Download - Liability Management : Autopilot Refinancing
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July 26, 2013
Liability Management:Autopilot Refinancing
Jonathan ZinmanDartmouth College and
IPA’s U.S. Household Finance Initiative
Financial Products Innovation FundWorking Group Meeting
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What’s This Talk About?
• Huge opportunity to add value by helping people manage their borrowing decisions
• Asset Management model for Liability Management• Take a segment of Liability Management:
“Personal Loan Shopper”• Focus on slice of that segment: “Autopilot Refis”
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Debt is Where the Money Is
• Huge market for asset management– Brokers, financial advisers/planners, private bankers, etc.
• Yet debt is where the money is for most Americans• $13 trillion on household balance sheets– Many more people participate in debt market(s) than in,
e.g., stock market• Borrowing costs > asset yields– Higher stakes
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Household Mismanage the Liability Side of Their Balance Sheets• (Or at least evidence suggests that they do)• Potential sources of “decision inefficiency”– Overspending– Misallocation
Credit cardsStudent loans
– Failure to take-up workouts (e.g., HAMP)– *Undershopping
Upfront contract choice (e.g., overpaying)When refinancing, or not
• Money on table => Money to be made
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Is There Really Money to Be Made?
• Focus just on overpaying. Take a household that:– Has $10k in credit card debt and pays +500bp– Has $20k in student loans and pays +200bp– Has $20k in auto loans and pays +100bp– Has $200k in mortgage and pays +100bp
• This household is paying >$3,000 in excess interest per year– Annuity value of $15,000-$100,000, depending on discount
rate– Could get just a piece of this-- e.g., just auto loans– and be
viable
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A Segment of Liability Management:Personal Loan Shopping
• There is a growing market for this already. Examples:
• Problems with existing products:– Limited personalization (key for risk-based pricing)– Limited coverage: a single site/app/service rarely credibly covers all
(low-cost) providers in the market– Biased coverage: nearly all business models are kickback-based– Limited/no coverage of refinancing
Where there are gaps, there are opportunities!
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A Slice of Personal Loan Shopping:Autopilot Refinancing
Problem:
People don’t refinance (auto, mortgage, student loans) when they should• Sen. Gillibrand
seeks automatic refinancing of student loans at 4% rate (Examiner)
• Agarwal et al on mortgages
Why?
• Inattention post-origination• Procrastination (fed up by complexity of option value)
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Solution:Find a better decision point -> at origination Put refis on autopilot• Allow borrower to set a refinancing rule at origination
– Like a limit order in asset management• Delegate mechanics to liability manager
– Manager shops and negotiates on borrower’s behalf– Manager handles paperwork
• Maybe even signing off under power-of-attorney
A Slice of Personal Loan Shopping:Autopilot Refinancing (Cont’d)
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Making Autopilot Refis Work:Some Design Issues
(These issues apply to loan shopping more broadly…)
• Getting personalized data on consumers– How much?
• Getting accurate data on offers
• Accurately mapping consumer characteristics into offers
• Moving money
• Fiduciary standards
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Making Autopilot Refis Work:What’s the Business Model?
• My premise: get borrowers to pay for it– Kickback model dominates, so differentiate– Wouldn’t transparent pricing be better?
BrandingRegulatory constraints/threatSignaling value proposition
• So how do we get there?– Issue for value-added services more generally
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Making Autopilot Refis Work:Will borrowers pay? How?
“People won’t pay out-of-pocket for value-added financial services… they expect freebies”
– But people do pay out of pocket for credit report management, identity theft protection, tax prep, etc.
Pricing Models that have worked in other contexts• Upfront lump-sum
Natural for cash-out refinancing?Otherwise paid by credit card?
• Monthly subscriptionTeaser?
• Periodic “debt under management” fees
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Pricing Autopilot Refis (and beyond):Unlocking borrower willingness-to-pay
Behavioral research offers some insights…• Willingness-to-pay depends a lot on framing, timing• E.g., on marketing and choice architecture– Content– Timing of offer– Ease of take-up (on-ramping)• Effectiveness can vary across contexts• So R&D needed to successfully apply these insights
to autopilot refis– To liability management more broadly– To financial product development even more broadly
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Summing Up
• Huge missing market for liability management– Personal loan shopping is a big piece
• With autopilot refis a big piece of loan shopping
• Many technical challenges• Some design/behavioral challenges, with the most
important being business model– Unlocking willingness-to-pay
• My bet is that these challenges are solvable– Some will require R&D of the traditional variety– Others will require behavioral R&D, including the sort of piloting
and RCTs (AB-testing) that is supported by IPA’s Ford-funded work
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Extra Slides Follow
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Unlocking Consumer Willingness-to-Pay: Marketing Content
• Informative appealsHow to frame cost savings?How to signal quality/credibility?
• Emotional appealsHow to capture attention?How to counter procrastination?
• Behavioral evidence suggests that:– Both informative and emotional can be effective– Context and customer-particulars matter=> Optimizing content requires experimentation
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Where do Consumers Go Wrong?(Product Design and Marketing)
What leads to undershopping, overspending?• Behavioral factors: self-control costs, limited attention,
price misperceptions• Confusion (financial illiteracy/innumeracy)• Disutility from personal financial management (distaste,
time costs)
How to solve for these pain points? R&D