2007 Trends and Perspectives Customer Retention in the Consumer Finance Industry*

2007 Trends and Perspectives Customer Retention in the Consumer Finance Industry* PricewaterhouseCoopers Consumer Finance Group *connectedthinking

A foreword from the authors The concept of customer retention has been one of the most talked about subjects in the consumer finance industry in recent years, with many companies advocating the importance and benefits of an effective program. In spite of all the talk, how much progress has the industry really made in this area and is customer retention really a viable concept in such a traditionally volume driven industry? We are pleased to present you with this discussion document intended to highlight the trends in customer retention that we have seen and provide some perspectives on alternative approaches. We hope that you find this helpful as you continue to refine your customer retention strategy. If you have any questions or comments, please do not hesitate to reach out to us. STEVE T DAVIES ROBERTO HERNANDEZ 646.471.4185 323.219.0027 steve.t.davies@us.pwc.com roberto.g.hernandez@us.pwc.com PETER POLLINI MARTIN TOUHEY 207.450.9036 206.790.8751 peter.c.polini@us.pwc.com martin.e.touhey@us.pwc.com Trends and Perspectives 2007

Table of contents 2 Introduction Retention in Other Industries 4 Mortgage Retention Today 7 Redefining Success 8 Developing a Retention Strategy 12 Becoming Innovative How Can You Succeed? Customer Retention in the Consumer Finance Industry

Introduction Recently we have seen several market forces combine to impact the industry including; compressed margins, increases in asset delinquency and repurchase rates, stabilization or in some cases a decrease in home values, a slowdown in existing home sales, and a surplus of new home inventory on the market. While these conditions may be temporary, they have placed a great deal of pressure on the bottom line of many consumer finance companies. As a result, many lenders are now applying a greater focus on their existing customer base as well as strategies to further capture share of wallet from these existing customers. Historically customer retention efforts have focussed on customers who are most at risk to refinance, or said using industry terms have a refi-incentive. Traditional retention programs have targeted these at-risk customers with a lowcost and streamlined refinance package. A viable strategy in a declining rate environment, but not supportive of the commentary we have heard in recent years about the large investments being made in customer retention that many companies have undertaken. Of late though there appears to be a shift in mindset underway as the concept of customer retention is being elevated to a regular discussion in board rooms and corporate strategy sessions. In addition, companies are looking at retention strategies beyond the streamlined refinance, strategies that include; targeted pricing, reward and loyalty programs, and in some cases cash incentives. This should not come as a surprise as industry veterans recognize that it is more profitable to retain a customer than to acquire a new relationship and that a satisfied customer represents cross-selling and referral opportunities. The main challenge faced by the mortgage industry is the continued price sensitivity of their consumers. As a result, the objective for many companies is to employ customer retention and development programs that will serve to reduce this price sensitivity and therefore reduce the flight risk of customers. This can have significant dividends in the form of lower prepayments, increased revenue, improved pricing on securitizations, as well as an increase in crossselling and referral opportunities. However, the mere implementation of a customer retention program does not guarantee success. To be successful, a customer retention strategy has to be carefully planned, executed, maintained, and measured. It also needs to be accompanied by customer service, product development, and product delivery strategies that are aligned with the targeted customer base. There are considerable opportunities for those companies who continue to develop their retention strategy in a way that maximizes profitability in different market and rate environments while improving the customer value proposition and customer experience. Retention in Other Industries Customer retention and loyalty programs outside of the consumer finance industry are becoming more sophisticated. Concepts such as customer lifetime value and RFM analysis 1 that were originally applied by direct marketing companies are now also being used in financial services, consumer products, hospitality, and entertainment industries. While best practices continue to emerge, the use of technology, especially the Internet, has allowed these companies to get almost immediate customer feedback to price changes, new products, and specific promotions. Tactics like window pop-ups as soon as a customer has completed a transaction, or merchandise receipt campaigns offering discounts, allow them to tailor their offerings to the changing demands of the customer base. Choices appear simple to the customer. Often one can enroll in a loyalty program in less than five minutes or answer a couple of questions when filling an online survey. However, the technology behind loyalty and retention programs has developed, largely using complex rule-based engines, to help executives offer different sets of options to the right customers at the right times. 2 1 Study of the recency, frequency and monetary value of customer transactions 2 Peter Clark. The 22 major factors that will shape the future of customer loyalty. The Wise Marketer, June 2006 2 Trends and Perspectives 2007

Let s take the hospitality industry as an example. Several hotel holding companies have begun to launch loyalty campaigns in which targeted loyal guests receive special offers and communications. These companies study guest lengths of stay and travel patterns, and then make assumptions about their preferences. Their objective is to increase retention rates, strengthen brand loyalty and maximize revenues at the same time by not offering special low rates to all the customers that have achieved gold, platinum or diamond status. Even companies that have enjoyed significant customer retention levels and/or brand loyalty are now thinking about ways in which they can offer a more personalized value proposition to the customer in order to sustain those high loyalty rates. For an example, one amusement park launched a major marketing campaign last year. The goal is to deliver once-in-a-lifetime experiences to guests that range from theme parties to spending a night in the park. Many of the customer retention and loyalty programs being followed by these companies are a result of the longanticipated mass customization trend. Mass customization is frequently defined as the creation of products and services that serve the customer s individual needs but that also produce near mass production efficiency for companies. Companies are increasingly being forced to offer their customers loyalty and retention programs that are not a common single solution. At the same time, companies are required to maximize revenues by achieving economies of scale. In the long-run customers will show loyalty for factors other than price only if they feel that they are receiving a personalized service or a unique value proposition. Although this has been an accepted concept for some time, companies are now taking these mass customization models into the next level that not only promote improved customer satisfaction but that also maximizes individual customer revenue. In addition to mass customization, the other approach that is being increasingly tested by companies is leveraging the customers brand loyalty to become a one-stop solution for a multitude of products and services. Some examples of this include a company whose brand stretches across music, travel, telecommunications, and financial services and a company that offers many services related to the automobile including: repair, gasoline, consumer products, insurance, personal loans. This is not a shift back to the conglomerate business model of the early 1980s as most of the companies trying this approach do not own the entire process but outsource or create joint ventures with service providers that specialize in these areas. The objective of many of these strategies is not to be all things to all customers, but rather to offer the right products to top customers in an effort to maximize initial investments in acquiring the customer relationship. Financial services companies have started following this model through cross-selling, as they are offering a multitude of products and services to the customer (mortgages, insurance, auto loans, checking, credit cards, etc.). The goal is to create voluntary and involuntary loyalty: voluntary because customer satisfaction can be expected to increase the frequency of transactions and referrals and involuntary because a customer might not be willing to go through the challenges of finding a multitude of new product and service providers unless the price difference or the customer dissatisfaction is great enough to fire. While each of these approaches can be implemented by consumer finance companies, they represent a particular challenge for mortgage companies for several reasons: The Limited Frequency of Transactions: while an average customer might use a debit card or buy a cup of coffee on a daily basis, they might only be shopping for a mortgage loan, either to purchase or refinance a few times during their lifetimes. Service providers of other significant transactions such as automobiles and houses have an opportunity to interact with customers and demonstrate value to them more frequently as customers will be taking the car for service and may want to replace the car within 3-5 years. Interest Rates: Customer demand for the financing of consumer products is often highly sensitive to interest rates offered and the resulting impact of monthly payments on their personal income statement. The Sale of Servicing Rights: Customer loyalty can be limited or even eliminated when the customer knows that his/her business can be sold at anytime during the life of the loan. As a result, a question often arises as to who owns the customer relationship? That is to say does the originator or the servicer have the customer trust when a need for new financing arises. Corporate and Compensation Structure: Many companies have legacy operating structures where two platforms have relationships with the same customer. In these cases it is not uncommon for the two platforms to look at a customer who has a mortgage and a home equity loan in the same bank as two separate customers. In these cases, the different platforms are often times incented to compete to retain the same customer (e.g. solicitation of a Customer Retention in the Consumer Finance Industry 3

cash out mortgage refinance while the home equity group solicits utilization of the home equity line as each area has production and/or portfolio growth targets to maintain). In these cases, the total customer value to the bank is not considered in the offer presented, possibly to the detriment of the continued relationship. While other industries may have similar challenges, they have demonstrated a willingness and need to become creative in their retention strategies and branding campaigns. We expect that the consumer finance industry will show similar levels of creativity when building and protecting value through their initial investment in customer relationships. Mortgage Retention Today There are several common objectives for retaining loans in addition to generating short term profits. In short, mortgage companies have generally developed retention strategies for any of the three reasons: 1. Maintain origination and/or servicing portfolio size 2. Manage the economic and accounting impact of unexpected loan turnover (i.e. impairment) 3. Maximize initial investments in the customer In managing to these objectives, the traditional strategy has been to identify customers who are most likely to pay off due to an identified opportunity to reduce their interest rate. These customers are highly susceptible to payoff as a reduction in their mortgage interest rate will have an immediate, positive affect on their personal finances. They are also easily targeted within the portfolio (e.g. borrower note rate is at least 50 bps greater than current market rate) an important factor in allocating loan origination and marketing resources. However, these reactionary approaches to interest rates have yielded results whereby many lenders achieve customer retention results equal to 20% to 25% of paid off loans. The table below shows historical customer retention rates for large mortgage lenders since 1999. TABLE 1: Average Overall Retention Rate (Q3 1999 to Q2 2006) 35% 8.5% Retention Rate 30% 25% 20% 15% 10% 5% 8.0% 7.5% 7.0% 6.5% 6.0% 30 Yr. Fixed Conv. Mortgage Rate 0% 3Q99 4Q99 1Q00 2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q06 1Q06 2Q06 5.5% Quarter Retention Rate 30-Yr. Fixed Conv. Mortgage Rate Source: PwC Customer Retention Survey Q2 2006 4 Trends and Perspectives 2007

The table illustrates an inverse relationship between interest rates and retention rates. This relationship also illustrates many servicers frustration given the volatility associated with retention campaign success. While many executives would expect a more consistent retention rate as evidence of their seasoned retention platform, our experience would suggest that the inverse relationship between interest rate and retention results, and the corresponding volatility that comes with it, is a simple matter of supply and demand. Said differently, do these retention programs make any difference today? For example, when rates are low, a larger segment of the portfolio has an incentive to reduce their monthly mortgage obligation. In these cases, mortgage lenders are less likely to compete on price as they may have met their production capacity and incremental production volume would likely result in reduced income due to increased overtime and loan quality deterioration. In this environment, lenders have an opportunity to increase margins given excess demand and may not have the capability to establish relationships with new customers as they continue to serve the refinance needs of their existing and past customers. Conversely, when rates are This viewpoint combined with the data in table one suggest that retention rates have historically been a function of interest rates and not necessarily an indicator of retention campaign success. Another important consideration is that this total retention rate measurement considers loans retained through all channels and not the economic value associated with retaining the customer relationship. The tables below show how retained loans are historically distributed by retention channel (i.e. the channel in which the loan has been retained regardless of initial origination channel). Due to the higher relative expected value that lower cost channels will yield (assuming consistent target pricing margins between channels), shifting retention volume away from higher cost channels is a continued focus of most retention programs and remains a top priority of those responsible for managing retention platforms. Achieving this shift without alienating brokers, correspondents and loan officers is challenging, but essential to maximizing the value of customer investments. TABLE 2: Average Portfolio Recapture Rates TABLE 3: Disbursement of Total Retention Between Channels 25% 100% 20% 90% 80% 15% 10% 5% 70% 60% 50% 40% 30% 20% 10% 0% Average 2Q 05 Average 3Q 05 Average 4Q 05 Average 1Q 06 Average 2Q 06 0% Average 2Q 05 Average 3Q 05 Average 4Q 05 Average 1Q 06 Average 2Q 06 Retail Direct Broker Correspondent Other (inc. Bulk) Retail Direct Broker Correspondent Other (inc. Bulk) Source: PwC Customer Retention Survey Q2 2006 higher excess capacity is available within the fulfilment process and customers are more sensitive to the impact mortgage payments have on their personal cash flows, mortgage lenders often are forced to compete on price via reduced margins. In these lower demand and lower margin environments, small variations in mortgage rates between the current lenders retention campaign offer and competing offers may be enough to deter a retention candidate from returning to their current lender. As a by-product of the interest rate cycle, the mix of purchase, rate/term refinance and cash out refinance has a similar affect on retention channel success in today s environment. As lenders have experienced over the past 12 to 24 months, rate and term refinance volumes are volatile and not sustainable from an origination perspective. In considering this volatility, companies are increasingly focused on non-rate and term refinance opportunities which while less volatile are significantly more difficult to identify due to a general lack of data supporting the reason for customer payoff. Customer Retention in the Consumer Finance Industry 5

TABLE 4: MBA Actual/Forecasted Volume (1986 2008) 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006f 2008f Purch Refi Source: Mortgage Bankers Association Mortgage Finance Forecast, October 2006 Given that most mortgage customer retention program strategies have historically focused on rate and term refinances, the chart below illustrates how volatile retention production volume can be while focusing solely on rate and term refinance volume. The chart also illustrates the relative stability of purchase production and the opportunity that more advanced customer analytics can have in increasing retention rates by understanding and targeting those customer most likely to purchase a new home, e.g. downsizing baby boomers, first time buyers looking to upsize, etc. To date however, analytics designed to identify these customer segments have not been widely used or been effective. Table 5 further illustrates the disparate results between purchase and refinance retention rates within the industry: Purchase and non-refinance retention rates represent a significant opportunity in the mortgage banking industry. As a result, and while companies have been developing and managing their retention strategies for many years, we believe that these strategies are changing and the critical elements that need to be considered in order to be successful are: Redefining retention success factors; Developing a retention strategy that aligns with the companies strategic vision and objectives; and; Becoming innovative We explore each of these more deeply in the coming sections. TABLE 5: Average Refinance and Purchase Retention Rates 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Average 2Q 05 Average 3Q 05 Average 4Q 05 Average 1Q 06 Average 2Q 06 Refinance Purchase Source: PwC Customer Retention Survey Q2 2006 6 Trends and Perspectives 2007

Redefining Success Historically retention in the mortgage banking industry has been monitored as a function of the loans paid off that have been recaptured through any channel. For example, if a company had a portfolio of 100 loans, 10 paid off and 3 were re-captured through various retention channels, the retention rate would be 30%. While this measurement is important, it does not consider the cost benefit of reinvesting in those previously acquired relationships. This approach to measuring retention success also does not attempt to identify why the company was unable to retain the additional 70% of those customers paying off in the period. While there may be legitimate reasons for the current retention rate, without understanding retention profitability and customer decision points it is difficult to determine if the retention strategy is effective. The mortgage industry has also typically taken the view that any loan is a good loan. This strategy has two shortcomings. The first is that a company does not invest to acquire a loan but rather it is investing to acquire a customer. The difference is simple; a loan has a very finite value to a company whereas a customer can have infinite value. How a company views its investment decision, customer versus loan will determine the value realized. The second is that not all customers may fit with the company s strategy, and as a result, a company should target customers that are reflective of its strategy and capabilities. The ability to target customers is predicated on the ability to understand your customer base and determine which customers offer you the greatest value potential. Note the key word is potential, and this requires the ability to understand a customer s lifetime value, which is discussed later on. Companies who do not understand or do not take the time to define their target markets, corresponding strategies and measure the incremental benefit of their investment in retention campaigns will be left with the customers who others have selected not to target. For example, some managers look at retention channels as a tool to replenish the portfolio as loans run off, while others may view retention as a tool to increase corporate profits. However, the table below illustrates how an improvement in retention rate may result in only a fractional increase the growth of the portfolio. TABLE 6: Retention Benefit (Portfolio and profit) $250,000,000,000 $85,000,000 $200,000,000,000 $68,000,000 Portfolio UPB $150,000,000,000 $100,000,000,000 $51,000,000 $34,000,000 Cumulative Retention Income $50,000,000,000 $17,000,000 $0 Year 1 Year 2 Year 3 Year 4 Year 5 0 Porfolio without targeted retention program Porfolio with targeted retention program Cumulative value of a 20 point improvement in retention rate Analysis assumes: a 20% annualized payoff rate; a traditional retention rate of 15%; an improved retention rate of 40%; a 20 bp. Improvement in price for the loans that have been targeted and originated to a lower cost channel (e.g. 40% 15% = 25% of payoffs are retained through a lower cost channel). Customer Retention in the Consumer Finance Industry 7

The table also illustrates how the retention of loans through a lower cost channel can have a more than fractional impact on profitability. It is our experience that while most companies do track their overall retention rate, they are less likely to track the incremental profitability that is missed by not retaining the loans through a more profitable origination channel. This focus on retention rate, and not retained loan profitability, is a significant weakness of many retention channels in the mortgage industry today and a barrier to maximizing their return on customer investments. 1. The percentage of targeted customer retained 2. The return realized in retaining a customer relationship versus the expected return of re-establishing the customer relationship. These two measurements are not mutually exclusive as expected profitability likely drives pricing strategies and at the same time will likely influence decisions around which customers to solicit as part of the retention strategy and, and what products/services to offer. As a result, we believe that in order to more effectively evaluate the success of a customer retention program, companies should monitor results in two separate areas: Developing a Retention Strategy A paradigm shift from the traditional model In the financial services industry, traditional models are being transformed to create a more customer friendly approach that allows for improved customer segmentation, alignment with the retention strategy and improved brand loyalty. Part of this transformation requires a level of channel integration not commonly achieved in the financial services market-place. To achieve this, an organization needs to take a customer view rather than an organizational view of their portfolio. However, creating this integrated delivery capability requires a function within the organization responsible for co-ordinating the Product/Channel offering around the customer. It also requires changes, in some cases to traditional organizational and compensation structures as illustrated in the mortgage versus home equity conflict discussed in the Retention in Other Industries. This channel conflict must be addressed to maximize customer value as the decisions will likely influence the expectations surrounding retention rates and profitability. Traditional Model Organizational Centric New Model Customer Centric Trust Retail Banking Mortgage Retail Banking Full-Service Brokerage Mortgage Investment Management Full-Service Brokerage Home Equity Investment Management Credit Card Home Equity Credit Card Products & Channels Products & Channels Advise Credit Trust Mutual Advise Fund Bank Credit Mutual Agent/ Fund Bank Broker/ Call Advisor Center Agent/ Internet Broker/ Call... Advisor Center Internet... Integration around the customer Products Products Channels Channels Customers Integration around the customer Customers Customers get what you sell them Customers Customers get what they want Customers Customers get what you sell them Customers get what they want 8 Trends and Perspectives 2007

Customer Segmentation In other industries, segmentation is a process by which different brands are developed to manage different strategies. Some companies may choose completely different brands for different customers like budget and upscale travelers; or have basic and premium versions of a similar product (four seat classes on long-haul flights); or even different versions of the exact same product (baseball fans credit cards versus basketball fans credit cards). Some companies offer products that address the needs of a customer at different life stages like retailers who have stores for infants, children and adults. A retention strategy should encompass more than just offering a refinance deal to customers or sending client information to other parts of the business. Companies need to take into consideration how they can generate differentiated service offerings for particular customer segments and what additional products and services customers will demand in the future. The most sophisticated consumer finance companies have been working on having a portfolio of products and services that segment their customers based on life trigger points. For example, a customer that is obtaining a first mortgage today might be the same customer that will be applying for a HELOC in two years, refinancing the first mortgage in 5 years, moving to a more expensive property in 10 years, and gaining interest in a reverse mortgage in 30 years. The diagram below illustrates the changing needs of a consumer that should be considered when identifying customer needs, building brand loyalty and improving retention results. Given the various segments of borrowers that a portfolio may contain, it is critical that companies understand each of the identified customer segments within their portfolio. To enhance this analysis, companies should consider not only internal information, but expanding their use of external demographic information to define their segments and anticipate their customers needs. These tactics are commonly used and established marketing concepts that are highly adaptable to consumer customer retention and cross sell strategies. Life triggers points Initiate banking relationship (savings/ checking account) Enter college, work force (credit card, auto loans) Marriage (joint a/c, CD, money market) Birth of a child (loans, insurance) School-age children (home equity loan, Insurance) College bound children (investments, education loans, second mortgages) Retirement (investments, reverse mortgage, estate planning) New home (mortgage, insurance) Teenagers/ students Single adults Childless couples Young families Established families Empty nesters Mature adults Preservation Acquisition Cash management Asset management Creation Customer Retention in the Consumer Finance Industry 9

Understanding Customer Value Regardless of your company s current segmentation techniques, it is important to remember that a loan has a finite value. However, as the illustration below demonstrates, a customer relationship can have a greatly expanded potential. Understand customers lifetime value Year 0 AAA Customer Product: Fixed 30 @ 6.5% State: CA FICO: 700 NPV (Profit): $2,500 UPB: $500,000 LTV: 85% Age: 35 years old Rates go up (70%) Rates go down (30%) Example. For illustrative purposes only Year 3 No refinance No payoff Additional income received from existing loan NPV: $600 *Takes a HELOC (20% campaign success rate) NPV: $1,000 Year 3 *Refinance (35% Campaign success rate) NPV: $2.000 *Takes a HELOC (20% campaign success rate) NPV: $1,000 Rates go up (50%) Rates go down (50%) Rates go up (50%) Rates go down (50%) Year 6 No refinance No payoff No additional income from existing loan Year 6 *No refinance *Buys a vacation property (20% campaign success rate) NPV: $800 Year 6 *Refinances as a Fixed 15 (35% campaign success rate) NPV: $1,000 Year 6 Loan pays off No additional income is received This lifecycle is a critical factor for companies to consider as part of the development of their retention strategy. Companies should see the first mortgage or initial loan as the beginning of a long-term relationship for their targeted customers than can generate a multitude of opportunities for the company in addition to the expected gain-on-sale or net interest income that will be generated by the product that is being originated today. The concept of customer lifetime value, which has been in place in other industries for many years, may become one of the consumer finance companies key performance indicators (KPI s) of the future. Customer Lifetime Value is a good indicator of the expected profitability for an individual customer or a particular customer profile. Using this calculated lifetime value; companies can concentrate their efforts in targeted segments that show the highest levels of customer lifetime value or set their prices on less profitable segments at levels that will produce the required rates of return. While there are varying approaches to calculating customer lifetime value, the calculations should consider the impact of customer satisfaction. For example, if a customer is satisfied with the product they have purchased and the service that they have received, intuitively we can expect that they are more likely to refer the company to a friend, relative or colleague. This would have a positive impact in the customer lifetime value calculation. On the other hand, if they have not received service in line with their expectations it should not be unexpected if they choose another lender and/or provide a negative referral of the company s brand resulting in a lower customer lifetime value. Whenever a company is going to make changes to its products, pricing or cost structures, it should take into consideration the impact of its decision on customer lifetime value. For example, a decision to increase certain fees to generate incremental revenue might bring additional profits in the short term but this benefit will be more than offset by the revenue lost due to unsatisfied customers leaving the company. Measuring customer retention Most companies have entire groups of people dedicated to collecting financial metrics and to analyze that is the overall market expectation for the quarter/year. However, very few assign top priority to the metrics that are related to customer retention. To be successful in the future, companies will need to be able to quantify what is the customer s reaction to the service being provided and what is the progress that they are making towards meeting the goals that were established in the initial strategy. Companies should identify how they will measure customer retention and then participate in a third-party study or conduct an in-house survey. This metric should fit the organization s culture and receive the same attention that 10 Trends and Perspectives 2007

financial metrics (ROE, net income, etc.) receive. This metrics should not be seen as a marketing objective but as something that the whole organization needs to be working on. Once a company has identified the customer retention metric, it is recommended to link this metric to compensation plans. This will ensure that all employees see the customer retention effort as something core to the company s success and as something from which they can all benefit. The company may decide to include a variable compensation component that is based on the change in the customer retention metric plus the individual s effort in meeting his/her customer service objectives for the year. The three levels of a customer retention strategy In considering retention strategies in the mortgage banking sector specifically, companies generally progress through a three stage process: Knowledge base Customer strategy Tactics Level one: Basic retention Loan level economic value Segments of at-risk refi loans Loan level database Analysis of service channel Implementation plan Change management issues addressed Aggressive pilots Credit reporting inquires Offering unique streamlined products Modification programs Outbound calls Refi capture opportunities Level two: Multi-Channel Sophisticated refi modeling Segments of at-risk purchase money loans Customer database Customer contact analysis Impact of website on retention and costs Integrated online value proposition Clear website content priorities Targeted customer metrics Customer service as a means to build loyalty Segmented services levels Actions to increase website usage Web enabled call center Security and privacy promoted Level three: Fully integrated loyalty Household level profiling and targeting Proforma allocation of resources to predicted Segmentation capabilities Clear customer migration Sophisticated cross selling initiatives Real time offer optimization Highly segmented retention Level 1 Basic Retention Tactics: Most mortgage companies are here. They need to strengthen this foundation to move forward with a clear knowledge of retention economics and organizational focus. For companies in this category more advanced financial analysis can help drive future retention benefits. Level 2 Multi Channel Approach: At this level, there is significant opportunity to improve results. Most mortgage companies have call centers and a website that do not realize their full potential. Measuring and analyzing the economics of retention (i.e., which types of customers are profitable and which customers are at risk ) can help drive the organization to the right strategy and tactics to retain customers. Other examples of understanding retention metrics include understanding which investor programs or correspondents/ brokers are more supportive of retention efforts. Level 3 Fully Integrated Loyalty Initiative: At present, a few telecommunications and financial services companies are here. CRM systems are underutilized because basic knowledge and business processes are not in place. However, companies are increasingly looking for ways to take advantage of the customer data that these systems are producing. The ultimate goal is to implement an endto-end strategy that links customer intelligence, technology and financial results. Customer Retention in the Consumer Finance Industry 11

Becoming Innovative As part of our research we observed two innovative concepts that non-us companies are using to increase their customer retention levels. The first is the concept of a one account or universal account that is being offered by financial institutions in the United Kingdom, Australia and Canada. This is a a combined checking, deposit and credit facility secured by a residential property. All the borrower s financing needs are consolidated into one credit facility. This allows the borrower to consolidate a mortgage, home equity, auto and personal loans into a single account. Some institutions have also incorporated all the customer liquid financial assets into the same account, reducing the net debt and also allowing for a lower financing cost since the interest rate is calculated based on the outstanding balance of the entire loan account. Companies offering this product believe that once a customer decides to obtain this single-stop financial solution, they will be hesitant to switch to a different company (providing that good customer service is being delivered). The second innovative concept consists on offering incentives or rewards programs to mortgage borrowers that obtain a mortgage or that remain with the company for a certain period of time. One example of this is a financial institution that offers a home-improvement store gift cards to borrowers on their mortgages fifth anniversary. The second example is of a mortgage company that offers a basis point reduction on a fixed-rate mortgage on its 5th, 10th, and 15th anniversary. Some recent evidence suggests that US consumer finance companies are also looking for more alternatives to improve their customer retention efforts: One national retail bank has started measuring customer delight by calling people each night who were in the branch that day for feedback. One online financial services company has started opening customer service centers that accept no payments or deposits and that offer financial education sessions and cocktails once a month. The U.S. subsidiary of a global bank has started marketing first mortgages to consumers by promising them that they will never sell them in the Secondary Market because they appreciate the value if having them as clients Several mortgage companies have started offering their customers mortgages to acquire vacation properties in Mexico as a way to retain customer in the long term The above are examples of strategies and tactics that different companies have undertaken to increase retention and further develop customer relationships and their profitability. The point is not for companies to view these examples as a must implement, but rather to highlight the importance of innovation in the consumer finance industry. Those companies who invest in product and service innovation will likely take a leadership position in the industry and with consumers, versus those who remain reactionary and simply seize upon products or services once they have been widely accepted. How Can You Succeed? Through the data acquired during the origination process, consumer finance companies, and more specifically mortgage companies, have a significant advantage in understanding their customers. However, given the volume at any cost strategy and common siloed organizational structure between mortgage, home equity, auto, student and other lending areas within most organizations, lenders have not taken a true customer approach. As a result, many of the perceived value associated with investing in a customer relationship is not achieved. To maintain and maximize return on customer investments, an executive should be able to answer these questions: Who is our customer? Are we using a low cost retention fulfillment process? Do we have a segment strategy? Are we viewing the customer relationship in its entirety? Are our marketing efforts bundled and coordinated? Have we improved our market intelligence to anticipate our customers next move? Have we re-assessed the way in which we measure retention and spread the information throughout the organization? Is our company focused on customer service? Do we have a process to know when to not invest in a relationship? 12 Trends and Perspectives 2007

Conclusion Price will always remain a factor in the consumer s purchase decision and will continue to be a challenge for companies to manage. However, through the development of an effective customer retention and development program, companies can help reduce the price sensitivity of their targeted customers. In short, if a targeted customer is being well serviced, has access to products and services that are consistent with their financial needs and offered on a timely basis at the appropriate price, they are more likely to look to their existing provider first, and be less likely to move for smaller price differences. The impact of this can be significant as this increase in retention provides further opportunity to capitalize on the customer s lifetime value. We hope that you have found this document useful. If you need additional information, please contact Steve Davies at steve.t.davies@ us.pwc.com, Roberto Hernandez at roberto. g.hernandez@us.pwc.com, Peter Pollini at peter.c.pollini@us.pwc.com or Martin Touhey at martin.e.touhey@us.pwc.com. Consumer Finance Group Partners and Principals Steve Davies, Co-Chair 646.471.4185 steve.t.davies@us.pwc.com Mike Seelig, Co-Chair 704.344.4390 mike.seelig@us.pwc.com David Guy 646.471.2561 david.a.guy@us.pwc.com Mike English 646.471.7357 michael.english@us.pwc.com Alan Lee 703.714.3814 alan.l.lee@us.pwc.com BRIAN WILLIAMSON 617.530.7528 brian.d.williamson@us.pwc.com Maryann Murphy 703.714.3808 maryann.murphy@us.pwc.com Michael Stork 612.596.6407 michael.stork@us.pwc.com MARTIN HURDEN 703.918.3250 martin.hurden@us.pwc.com Customer Retention in the Consumer Finance Industry 13

www.pwc.com PricewaterhouseCoopers shall not be liable to any user of this report or to any other person or entity for any inaccuracy of this information or any errors or omissions in its content, regardless of the cause of such inaccuracy, error or omission. Furthermore, in no event shall PricewaterhouseCoopers be liable for consequential, incidental or punitive damages to any person or entity for any matter relating to this information. This report is provided for informational purposes only and does not constitute the provision of tax, accounting, legal or other professional advice. 2007 PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to PricewaterhouseCoopers LLP (a Delaware limited liability partnership) or, as the context requires, other member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers LLP (US). BS.BS.07-0403.0107.DvL