Human psychology indicates that human beings make purchase decisions based on emotions which are subsequently justified by rational suggestions. According to Simon Sinek, it’s easier to sell a product that’s emotionally charged. This is where incentives come in. Humans as consumers generally respond to incentives as a big motivating factor for their purchase decisions. The usefulness of customer incentives in shaping consumer behavior has been proven across many industries; including lending and other financial services.

As a lender, you can design incentive models that position you to increase your share of wallet with your customers. This is particularly beneficial in a digital environment where numerous options are available to borrowers and it’s super easy to compare loan products and offers. Incentives are a way to differentiate your own offers from those of all other lenders.

Incentives are bonuses (monetary or otherwise) associated with a product or offer. They aim to encourage the intended market to purchase a product. When trying to sell a product to a customer, an incentive essentially answers the question “what’s in it for me?” beyond the primary benefits. Customers are more likely to convert when they’re convinced they’ll receive more “bang per buck” – value for their money.

Let’s walk you through steps to take in designing and implementing an incentive model for your lending business.

What to consider when designing a customer incentive model

The very first step in designing an incentive model is identifying the objectives you seek to achieve through the model. Why are you setting up a customer incentive scheme? Is it to:

• Reward high-value borrowers for their relationship with your lending business?
• Introduce a new loan product to the market?
• Drive uptake for a specific loan product that is performing lower than expected?
• Onboard prospective borrowers within a particular segment?
• Introduce a partner to existing customers?

You can achieve more than one objective with your incentive model. However, incentives that don’t expire after a one-time use are more effective. This supports your borrower retention strategy. The goal should be to convince borrowers that there’s always more value to be gained from taking loans from you than from other lenders.

As a lender, you can reward borrowers for their loyalty. For instance, you can make higher loan amounts available to repeat borrowers and go even further by offering lower interest rates to borrowers that have repaid up to x loans with you. We’ve seen lenders that even do a limit tenor and amount with zero interest rates for their most loyal customers.

Referral programs are also a great way to go. Give borrowers the chance to earn cash or points that can be redeemed for cash rewards for introducing your lending business to others.

After defining the overall objective of the incentive program, it must then be translated into quantitative targets:

• Number of new customers to be onboarded
• Number of customers signed-up to incentive scheme
• Loan value booked
• Revenue generated from incentive scheme

What is your desired outcome for the incentive scheme? Defining these metrics gives you a yardstick with which to measure the success of your endeavors. Your “numbers” as a lender are extremely important and you can’t afford to lose sight of this and risk your business failing.

How to ensure your customer incentive model works

Once you’ve defined the objectives and metrics you wish to achieve, naturally, you have to focus on your customers. The target borrowers for your incentive program should be clearly spelt-out. This includes how they will be engaged. It’s important to note that people respond to incentives differently. You need to know which groups of borrowers respond to what. Are the borrowers you’re targeting more likely to respond to the possibility of getting higher loan amounts? Or are they more interested in lower interest rates? Do they want the loans to withdraw in the form of cash? Or are they more interested in securing credit to spend elsewhere?

Additionally, the medium and approach for engaging borrowers on the incentive program referral program should be tailored to how the borrower segment is most receptive to being engaged. This could be a mix of active field sales engagement, social media marketing, email marketing, push notifications, etc.

For lenders, incentive schemes can be deployed in partnership with other service providers. An example of this will be a scheme deployed within buy-now-pay-later (BNPL) partnership in which customers of the lender or the merchant receive incentive options for signing-up to the model. You can launch a BNPL partnership for free right now on Lendsqr.

After deploying your incentive scheme it is important to monitor the program to ensure performance is in line with expectations, and that the system is not being gamed by fraudsters. Don’t take chances that can ruin your lending business. Block chronic debtors and fraudsters with Lendsqr’s blacklist engine for free. Sign up to start lending safely. You should actively monitor and proffer recommendations on areas of improvement to ensure the customer incentive scheme performs as desired.

You can reach out to [email protected] to find out more about how to set up a successful customer incentive program on Lendsqr