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The Originations Imperative

The Originations Imperative. Organic Growth by attracting New Customers. Daniel Melo Director Pre Sales EMEA FICO DanielMelo@fico.com. 11 Nov, 2010. Originations: path for growth. Many “leaks” in the Portfolio! Everybody drinks your beer. Voluntary Attrition Collections Inactive

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The Originations Imperative

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  1. The Originations Imperative Organic Growth by attracting New Customers Daniel MeloDirector Pre Sales EMEAFICO DanielMelo@fico.com 11 Nov, 2010

  2. Originations: path for growth Many “leaks” in the Portfolio! Everybody drinks your beer... Voluntary Attrition Collections Inactive Competition Capital Requirements Buy Originations With few sources of replenishment...

  3. Originations: The New Credit Consumer • There is a new client around the block • With different origination needs • Traditional  Branch, not much credit appetite, no appetite for consumer credit, can wait decisions, prefers papers and documents; • Normal  Semi virtual, with credit needs but careful, likes fast decisions, accepts virtual contracts; • Webbie Branch? What is this?, consumer above all, love (and sometimes do only know) plastic cards, not careful, demands real time decisions, paperless; • Emerging  no previous bank experience, uneducated regarding product characteristics, insecure when decisions delayed, prefers papers, documents and personal attention; • ..... • Keen for price and service levels • Overwhelmed with many different banking and credit proposals • “Good”/low risk customers? Focus of everybody!

  4. Originations: The New Credit Market • Regulatory issues • Capital requirements and sometimes “cap” over credit limits • Increased emphasis on alignment of provisions to risk appetite • Demanding more customer protection, more transparency • Local regulation versus Basel versus BCE demanding more control • Internal Bank issues • Mergers / “forced marriages” involving weak banks taken over by more stable entities – legacy systems or multiple operating jurisdictions result • Emphasis on strong Governance in wake of banking crisis – increased scrutiny on Risk • Tensions between desire to grow and compete successfully, reality of highly cautious approach to risk and capital allocation • As attention refocuses on originations,operational and resource issues can arise as the market resets

  5. Originations in the Resetting Economy • Multiple decision moment / Not a silo decision: • Credit Risk evaluation • Fraud Risk evaluation for First and Third Party Fraud • Return on Allocated Capital • Price definition based on Risk (any evaluated risk) • Commercial Offer (Up Selling / Cross Selling) • Pressure for fast decisions • Multiple sales points to integrate • Traditional face –to-face interviews and paper applications • Internet and Mobile Channels increasingly popular • Applications without paper trail can be riskier due to lack of data proof • Adapt decisions to a fast market change • Reshape on the fly the offer, risk decision/appetite.

  6. Key Concerns within the Originations Function ExternalData Precision Marketing Originations ManagingCustomers • Location and geographic footprint strategy? • Target prospect / customer? • Manage marketing campaigns? • Tailor offer / message / incentive? • Tier pricing? • Manage promotional expense and effect? • Timing of campaigns? • Accept/reject? • Deter fraud? • Verify customer data? • Anti-money laundering compliance? • Tier pricing? • Initial line? Loan-to-value? Collateral value? • Cross-sell? • Upsell / downsell /offer alternative? • Manage payments? • Promote usage? • Manage exposure? • Collection & recoveries? • Collateral tracking? • Mitigate risk? • Deter fraud? • Marketing communications? • Adjust pricing? • Service level? • Cross-sell? • Stress testing? D A T A D A T A Internal Data Reactions Actions Client Prospects Client Customers

  7. Data Entry and Information Capture Has Impact Across Originations Process and Beyond • Tension: more information requested, less likely customer will complete application • Adapt for each customer type  offer/proposal segmentation will drive commercial offer • Balance between Risk x Marketing x Sales x Finance • “Short-cuts” where the customer is already well-known to you • Application data needed to perform: • Credit review • Fraud evaluation • Activation probability • Marketing / Commercial offer review • Yes, external data is usable and important • Conform with local/EU regulations in Data Protection • Yes, internal data is usable and perhaps most important • Insights from existing credit, liability relationships with the customer

  8. Minimum Mandatory Information — How Do You Know? • Information is typically considered mandatory if it: • Is legally required to open an account and/or satisify “know the customer” and ID protection requirements • Example: Mailing address, date of birth, vehicle ID number • Is legally required to obtain a credit report • Example: Evidence of customer consent • Is needed to perform the multiple decisions • Example: Income - reviewed from fraud, credit, marketing, other perspectives • Is required for downstream contact • Example: Telephone numbers at home and business • Would invalidate the statistical correctness of a score calculation if too many elements were missing

  9. What Can You Do to Control Fraud at Originations? • Have reps observe application clues • Handwriting characteristics indicative of fraud rings • Abnormal inclusion or exclusion of detail (income = 10.000 vs. 10.023,15) • Unable to correctly spell occupation, other key words • Implement a Rule and Decision Platform • Can routinize simple checks for repeated use of phone numbers, addresses, names • Can create unlimited, highly sophisticated rules and flexibility – highly scalable • Enables the bank to manage complete detection system by themselves • Must take care to avoid “training” fraudsters how to cheat through frequent update • Fraud Consulting • Review policies and procedures across the life cycle • Help identifying most effective rules for originations fraud deterrence • Apply industry best practices • Models • FICO builds models to detect First Party Fraud at application stage • A decision platform will allow other score cards or hot list to be called to improve the intelligence and decision

  10. Blocking Fraud: Analytics at Originations New Customer Application Optional Account Profile Data Includes: • Application • Credit Bureau • Existing Customer Master File • Linked Accounts • Hits on Hot lists/files APP Model Customer Profile Manual Review Application models can be stand-alone scorecards or include advanced capabilities that detect and address differences in channel and product fraud trends

  11. Fraud Model Results Fraud To Non-fraud Score Separation Percent Advanced Analytics increases the concentrationof fraud relative to good transactions at high score thresholds % Goods % Bads Advanced Analytics decreases the concentrationof fraud relative to good transactions at lower score thresholds While minimisingthe false-positives While minimisingthe false-negatives

  12. Multi-Product and Counter-Offer Strategies Make Sense for Many Full Service Retail Creditors Customer Current Account/ Checking • Counter-offer makes sense if customer could qualify for a product other than the one requested • Up-sell — better product or multi-product offer • Down-sell — lesser product or product with more restrictive terms • Counter-offer typically communicated in place of decline, but with same communication requirements • Where multi-product lending is possible, may make sense to establish customer exposure and offer additional products beyond the one for which customer immediately applied Overdraft Protection Debit Card Credit Card Vehicle Loan Education Loan Mortgage / HELOC

  13. Keep your product offerings competitive Adverse Selection: High risk applicants will respond to any product opportunity, while low risk applicants can discriminate between various credit opportunities High response rate is not always good news General Challenge to Create Competitive Advantage Magnified in Crunches

  14. Open Originations Platform Application Processing Application Sources Data Normalization Branch Workflow, queues, manual handling 3rd Party Data Online Banking WEB Offer Management Kiosks Decision Management Dealers Parameters Reports Retail Stores ATM Offers Flyers Bank DataHosts Telephone

  15. Competition, Technology Channel Proliferation

  16. Risk-based Pricing: Business Goals • Caveat: Risk-based Pricing may be subject to government restrictions including rate caps, fee caps, may need to meet “transparency” requirements • Good Credit Quality Customers will expect lower costs, more attractive offers; Higher Risk Customers more accepting of high fees, high rates, less compelling products • Risk-based pricing can improve profitability • Enhance Revenue from Riskier accounts • Enable approval of riskier customers based on risk-adjusted returns • Increase rates and fees to enhance revenue on high risk customers • Reduce losses (spark Positive Rejection) • Encourage interest revenue from lower risk accounts • Increase activation and retention • Enhance customer relationships • Small changes in price will yield larger changes in Profit

  17. How Does Penalty Pricing Work? • Event driven or criteria driven Penalty Pricing most common • Event: History of Multiple Delinquencies • Example: Two times one cycle delinquent within a set period • Example: Once Two cycles delinquent • Criteria: High Risk Originations Score • In practice, ranges from: • The Simple - One defined “From” and “To” Price ( from 18% to 23%) • The Complex: • Score driven ranges of increasing rates (low risk goes to 21%, high risk to 25%) • Based on Score AND/ OR Criteria • Should be empirically derived, including test for Actual vs. Expected Payment Rates • CAUTION: Penalty pricing under increasing regulatory scrutiny • CAUTION: Penalty pricing that is too onerous can become a self-fulfilling prophecy of degraded performance

  18. How Does Promotional Pricing Work ? Many Approaches • Lower Risk = Lower Interest Rate at originations • Lower Risk = Lower Fee • Upgrades to gold products under same Fee (not a selling act, an upgrade) • Upselling • Fee Waiver • Added Rewards Points • Time-restricted offer where rate varies after a fixed period • Behaviour-restricted offer where promotion award occurs when customer makes specific purchases, maintains specific balances, etc.

  19. Connected Decisions – Setting Up the Booked Account Customer • Important to transfer information to the billing system master file that will • Enable customer contact • Permit ID verification • Satisfy legal requirements • Enable score and policy tracking • Permit performance capture to tie back to originations criteria Marketing Originations Distribution Fraud Service Collections & Recoveries Customer Management

  20. Originations in the Resetting Economy • There is a new Originations need around the corner • Changes in Clients, Markets and Regulations • Not just a Credit Risk decision anymore • Remove silos • Be proactive internally and externally • Maximize opportunity with the customer • Control with flexibility • Fast adoption of changes with proper control and performance following • Do not wait for the call • Prepare now for the resetting economy

  21. THANK YOU Daniel MeloDirector Pre Sales EMEAFICO DanielMelo@fico.com 11 Nov, 2010

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