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Trends 2012 in the loan institution - retail chain tandem

In 2012 retail chains will seek to establish virtual credit brokers, introduce bidding procedures for selecting loan partners, and insist on further acceleration of the loan granting decision process.

First of all, it’s required to classify the retail networks by sales activity directions. The reason is that trends typical for certain work areas significantly vary depending on the activity format.

In terms of large formats, they cover techno-markets and hypermarkets of building materials.

Certainly, techno-markets are represented by Eldorado, Technopolic, Foxtrot, Comfy.

Let’s mention chains selling building and redecoration materials: Epicenter, Nova Linia, Praktiker, Leroy Merlin.

In fact, these hypermarkets sell industrial goods. Let’s classify them as the first type chains.

In addition, there are retail chains using more compact outlets mainly involved in selling gadgets: cell phones, laptops, media players, etc. They cover some local and regional retail chains. Let’s classify them as the second type chains.

The first type chains strictly head for a bidding-based cooperation with loan institutions. Bidding procedures include the following points: effective rates, application acceptance levels (filled applications share), participation in special sales of the retail chain.

For example, in 2010-2011 this approach was mainly used by big techno-markets. However, this year we can see the similar principles are followed by hypermarkets selling household products.

The second type chains don’t generally use bidding procedures, not yet. They rank lending partners by rates and application acceptance levels. These chains use ranking to update the list of partners and even to change the partner content at a certain outlet.

The key point is that the second type chains are featured by three-level sales outlets. The first level comprises shops with the wide range of products, heavy consumer traffic and crediting points. The second level covers average potential shops, and the thirds level is represented by weak outlets. Of course, loan institutions prefer to cooperate with the first and second level shops.

The second type chains try to implement their own IT-solutions to accept credit applications and create a kind of their own virtual credit broker. That is to say, the retail chain employees act as specific virtual credit brokers who collect applications and distribute them via the internal networks to the partner loan companies. The lender who is the first to react and offer the best terms will get the credit recipient.

Unfortunately, the quality of processing of these applications is rather low. Moreover, the retail chain staff can be financially and strongly encouraged to arrange a loan, but they might not have even a tiny responsibility for attracting an anticipatorily low-quality borrower.

You have to be aware that this scheme implies serious operational risks specifically caused by the mentioned factors. It’s hard to explain, for example, why the whole package of the required documents has not been collected for a certain borrower, or why the borrower was not properly informed of the credit granting conditions. However, retail chains are not ready or can hardly accept crediting risks.

A similar scheme is being introduced by some car shops: an employee gets a buyer’s application and sends a credit request to several banks and financial companies selected by some criteria. This is how the initial screening of potential lenders is made: down payment size, crediting period, credit amount, etc. The first company to offer the best conditions will get the customer.

However, we can observe a trend where companies take a race to approve a quick decision and guarantee the credit issuance after this decision was already made. If a lender does not provide a credit, then a car seller will be in trouble: a booked car has to be purchased from the importing company. If the credit is not provided, the car order will be pending on the trader’s balance and spoiling the whole picture.

By the way, there are strict timeframes imposed on the raced crediting decisions. It’s not a normal situation when a lender is ready to decide on the car credit within several hours. Either there is a chance that the borrower will be rejected at the nick of time, or the lender stuffs a portfolio with low quality credits. We are not sure if one day is enough to take a proper decision, but 2-3 days will make a sufficient time.

Nevertheless, loan companies are interested in this type of cooperation because of receiving a stable flow of customers. Moreover, selling credits through retail chains provides an access to a wide customer database for the future sales of other (adjoining) financial services. In a sense, crediting companies follow a forward thinking approach: today they get a small margin under retail partnership programs, but they expect the gained customers will make a good benefit in the future.

What are the ways for a crediting company to realize its interests without any damage to the capital and current financial performance? Apparently, it needs to improve its risk-management, strengthen IT solutions in use, as well as increase the quality and performance of scoring systems.