Chapter 2 Summary of Managing a Consumer Lending Business

Date: April 25, 2021

This chapter, although it is called Planning Consumer Products, I think it is about product development. It talks about the variables in developing a product/ adjusting a product.

First of all, the product should align with the underlying strategy of an organization. We need to understand whether the company is an expansionist where management intends to grow a business rapidly, and accepts and understands risk, as well as is willing to invest in the necessary resources, or a controller where stability and reliability are rewarded, or a minimalist where management is defensive and unwilling to take risks, for example, it makes little attempt to change the existing way of doing business.

Next, we have to understand the playing fields, both externally and internally. Externally, we may ask ourselves questions regarding the state of the economy, competitions, and types of product available. Internally, we determine whether it has the internal resources necessary to do the job, such as enough capable and knowledgeable managers, outside hires, computer, systems, office space, etc.

After that, we started to develop a product. But what is a product? A product is, according to the author’s definition, a collection of loans or lines of credit governed by standard terms and conditions. Term loan, requiring the borrower to repay a fixed amount or revolving product, customer can draw down the funds at will. Direct loan product, institution distribute the product on its own or indirect loan product, products are marketed through independent distributors or agents. A secured loan, in which the lender will lend money only by taking a lien on an asset or unsecured, in which the lender has no access to the assets of the borrower.

The target market is another key variable in a product. In general, the author classified the target market into 3 segments. High-usage and high-risk. Customers who need credit badly and expect to pay a high price belongs to this segment. Moderate-usage and moderate-risk, in which customers use credit regularly and have ample offers, and are not too fussy about pricing. Low-usage and low-risk. Customers who pride themselves on paying their bills on time and keep their debts at a minimum belongs to this segment.

When studying a target market, a good competitive survey should be done. The author did not go into details on that in this chapter but mentioned a few key information to be included in the survey, There are, the basic interest rate charged, the fees, minimum monthly payment requirements, product features, enhancements. (Pay attention that this book is about consumer lending business.)

The author also mentioned some obvious variables in product design, such as pricing, fee structures, product features, such as grace period, minimum monthly payment; enhancements, such as airline services, VIP services, etc.

Finally, all variables should put into a forecast of the results. What results are expected? How many applicants will apply each year, or what response rates are expected? What will be the usage? What fees will be paid? What is the projected write-off rate in both numbers of accounts and balances? “If the product doesn’t work on paper, it can’t work in the real work.”

To be honest, the most important take away from this chapter is the session on Approval. Product design should be documented and sign-off by several members of senior management. However, the author said, “Each person signing the document should be able to add value either by asking the right questions or contributing to the product’s development (i.e., he should really know the business). Approval from a senior manager(s) with no knowledge of the business is worthless. Indeed, such approval may corrupt a perfectly good proposal if it is contingent on unnecessary (or stupid) changes.” This is truly a great reminder! Finally, monthly updates should be given to validate assumptions and review the performance of the existing product.