Lying Customers and Relationship Responsibilities

If you have made it through the headline, I will assume that I have your attention! Over the last twelve months, we have been subjected to a litany of so called experts claiming that the nexus of the subprime crises was due to aggressive attempts by banks to sign up customers to complex mortgages of which they had minimal understanding.

On December 28, 2008, The New York Times published a front page article about the fall of Washington Mutual (WaMu) and its actions that led to its demise, particularly approving countless mortgages to customers who were unable to realistically make regular mortgage payments. According to the article, customers also submitted false documents overstating their income while WaMu failed to conduct the requisite due diligence to verify the authenticity of such information. WaMu was ultimately to be sold for $1.9 billion falling nearly 95% from its peak market capitalization of more than $40 billion. While it’s clearly apparent that WaMu failed to conduct proper due diligence, it is also clear that customers, in particular those lying customers, bear significant responsibility for this current financial crises threatening various financial institutions and our nation’s economy. However, the question remains – “will all the lying customers ultimately be held accountable?”

The underlying story as I see it is that WaMu failed in its responsibility to approve mortgages for only credit worthy customers – and paid the devastating price for this failure. However, the unreported story is that tens of thousands of customers defrauded this banking institution by making erroneous statements and submitting false documents to obtain loans. In the insurance business there is a simple law called insurance fraud where individuals submitting fraudulent insurance claims (by offering fictitious information) are arrested and prosecuted. The logic behind prosecuting insurance fraud schemes is to prevent financial outlays to those individuals who aren’t legally entitled to receive them. An ancillary reason is that fraud damages both the company and its customers. Nowhere is this more apparent with the shareholders and customers of financial institutions who have seen holdings decimated and services interrupted. In my estimation, the behavior of lying customers is little different than those who commit insurance fraud.

At this point you’re probably thinking “where’s he going with all of this?” So here’s the two-part answer. The first part is to illustrate the need for companies to employ the full extent of its resources to prevent the fraudulent customer behavior, even during times of economic prosperity. The failure to carefully accept some customers and reject others will lead the “wrong” customers to consume the limited resources and services at the expense of the company and the “right” customers. Companies need to exercise strict discretion when selecting customers with whom they’re willing to do business in order to reduce the chances of accepting customers that are a drain on a company’s limited resources.

As you go through corporate planning for 2009, you will likely be asked to cut costs due to weak business and consumer spending, and overall market uncertainties. However, before you begin implementing plans to reduce costs, stop and think about your lying and otherwise unprofitable customers. It is these customers that are driving up costs, so that redefining the terms of these relationships (or letting them go altogether) could well achieve similar results to a large corporate cost reduction plan. While it is easy in good economic times to relegate these customers to the overall cost of doing business, in times of economic uncertainty, no company can afford to retain these customers and reduce service to other loyal and profitable ones. It is incumbent upon companies to review their customer bases and either redefine the terms of some existing relationships or eliminate them as customers altogether.

Lastly (and for the second part of the answer), every relationship brings with it various responsibilities. Just as in our personal lives, relationships require that all parties understand what is expected of them, and that they live up to these responsibilities. If your customers do not live up to previously defined expectations, it is likely that they are receiving far more than they are giving – usually at the expense of other more profitable and truthful customers. In this challenging economic environment, no company can afford to turn a blind eye to customers taking advantage of lax customer selection and segmentation, and allow these customers to consume resources at the expense of other customers. It is time for companies to reevaluate, redefine (and if necessary terminate) customer relationships. Send your lying and unprofitable customers to your competitors and focus on those that are loyal and profitable. This is the best way to reduce costs and ensure that the experience remains gratifying and delightful.

I’d love to hear your thoughts.
What is your experience with lying customers? Do you currently have a process to identify and weed out the unprofitable customers from the profitable ones?