Transcript Presentation Title

The Originations Imperative
Organic Growth by attracting New Customers
Daniel Melo
Director Pre Sales EMEA
FICO
[email protected]
16 November, 2010
Confidential. This presentation is provided for the recipient only and cannot
be reproduced or shared without Fair Isaac Corporation's express consent.
1
© 2010 Fair Isaac Corporation.
Originations: path for growth
Many “leaks” in the Portfolio!
Everybody drinks your beer...
Voluntary Attrition
Collections
Inactive
Competition
Buy
Originations
Capital Requirements
With few sources of replenishment...
2
© 2010 Fair Isaac Corporation. Confidential.
3
© 2010 Fair Isaac Corporation. Confidential.
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
© 2010 Fair Isaac Corporation. Confidential.
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 “the world” 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  avoid same mistakes…
» 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  the neglected element?
5
© 2010 Fair Isaac Corporation. Confidential.
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 (internal/external)
» 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
© 2010 Fair Isaac Corporation. Confidential.
Key Concerns within the Originations Function
Precision
Marketing
External
Data
DATA


DATA




Internal
Data

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?
Managing
Customers
Originations








Accept/reject?
Deter fraud?
Verify customer data?
Anti-money laundering
compliance?
Tier pricing?
Initial line? Loan-tovalue? Collateral value?
Cross-sell?
Upsell / downsell /offer
alternative?












Reactions
Client Prospects
7
© 2010 Fair Isaac Corporation. Confidential.
Manage payments?
Promote usage?
Manage exposure?
Collection & recoveries?
Collateral tracking?
Mitigate risk?
Deter fraud?
Marketing
communications?
Adjust pricing?
Service level?
Cross-sell?
Stress testing?
Actions
Client Customers
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
© 2010 Fair Isaac Corporation. Confidential.
Minimum Mandatory Information —
How Do You Know?
» Information is typically considered mandatory if it:
» Is legally required to open an account and/or satisfy “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
© 2010 Fair Isaac Corporation. Confidential.
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
© 2010 Fair Isaac Corporation. Confidential.
Blocking Fraud: Analytics at Originations
New Customer
Application
» Optional
Data Includes:
Account
Profile
APP
Model
» Application
» Credit Bureau
» Existing Customer Master File
Customer
Profile
» Linked Accounts
» Hits on Hot lists/files
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
© 2010 Fair Isaac Corporation. Confidential.
Fraud Model Results
Fraud To Non-fraud Score Separation
Percent
% Goods
Advanced Analytics
increases the
concentration
of fraud relative to
good transactions
at high score
thresholds
% Bads
30
25
Advanced Analytics
decreases the
concentration
of fraud relative to
good transactions at
lower score
thresholds
20
15
10
While
minimising
the false-positives
While
minimising
the false-negatives
5
0
0
100
200
300
400
500
Score Cut Off
12
© 2010 Fair Isaac Corporation. Confidential.
600
700
800
900
1000
Multi-Product and Counter-Offer Strategies Make
Sense for Many Full Service Retail Creditors
Current Account/
Checking
» Counter-offer makes sense if
customer could qualify for a
product other than the one
requested
Overdraft
Protection
» Up-sell — better product or
multi-product offer
» Down-sell — lesser product or
product with more restrictive
terms
Debit Card
Credit Card
Customer
Vehicle Loan
Education Loan
Mortgage /
HELOC
13
© 2010 Fair Isaac Corporation. Confidential.
» 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
General Challenge to Create Competitive Advantage
Magnified in Crunches
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
14
© 2010 Fair Isaac Corporation. Confidential.
Open Originations Platform
Application
Sources
Data
Normalization
Application Processing
Branch
3rd Party Data
Workflow, queues, manual
Online Banking
handling
WEB Offer
Management
Kiosks
Decision Management
Dealers
Parameters
Retail Stores
Reports
ATM Offers
Flyers
Telephone
15
© 2010 Fair Isaac Corporation. Confidential.
Bank Data
Hosts
Competition, Technology
Channel Proliferation
16
© 2010 Fair Isaac Corporation. Confidential.
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
© 2010 Fair Isaac Corporation. Confidential.
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 9 to 11%)
» The Complex:
» Score driven ranges of increasing rates (low risk goes to 9% and all the
way to high risk at 11%)
» 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 selffulfilling prophecy of degraded performance
18
© 2010 Fair Isaac Corporation. Confidential.
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
© 2010 Fair Isaac Corporation. Confidential.
Connected Decisions –
Setting Up the Booked Account
Distribution
Customer
20
© 2010 Fair Isaac Corporation. Confidential.
» 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
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
© 2010 Fair Isaac Corporation. Confidential.
THANK YOU
Daniel Melo
Director Pre Sales EMEA
FICO
[email protected]
16 November, 2010
Confidential. This presentation is provided for the recipient only and cannot
be reproduced or shared without Fair Isaac Corporation's express consent.
22
© 2010 Fair Isaac Corporation.