Technology, Customer service, lending

Mortgage retention and optimisation for building societies: How do I reward my members while remaining profitable?

FICO

FICO

Traditionally, optimisation in the mortgage space has been used to maximise profitability by targeting offers using traditional pricing dimensions such as Loan-to-value (LTV) band. As a result, the question has always been asked, can optimisation be applied to drive value in a member-centric world, as opposed to a profit-centric one?

If the answer is yes, then how?

Firstly, the objective needs to change from profitability to retention. While retention targets can still seem cold, changing the objective is decisive: an optimisation framework to throw higher rates and fees at customers who are seemingly unresponsive is replaced by a natural drive to find the best offers for members in order to retain them. In other words, finding offers that make members happy becomes a natural outcome of a retention-oriented solution.

We still care about demand models because we need to know what will happen to our portfolio if we choose one retention strategy versus another. We also still care about profitability, because we also need to ensure that our margins are not under threat, and that we will not suffer losses that we need to pass on to members. But in a member-oriented world, these considerations are secondary to the objective of keeping members happy and retaining them throughout the full terms of their mortgages.

Secondly, the concept of price differentiation needs to be modified from one that uses more segmented pricing to target increased profitability, to one that targets the rewarding of members. Most building societies currently focus on LTV band only for pricing. Further differentiation is not a pre-requisite for driving value from optimisation. However, the practice of providing discounts to members with stronger relationships or longer tenure is seen only sporadically in the market.

In a world where we want to reward members and retain them, this ethos and the mathematics of relationship-based pricing both push in the same direction: loyal, longer-tenured members are more likely to be retained when they roll off future mortgage deals. Surely it makes sense to incentivise them to stay in the future by rewarding them today?

Learn more on this webinar on the challenges with the retention of members and how you can analytically improve your mortgage portfolio management to keep them.