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Effective customer retention techniques in group lending

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The document discusses techniques financial institutions can adopt to retain their customers, particularly microfinance institutions using the group lending methodology. It explores reasons why customers leave the financial institution or the groups they belong to, examines challenges relating to the group methodology and proposes strategies to retain group members.

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Effective customer retention techniques in group lending

  1. 1. Effective Customer Retention Techniques in Group Lending
  2. 2. Objectives • At the end of this training, you will – Identify reasons why customer retention is critical for any business – Understand why customers leave the financial institutions or the groups they belong to – Determine challenges associated with the group lending methodology – Identify strategies for retaining customers in the financial institution and the group
  3. 3. Content • What is customer retention? • Group lending and its benefits • Why members desert groups or the FI • Customer retention techniques
  4. 4. What is customer retention? Session 1
  5. 5. Customer retention • What is customer retention? • The process where customers continue to buy products and services within a determined time period – Simply put… • the ability of a business to keep its customers over a specific period of time • the activities and actions that businesses take in order to reduce the numberof customers who leave. • The goal of customer retention is to help businesses keep as manycustomers as possible.
  6. 6. Why is customer retention so important? • Because… – Acquiring new customers can cost as much as five to seven times more than simply retaining existing customers. (U.S. Small Business Administration and U.S. Chamber of Commerce ) – Customer profitability tends to increase over the life of a retained customer. (U.S. Small Business Administration and U.S. Chamber of Commerce ) – A 2% increase in customer retention has same effect as decreasing costs by 10% – A 5% increase in customer retention increases profits by 25% - 95% (Harvard Business School Report)
  7. 7. Why do customers leave? • Generally, the following reasons have been identified in research, why your customers may leave you. – 68% leave because they are unhappy with the service they receive. – 14% are unhappy with your product or service. – 9% decide to use a competitor. – 9% for a variety of reasons.
  8. 8. Why do customers leave? • Lets assume that nothing can be done about the – 9% who decide to use a competitor and – 9% who leave for various reasons • Why? – Because some customers will still leave you no matter how much effort you put into making them happy…you can’t win them all • That leaves us with 82% of our customers – Let’s focus our energies on what to do to retain this percentage of our customer base.
  9. 9. Why do customers leave? • But why do customers leave a financial institution (FI) or a solidarity group to which they belong in the FI? – When we know why customers leave, then we can devise better strategies and techniques to retain them. – To understand why customers leave, we need to take a look at what group lending entails
  10. 10. Group lending and its benefits Session 2
  11. 11. What is group lending • A lending method which allows a group of individuals - often called a solidarity group to provide collateral or loan guarantee through a group repayment pledge. – The incentive to repay the loan is based on peer pressure, if one group member defaults, the other group members make up the payment amount. (igi-global.com) • A form of collateral substitute in which borrowers form groups, all of whose members must maintain a satisfactory payment record for any group member to be eligible for future loans. (USAID)
  12. 12. 1. SolidarityGroups • Normally one loan per group • Begins with training/ information session • Targets existing business with regular cash flow • Loan amounts are somewhat larger than other group methodologies 4. Village Bank • MFI/Bank organizes and trains groups • May use internal account • Platform for non-financial services 2. Group of Groups • Individual contract with group as co-signer • Begins with several weeks of meetings and savings • Supports new income generating activities • Platform for non-financial services 3. Self Help Group • Typically involves 2 institutions (NGO & FI) • Bank/MFI lends to SHG (not to members) • Begins with 6 month of savings and internal lending • Platform for non-financial services Forms of group lending
  13. 13. Group lending • The essence of group lending is that it is a way to transfer onto customers the responsibility for the tasks usually undertaken by the Financial Institution (FI) – screening potential customers, monitoring their efforts and enforcing contracts. • It therefore has huge benefits for the FI in terms of reduced loan related transaction costs and risks.
  14. 14. Benefits to the FI • By shifting screening and monitoring costs to the group, a FI can reach a large number of clients through the self selection of group members. • One of the reasons that self selection is so important is that the members of the same community generally have excellent knowledge about who is a reliable borrower and who is not. • One important feature of group- based lending is the use of peer pressure as a "collateral" substitute
  15. 15. Benefits to the customer • Group lending also has a wide range of benefits for the customers or group members. Lets look at some of them: • Many group-based lending programs target the very poor, who cannot meet the traditional collateral requirements of most formal financial institutions such as commercial banks and non- bank financial institutions. • Group lending therefore enables people who would otherwise not have access to financial capital due to lack of collateral, to do so. – Thus the very poor and underprivileged can also do business
  16. 16. Benefits to the customer • Dynamic group membership could lead to empowerment • Customers have the liberty to choose their group members, ensuring that members choose people they trust as credible borrowers – Where the group is dynamic enough, they can, as a group, access various services, not only from the bank. There are NGOs who provide business development services to communitygroups and they can take advantageof this and other services as well. – Peopleare however, usuallyvery careful about who they admit into their group, given the threat of losingtheir own access to credit or havingtheir own savings used to repay other people's loans.
  17. 17. Group lending • If the FI is important to the business survival of the customer and • If group lending has good benefits for the customer, – why do the customers still leave and – What measures can we take to ensure that we retain them?
  18. 18. Why members desert the financial institution and/or the group Session 3
  19. 19. Why do customers leave the FI? • Three main reasons have been given why customers will leave the financial institution (FIs). Some of these are outside our control, others can be worked on. These are: Industry structure How FI is managed Characteristics of the customer
  20. 20. • Where • there is a fragmented market • And • There are a lot of competitors who differ in size • There is fierce competition that can cause current customers to become highly indebted because they borrow from more than one institution. • When customers are highly indebted and cannot pay their loans, they will leave Industry structure
  21. 21. Satisfaction with the product •Customers have needs and the FI has products. Customers want solutions to their needs and if the products do not solve their needs, they will go. •Are your products flexible enough to meet their needs in terms of credit use, maximum amounts, repayment periods etc. •Where products are seen as the same from one FI to the other, there is not much incentive to remain. Develop unique products Emotional involvementwithFI • Customers tolerate their FI’s weaknesses because of the emotional bond they have with loan officers, other staff or the FI itself. Without emotional involvement, they will leave. There must be emphasis on relationship building with customers. • Loyalty is based on emotions, which is why it is important to identify and meet customer’s emotional needs. When customers emotional needs are not met they will leave. ie To be: • respected • Acknowledged • Rememberedetc. How the FI is managed
  22. 22. Quality of Customer Service •Customers expect some minimum level of customer service and when they don’t get it, they may leave. •Key contact points with customers in the lending process are opportunities to provide excellent customer service. Customers however face challenges at these contact points. We’ll look at some of them. Image or reputation of the FI •Sometimes, positioning the FI as a small one makes some customers see it as a temporary solution. Once their business grows bigger, they start looking for other service providers. eg. Some institutions are positioned as credit providers so customers only take credit from them but open savings accounts with other institutions. •Other FIs have earned the reputation of being ruthless when it comes to collection of loans, they use all kinds of methods to get it. People will be reluctant to come to you. Do business with a human face How the FI is managed
  23. 23. Client Recruitment and Group Preparation Loan Application Evaluation and Loan Approval •Customer receives insufficient or disorganized/random information. •Theonly information source is the loan officer. Customer is not able to verify information fromthe institution itself, leading to dependency on the loan officer and creating challenges in obtaining information. •Serviceis focused on explaining the institution’s productsand creditpolicies instead of understanding the customer’s needs •Customer is evaluated based on the easiest and quickest credit recovery, more than on the micro-business cash flow. •Evaluation is perceived by customers as indiscreet, invasive, in front of micro- business competitors Key contact points – Challenges of customers •Inadequate support to customers in providing relevant information required on loan forms. •Loan processing takes time
  24. 24. Key contact points – Challenges of customers Disbursement Collections •Customers are not notified about deductions from loan amount in the form of commissions, forced savings etc. Customers therefore feel cheated •Limited customer knowledge regarding their credit as a result of incomplete orientation meetings, inadequate information from the FI etc. •Long waiting lines resulting from the overburdened system, insufficient teller windows or insufficient infrastructure. •Contact with cashiers is most unpleasant since they lack customer service training •Time-consuming meetings
  25. 25. Group Activity • Let’s take another look at the lending process – 1. For each stage in the lending process, identify other challenges that customers may be facing, which have not been discussed. – 2. For each stage, prescribe ‘workable solutions’ to the challenges that have already been discussed and any new ones you have identified. – Use sheet 1
  26. 26. Characteristics of the customer • Many FIs take for granted that their customers need credit. • Customers do not seek credit as such: rather they are looking for solutions to their needs • Besides, micro-entrepreneurs have a variety of financial needs such as – savings, – training, – networking, – business advisoryservices and related – micro business services. Do you know your customers’needs? Customers leave because their needs are not being met.
  27. 27. Why do members desert the groups? • Let’s now turn our attention to why members leave the group. • Two key reasons have been identified as to why members may desert a group: – Features of the group lending method – Interpersonal challenges with group members Let’s discuss some of the features of the group lending method which may be driving away our customers
  28. 28. Why do members desert the groups? – Customers suffer through no fault of theirs because a group member has defaulted in their payments. • Thus the defaultof one member in a group generally means that further lending to other group members is stopped until the loan is repaid. – For instance, in the event that several members of a group encounter repayment difficulties, then the entire group is faced with economic challenges and the group collapses. – Sometimes a borrower through no fault of her own has liquidity problems. What happens then? Excessive group pressure and lack of flexibility
  29. 29. Why do members desert the groups? – Customers have little privacy over their financial matters as every group member is aware of payments or defaults of others. • The use of public payments as a way of shaming customers is unattractive Lack of privacy
  30. 30. – Customers are entitled to limited or fixed loan amounts whether it serves their needs or not – Customers are forced to make payments at fixed periods ie. weekly, whether it corresponds with their cash flow or not . – It is sometimes unrealistic to impose regular payments in areas with highly seasonal occupations, such as agriculture. Lack of flexibility with respect to credit Fixed payment durations
  31. 31. – Customers feel detached from the FI as no real relationship is established on an individual level between loan officers and customers, especially where the practice is that the loan officer deals with the group leader more frequently, not necessarily all group members. – Attending meetings can be costly, both in terms of time and money, particularly in sparsely populated areas. Individual relationship with the FI is not established over time Making time to attend meetings How do we overcomethis challenge?
  32. 32. – Customers need to find other borrowers in order to be eligible for a loan – This comes with its own risks that most customers do not want to bear – In sparsely populated areas and urban areas, customers might not have good information on each other and may therefore make wrong choices in selecting group members – a mistake they will have to pay for dearly in the form of financial punishment by being forced to repay other people's loans due to their lack of " financial discipline" The risk of finding credible borrowers to partner with
  33. 33. – A group loan product may not be suited to the needs of a particular area or business – You need to do your own assessment to determine if the social/geographical/business context is ideal for group lending Group-based lending does not work well in all contexts or circumstances
  34. 34. Why do members desert the groups • Interpersonal challenges also play a role in why people leave groups. • Interpersonal skills are those skills which are necessary for relating and working with others – such as verbal and non- verbal communication, listening, giving and receiving feedback. • As with any human gathering, there are bound to be challenges because we – Are all different, – Come from different backgrounds – Have different experiences – Relate to people differently
  35. 35. Why members desert the group • Being able to understand and work with others in teams or groups is an important aspect of interpersonal skills. – The focus is on ensuring teamwork, group effectiveness, decision making, running meetings etc. • Loan officers need provide interpersonal skills training from time to time as part of group meetings. • This will prepare groups to expect such challenges since they are inevitable as well as give them the skills to handle them
  36. 36. Strategies to retain customers Session 4
  37. 37. Customer retention strategies Group lending related Product or service related Customer related
  38. 38. Strategies relating to group lending • Embark on progressive lending as against fixed credits – Progressivelending promises larger and larger loans for groups and individualsin good standing. This will even encourage customers to quicklypay back their loans since they will receive bigger amounts with time. • Match repayment schedules to business cash flow – Where possible,micro-entrepreneurs involved in the same line of business shouldbe encouraged to form a group since their business cash flows may be similarespeciallyin seasonal businesses. This may make it easierfor the FI to match repayment schedules to their cash flow and makeit easier for them to pay back their loans.
  39. 39. Strategies relating to group lending • Eliminating or relaxing the rules of joint liability. – Given that many micro entrepreneurs do not want to be penalized for the defaults of other group members, other measures to ensure repayments needs to be adopted such that the rules of joint liability can be relaxed or eliminated. – FIs can give incentives to customers by threatening to exclude defaulting customers from future access to loans, not necessarily punishing the whole group for one person’s default
  40. 40. Strategies relating to group lending • Ensuring that existing customers do not contract new loans either – From the same institution • this can be easilydone by cross checking internal records – From another institution in the area • This can be done by using credit bureaus or designing ways that promote informationsharingbetween FIs, so that a customer that defaults on one FI loan would not be able to turn to another FI withina certain catchment area and be granted a loan
  41. 41. Strategies relating to group lending • Financial literacy – Promotingfinancial literacy among clients may help them in their borrowing decisions, which in turn may limit multiple loan-taking. • Provide short training during group meetings • Give them hands-on support to help them understand financial issues
  42. 42. Product & service related strategies • Be the expert – Provide technical support • Micro-entrepreneurs are usually people with very little understanding of business and business skills. – Provide them with technical skills training, how to manage their capital etc. and follow up on them. • No matter what industry your customers operate in, if you can be an expert to them in the area of managing their businesses, you will likely retain more customers
  43. 43. Product & service related strategies • Product or service integrity • There must always be total consistency between what you say and do and what your customers experience. – Long-term success and customer retention belongs to those who do not take ethical shortcuts. • The design, quality and serviceability of your product or service must be of the standard your customers want, need and expect.
  44. 44. Product & service related strategies • Service integrity is also demonstrated by the way you handle the small things, as well as the large. • Customers will be attracted to you if you are – open and honest with them, – care for them, – take a genuine interest in them, – don’t let them down and – practice what you preach … and they will avoid you if you don’t.
  45. 45. Customer related strategies • Know your customers’ needs and expectations in terms of product and service. • The customer has 2 separate needs that must be met: – needs relating to your product • Is your product a solutionto their business needs? • Is it only credit they need as a micro/small business?How about savings?,technical skills?Etc.
  46. 46. Customer related strategies • Needs relating to your service – Customers are first and foremost individuals – As individuals we like to be: • Heard • Understood • Respected • How well are you meeting both needs of your customers? 46
  47. 47. Other customer retention strategies • You can also retain customers by • Reducing attrition – The easiest way to grow your business is not to lose your customers. – Once you stop the leakage, it is often possible to double or triple your growth rate because you’re no longer forced to make up lost ground, you can just stand still.
  48. 48. • Virtually every business loses some customers, but few ever measure or recognize how many of their customers become inactive. – Take some time to cross check on the number of customers who have left and you may be surprised at how much your institution is losing • Most businesses, ironically, invest an enormous amount of time, effort and expense in building that initial customer relationship. – Then they let that relationship go unattended. • In some cases they even lose interest as soon as the sale has been made, or even worse, they abandon the customer as soon as a problem occurs. Rather than resolve the problem, they spend another small fortune to replace that customer.
  49. 49. By building relationships with customers • Build trust through relationships – As the age old saying goes, you do businesswith people you trust. – Trust is essential in business, and building relationships with clients will give you that trust – Implement a relationship marketing strategy in order to ensure consistent relationship building with customers. This is of particular importance because you are a service-based business
  50. 50. By giving good customer service • Customer service is the provision of service to customers – before, – during, and – after a purchase. • Customer service has often been done badly because it has been defined badly.
  51. 51. Class Activity: In what ways can we give good customer service • Before service delivery • During service delivery • After service delivery
  52. 52. By following up on old customers • Bring back the “lost sheep” • Reactivate customers who already know you and your product. This is one of the easiest and quickest ways to retain customers and increase your revenues. – It is sometimes easier to go back to a relationship you had which has ended than to embark on a new one, especially if the old relationship is promising change • There is little point in dedicating a lot of resources to finding new customers when 25-60% of your dormant customers will be receptive to your attempts to do business with you if you approach them the right way, with the right offer.
  53. 53. • Get in touch with former customers • Remind them of your existence as an institution • Find out why they’re no longer with you • Take note of their concerns and act on them • Demonstrate that you still value and respect them by being consistent in the areas they had problems with you before – This approach is cheaper than exploring new relationships withtotally new customers and may lead to some of your best and most loyal customers.
  54. 54. By taking complaints seriously • A complaint is a gift • 96 percent of dissatisfied customers don’t complain. They just walk away, and you’ll never know why. That is because they – often don’t know how to complain or who to complain to – can’t be bothered – are too frightened, or – don’t believe it’ll make any difference. • Though they may not tell you what is wrong, they will certainly tell many others. A system for unearthing complaints can therefore be the lifeblood of the institution because customers who complain are giving you a gift.
  55. 55. • Complaints are gift packages waiting to be opened because they: – Are given freely – Are not solicited • You do not incur any cost to get them – free information – Are unexpected…they come as a surprise (usually) – Hold the key to happiness for the FI • If they are well handled • A complaint gives you: – Free direct communication from the customer about • service failures,competitors offerings etc. without the added cost of conductinga survey – Readily available market research: they define what customers want 55
  56. 56. • A complaint gives you the opportunity to: – Increase customer trust – Build long term relationships- • customers will use your services again if they believe complaints are welcomedand addressed – Rectify service failures – Engage customers as advocates
  57. 57. So how should complaints be handled? • Listento the customer • Get a proper understandingof the problem • Apologiseas if you caused the problem, not someone else • Acknowledgethe customer’s pain or frustration • Explainthe action you are going to take and give a time frame for resolving the problem if possible • Thank the customer • Follow up to ensure that the problem has been solved • Don’t take it personally • Remaincalm • Focus on the problem and not the person
  58. 58. • Address customers by name • All communication should be in the first person. – Use “I am sorry” not “we” • Don’t make excuses or blame others in your organization • Give the customer your full attention and establish eye contact • Don’t be defensive • Be composed at all times • Don’t take criticisms personally • Offer an apology even if the disservice is not your fault • Show empathy by using such phrases as: “I can understand how you feel”, “I appreciate what you’re saying.” Tips for handling complaints
  59. 59. • If you don’t know the answer to their problem, don’t lie. • Call back when you say you will, even if for some reason, you haven’t been able to obtain a satisfactory answer by then • Tell them what you can do…not what you can’t do • Find out what it will take to turn their dissatisfaction into satisfaction • If they agree to that solution, act quickly before they change their mind • And remember: – You can never win an argument with a customer – If you do, it will be to the detriment of the institutionbecause the customer will leave. Tips for handling complaints
  60. 60. By building customer loyalty • What is Customer Loyalty? – When customers consistentlypatronize your services over a long period of time – When customers use your services often, use other products you have and bring you even more customers – Customerloyalty is builtby treating people the way they want to be treated.
  61. 61. Discussion: What practical and simple ways can we use to build loyalty among our unsophisticated customers? Discounts as an incentive to pay back loans on-time… Any other ideas ?… …… …… …..
  62. 62. Other ways to build loyalty… • Personal thank you messages • Showing that you care and remembering what your customers like and don’t like. • Ask your customers how they’re doing – and take it to heart! • Treat your team well so they treat your customers well.
  63. 63. Resources: – Urquizo Jacqueline(2006): Improving and Monitoring Customer Retention – Riecken Julie & PaulsenRick: Building Customer Loyalty – Viswanath P.V.: Beyond group lending – DavideCastellani (2015): Microfinance Lending Technologies