The Price and Risk Benefits of Loyal Customers

In my previous article I mentioned that loyalty takes several different forms, including a loyalty of convenience, a loyalty of compensation and a loyalty of association.

Once again, in this article I am not going to attempt to determine the type of loyalty or its underlying cause, but rather make the simplifying assumption that any borrower who opens a new loan at the same lender from whom they took their most recent loan, is ‘loyal’.

Even with this simple definition, though, we’re able to see some immediate benefits that lenders can enjoy when they manage to create a loyal customer.

Firstly, loyal customers generate larger margins. To understand why, we need to consider the inverse: in order to win over a new customer, lenders generally have to offer a discount. Not having to give up that discount is a financial benefit supplemented by the likely lower acquisition costs of a loyal customer.

There are also indirect savings to be earned from loyal customers. While delinquency rates aren’t always top of mind in generally low-risk Hong Kong, they do play a bigger role in the decisions of personal loan issuers, so it is interesting to see how they delinquency falls with loyalty.

Research shows that 2.8% of subprime consumers who opened their first loan between October 2017 and March 2018 were in collections three months after that loan was opened — more than double the number of subprime consumers with a measure of loan experience and more than triple the amount of similarly risky consumers, with loan experience, and who are returning to the same lender.

Clearly loan experience counts for something — as would survivor’s bias — but even among returning borrowers those who are returning to a new lender are almost 50% more likely to be 30 days in arrears three months after opening.

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For more insights into the Hong Kong consumer credit market, read TransUnion’s latest quarterly Industry Insights Report and other articles here.