.com

42


Sopra.Group.wishes.to.thank.IHS.Global.Insight.for.having.allowed.it.to.use.certain.IHS.data.contained.in.this.report..

Sopra.Group.wishes.to.thank.as.well.the.participants.of.the.Efma/SOPRA.Think.Tank.“Consumer.Finance”.who.have.contributed.to.share.their.well-informed.views.on.the.consumer.credit.market.in.various.European.countries:.Patrick.Abadie,.Dimitry.Aleksandrov,.Jean-Philippe.Aractingi,.Samuel.Champanhet,.Massimiliano.Ciuffo,.François-Xavier.Coyras,.Roberto.Ferrari,.Luca.Gasparini,.Valérie.Goutard,.Zoltan.Major,.Sibel.Mayo,.Ahmed.Michia,.François.Miqueu,.Lukasz.Molenda,.Razvan.Munteanu,.Andrzej.Olejnik,.Jan.Ondras,.Jan.Ottoy,.Johannes.Riha,.Gianluca.Soma,.Bart.Vanhaeren,.Petros.Zabetas.and.Andrew.Zeller.

Acknowledgements

43

“The.regulation.strengthening.on.credit.is.significantly.impacting.overall.consumer.credit.profitability”

“The.growth.of.e-commerce.is.an.opportunity”

“.Digital.identification.and.signature.must.evolve.otherwise.consumer.credit.institutions.will.not.be.fully.capable.to.follow.consumers.into.their.digital.journey”

“How.to.react.quickly.to.consumer.requirements.as.processes.are.mostly.outsourced?”

“Should.priority.be.given.on.m-commerce.rather.than.e-commerce?”

What the Think Tank members said...

For.more.information,.please.contact:.www.sopragroup.com

Jean-Yves BrunaExecutive.Director.strategic.developmentjean-yves.bruna@soprabanking.com+.33.1.55.91.02.32+.33.6.40.36.67.62.Philippe BourgeoisSolution.Management.Director.philippe.bourgeois@soprabanking.com+.33.1.55.91.40.91

Olivier [email protected]+.33.1.55.91.71.05+.33.6.38.70.38.77

For.press.and.marketing.inquiries,.please.contact:

Coralie [email protected]+.33.1.55.91.71.68.Muriel Arthaud [email protected]+.33.1.55.91.71.39.84

Karine [email protected].+33.1.47.42.69.82

Copyright.©2012.Sopra.Group.and.Efma.

All.rights.reserved..This.report.may.not.be.reproduced.or.redistributed,.in.whole.or.in.part,.without.the.written.permission.of.Sopra.Group.&.Efma..Sopra.Group.&.Efma.accept.no.liability.whatsoever.for.the.actions.of.third.parties.in.this.respect.


September 2012

Documents

CONSUMER CREDIT: A RAPIDLY CHANGING LANDSCAPE