One of the hallmarks of our modern, post-recessionregulatory environment is the consumer complaint. While people have been grousingabout their banks for as long as banks have been around, the recent effortundertaken by regulatory agencies to solicit, catalogue, and respond to those complaintsis truly unprecedented for any industry.
According to a recentreport from the CFPB, since opening their doors in July of 2011, they havehandled approximately 309,700 consumer complaints. Perhaps more ominously, therate and scope of them is increasing. The CFPB has expanded the categories theyaccept from credit cards to virtually every type of financial product andprocess including mortgages, auto loans, credit reporting, debt collection, andpayday loans. Additionally, the volume they have received has increased 80% between2012 and 2013.
Setting aside the time and money that banks spent respondingto these complaints in 2013, the broader, and perhaps more important,implication for the financial industry is the sheer amount of information thatis being collected by regulators. The priority of the CFPB and other regulatoryagencies has always been finding and eliminating any systematically unfairtreatment of consumers. Individual complaints need to be addressed, but thewhite whale has always been systematic discrimination. While it’s unlikely thatbanks’ policies and procedures were designed to be explicitly discriminatory, thedoctrine of disparate impact means that they don’t have to be for an institutionto be liable. All that it takes is enough individual consumer complaintsalleging unfair treatment for regulators to be able to draw a line that shows adisparate impact.
The implication for the financial industry is immense. It isno longer sufficient to eliminate systematic discrimination, because isolatedexamples of non-compliant customer decisions can be just as damaging in the aggregate.In today’s regulatory environment, inconsistent processes that result in arbitrarycustomer outcomes are simply unacceptable. It is now critical to be able tomake compliant, data-driven customer decisions consistently across the institution.
That is much easier said than done. As consolidation hascontinued to reduce the overall number of banks and increase the average sizeof those that remain, the decision-making infrastructures at banks have becomedownright byzantine in their complexity—siloed product lines, overlapping CRMs,redundant channel systems, manual reviews, and legacy decision engines. Is itreally surprising that a customer trying to make it through that gauntlet ofmishmashed technology and processes mighthave a bad experience?
In response to this challenge, leading financialinstitutions are aggressively pursuing initiatives to centralize and automatetheir decisioning processes and create more consistent customer experiences. Theyare justifying the investment by focusing on the components of theirdecisioning processes that are the most common and resource intensive acrosstheir organizations. By automating functions like data acquisition and riskscoring at an enterprise level, these banks not only introduce more consistencyinto their decisioning processes, they also reap significant efficiency andcost benefits.
Attributes are a great example of this trend towardscentralization. Attributes enable banks to easily summarize a consumer’s credithistory into predictive indicators that can then be used to assess thatconsumer’s credit worthiness. For the last decade, multiple top-10 banks haveinvested hundreds of millions of dollars in projects to consolidate thecalculation of these credit risk variables. At these institutions, every creditapplication that comes in—regardless of the product line or channel—is routedto a single engine that pulls the consumer’s credit file, calculates therequired attributes, and feeds them into the appropriate decision engine. Thisensures that all of the banks’ credit decisions are based on a single set of centrallydefined and managed definitions. While some consumers may still complain aboutbeing declined, the underlying process used to make the decisions is consistent,transparent, and easily auditable.
In the CFPB’s annual report, Richard Cordray stated thatconsumer complaints are the compass that the CFPB uses to “identify andprioritize problems for potential supervisory, enforcement, and regulatoryaction.” In this regulatory environment, it is clear that the experiences ofindividual bank customers have never mattered more. What remains to be seen iswhether the majority of banks will make the changes to their processes andtechnology needed to thrive in this new era of consumer complaints.
Alex Johnson ismarketing specialist for Zoot Enterprises Inc., a provider of loan origination,account acquisition and credit risk management solutions for large financialinstitutions. You can follow him on Twitter @AlexH_Johnson or Google+. Visit Zoot’s Credit Strategy Session and its Merchant Acquiring Strategy Session on PaymentsJournal.