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Top moments to assess a customer’s “ability to pay”

July 12, 2016 by Kerry Rivera

ability-to-pay All customers are not created equally – at least when it comes to one’s ability to pay.

Incomes differ, financial circumstances vary and economic challenges surface. Lost job. Totaled car. Unplanned medical bills. Life happens.

Research conducted by a recent Bankrate study revealed  just 38 percent of Americans said they could cover an unexpected emergency room visit or a $500 car repair with available cash in a checking or savings account.

It’s a scary situation for individuals, and also a source of stress for the lender expecting payment.

So what are the natural moments for a lender to assess “ability to pay?”

Moment No. 1: When prepping for a prescreen campaign and at origination.

Many lenders leverage an income estimation model, designed to give an indication of the customer’s capacity to take on additional debt by providing an estimation of their annual income. Within the model, multiple attributes are used to calculate the income, including:

  • Number of accounts
  • Account balances
  • Utilization
  • Average number of months since trade opened

Combined, all of these insights determine a customer’s current obligations, as well as an estimation of their current income, to see if they can realistically take on more credit. The right models and criteria on the front-end – whether used when a consumer applies for new credit or when a lender is executing a prescreen campaign to acquire new customers – minimizes the risk for default. It’s a no-brainer.

Moment No. 2: When a customer is already on your books.

As the Bankrate study mentioned, sudden life events can send some customers’ lives into a financial tailspin.

On the other hand, financial circumstances can change for the better too.

Aggressively paying down a HELOC, doubling down on a mortgage, or wiping out a bankcard balance could signal an opportunity to extend more credit, while the reverse could be the first signs of payment stress.

Attaching triggers to accounts can give lenders indications on what to do with either scenario, helping to grow a portfolio and protect it.

Moment No. 3: When an account goes south.

While a lender hates to think any of its accounts will plummet into collections, sometimes, it’s inevitable. Even prime customers fall behind, and suddenly financial institutions are faced with looking at collections strategies. Where should they place their bets?

You can’t treat all delinquent customer equally and work the accounts the same way. Collection resources can be wasted on customers who are difficult or impossible to recover, so it’s best to turn to predictive analytics and a collections scoring strategy to prioritize efforts.

Again, who has the greatest ability to pay? Then place your manpower on those individuals where you can recover the most dollars.

Assessing one’s ability to pay is a cornerstone to the financial services business. The quest is to find the sweet spot with a combination of application data, behavioral data and credit risk scoring analytics.