Win-Win situations:Responsible Lending at ANZ

Jenny FaggManaging Director Consumer Finance

National Consumer Congress14 March 2007

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The industry needs to take a lead on responsibility

• Banks are seen to be contributing to escalation of household debt

• Credit Cards – expectation to control unsolicited offers

• Rising interest rates, household debt, petrolprices and bankruptcy increase ‘heat’

• Failure to act = lose-lose:– consumers in difficulty remain trapped– credit providers no better equipped– further regulation

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Responsible lending is part of ANZ’s broader framework

These proactive steps can assist with long-term strategic issues:

A more informed market place

lessens market failures which

prompt regulation

Empowered and confident

consumers more deeply engage with

financialinstitutions

Rebuilding ourreputation

Responsible Lending

• Better credit assessment

• Better at identifying and assisting customers in difficulty

• Giving customers tools to manage money better

Financial Literacy and Inclusion

Leading research Innovative Programs

Customer Charter Public benchmark for service to our customers

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The ANZ Customer Charter is our commitment to customers

• Customer Charter– convenience– service– complaints– simple products– fast account opening– simple and clear

communications

• Results:– ANZ has highest customer

satisfaction rating of all major banks

– customer complaints have decreased by almost 36% in five years

• Key features – public, specific, measurable

Customer Charter

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Responsible lending is a key focus

• Media, political and community focus

• Credit card debt is a minor contributor to overall debt levels

• But there are customers at the margins

• Credit limit increases raised during the Vic Government’s review of consumer credit

ANZ was the first

Australian bank to

introduce Responsible

Lending commitments as

part of its enhanced

Customer Charter

Responsible lending – To Date

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Behaviour scoring and other “traditional” credit practices are effective for managing most customers

• Key in determining credit limit increases

• Extremely robust for “averages”:– Comprehensive historical data– 150 behavioural variables– 9-12months data, regularly refreshed

• Prescription of credit assessment techniques will not necessarily lead to better results– Statistically more reliable than manual assessment: e.g. ACT

• UK Banking Code – best practice means at least two of:– manual assessment– past performance– credit reports– credit scoring

• Excluding “marginal” customers is more likely to be effective than increasing disclosure or asking for more details

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ACT’s CLI restrictions started

on 25 Nov 2002

Delinquency rates of ANZ credit card customers in ACT and rest of Australia

Delin

qu

en

cy r

ate

(in

dexed

)

Note: Delinquency rates show the percentage of customers 90 or more days past due in the last 12 months. Data for ACT and Rest of Australia has been indexed to give an average of 100 for 6 months prior to November 2002.

Source: ANZ Credit Cards Australia

ACT

Rest of Australia

ACT’s credit limit requirements have not worked to reduce defaults

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Circumstances Out of Individual’s Control

Unhealthy Financial Ways of Thinking

Over-Spending &/ Over-Commitment

Decreased Income &/ Increased

Expenses

Poor Financial Decision-Making

ANZ research highlighted financial difficulty (affecting 2%) arises from a combination of factors

• Of the 2% of borrowers who ‘feel out of control’, financial difficulty is most often due to behaviour and traits of the individual or unexpected events (or a combination)

• Lack of financial skills and knowledge only a small component

Lack of skills, knowledge

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Responsible lending requires increased sensitivity to “marginal” customers

• ANZ’s response guided by this research and stakeholders

• Lenders can indirectly influence the path to financial difficulty– Customer Limit Increase (CLI) offers

provide the ‘opportunity’ to access credit

– ‘it must be OK if the lender sent it to me’

• Stakeholders (especially financial counsellors) have told us people are particularly vulnerable where they do not have the capacity to deal with unexpected financial pressure ie there is no “buffer”

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So, we have additional promises and business practices to exclude some customers from limit increases

• ANZ does:

– not offer a CLI to those with poor recent credit performance or struggling to meet repayments (eg. overdue, minimum payments)

– not offer a CLI to customers whom we know are on a fixed income (eg. receiving a government benefit into ANZ deposit account, has a deeming account)

– with any CLI offer, outline how much the minimum monthly repayment would increase if the offer was accepted

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These simple but effective steps have brought good results

• Pool of customers reduced by around 11%

• Breaking this down:– 7% reduction due to exclusion of customers on fixed incomes– 2% enhancements to behavioural scoring– 2% reduction due to exclusion of customer making late or only minimum

payments

• Performance reported and independently audited

• Credit assessment is not everything

• ANZ moving to the next phase:

early assistance

new product

online calculator

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Early assistance helps customers having difficulty

• Assistance to customers is often too late

• Identify those in early difficulty

• Early assistance could be:– rescheduling repayments– offering repayment holiday– amending payment days– offering external assistance (e.g.

financial counsellors)

• Prevention better than cure

• Aim:– create the right environment for

customers to discuss their situation– build capacity to identify troubled

customers early and offer the right assistance

Responsible lending – Next phase

early assistance

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Early assistance is good for business and customers

• Identifying through behaviour

• Approaching customers:– not debt collection– flexible solutions

• Win-Win– timely assistance– responsible and responsive– good for business

• Pilot to begin in April/May

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New product to assist money management

• Assisting customers to manage money more effectively

• ANZ Paydown Plan:– isolate balance– pay down by instalments– credit limit remains same – tool to achieve own repayment goals– incentive to make instalment payments

• Results so far– high response rate– used by those with low capacity

• Possible changes to improve

new product

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Online calculator to provide tailored information

• Tailored information about credit card payments

• Calculates how long it takes to pay off debt if making minimum repayments

• More effective than the government-prescribed disclosure, which covers only one scenario

• Simple to use

• To be developed March/April

online calculator

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ANZ is committed to financial literacy

We continue to invest in community programs and work with community partners aimed at improving the financial literacy of Australians

Progress Loans

Financial literacy

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Conclusions

• Current climate = opportunity for industry

• Responsible lending is good for business and consumers:

– banks more responsive to customer needs

– informed customers comfortable approaching their bank about their financial situation

– shareholders benefit from reduced bad debts

– staff pride in the outcome

• It is a journey and we look forward to working with you