Consumer fairness in banking is paying off

2013-04-21 14:00

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One German bank is blazing a trail by successfully making loans fairer to customers, writes Maya Fisher-French

There is a move globally towards making financial services fairer for consumers.

One German-based bank has successfully managed to make bank loans fairer to customers – and that is not an easy task.

As the Harvard Business Review aptly says: “The reputation of this business (lending) – which encompasses credit cards, personal loans, point of sale financing, payday advances, and so on – is so questionable that any claim of ‘fairness’ is viewed by customers with extreme scepticism.”

The Harvard Business Review article goes on to explain how TeamBank successfully developed a consumer-credit product into a brand that “transforms the fuzzy concept of fairness into a visible and credible set of product characteristics and operation processes”.

TeamBank identified as far back as 2006, well before legislative requirements were introduced in Germany, that consumer sentiment was changing and that there needed to be a change in attitude, namely to be more fair to customers.

Speaking at this week’s Regulatory Seminar held by Glacier by Sanlam, Andrew Zeller of TeamBank gave insight into the changes they implemented, which provides lessons for our local banks.

One change that transforms the relationship between banks and their customers is around protection from legal action, whereby TeamBank assured customers they would not take legal action against non-payers who experienced unexpected changes in their financial situation – as long as certain rules were followed.

For example, the contract specifies that if you notify the bank within 10 days of losing your job, the bank will not take legal action against you if you struggle to meet your loan repayments.

Zeller says the majority of people want to repay their loans, but need a breathing space.

Although people are encouraged in South Africa to contact their bank when they run into difficulty, there is fear that this will simply expedite the legal process. People don’t inherently trust that the bank will try to help them first.

By putting this protection into the contract, it gives the customer an incentive to call immediately.

Zeller says since this clause was introduced, their recovery rates have skyrocketed.

TeamBank generally follows a more conciliatory approach to non-payment in order to find a solution.

When a customer falls behind in making payments, advisers work with them to find a solution – for example, by allowing no payments for three months, rather than threaten legal action.

When a loan becomes delinquent and is handed over to a law firm, TeamBank requires that the law firm continue to offer customers opportunities to make minimum payments that would get them back on the path to compliance and avoid damage to their credit records.

The bank also tells people who are rejected for a loan exactly why they were rejected.

This allows people to rectify the situation and reapply.

Zeller says, for example, a common reason for turning down a loan is because someone has worked for less than six months for a company and is still therefore under a probation period, meaning their job contract could be terminated.

This makes them a higher risk for the bank.

Once the customer understands the reason for the rejection, they know they can reapply once they have been at the company for more than six months.

The bank also stopped the practice of what is referred to in South Africa as redlining, where banks assess credit risk based on the neighbourhood – certain poorer neighbourhoods may have a higher default rate.

Zeller says that although statistically this has proved to be a good measure of risk for the bank, it was not fair to clients to assume that because they lived in a certain area, they would default, so they removed it as an unfair practice.

TeamBank also made their contract easier to read and understand by cutting it from a massive 76 pages to 40 pages.

They also provide a one-page easy-to-understand summary of what the major terms of conditions are in the contract.

Too often, customers are overwhelmed by reams of paperwork and although they know they should read all the “terms and conditions”, they don’t.

Unscrupulous lenders are able to bury prejudicial terms in the paperwork and when the customer challenges them, they are told “but you signed the contact”.

Although TeamBank introduced a range of fairer practices, including penalty-free repayments, a 30-day retraction period for a loan and made credit insurance optional and not mandatory, they initially experienced negative feedback from their customers when they first introduced their changes.

Zeller said the fact they were the first bank to introduce affordability assessments through questioning customers on their income and expenses lost them many customers initially as it was easier for the customer to go across the road to another bank that would ask less intrusive questions.

Over time, however, the reputation of fairness has paid off and TeamBank is today the third-largest consumer-finance provider in the German market, with 600?000 customers and growing by 17% in 2011 in a flat market, while its delinquency rate is much lower than the industry average.

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