As financial institutions and other organizations scramble to formulate crisis response plans, it’s important to consider the power of data and analytics. Jim Bander, PhD, Experian’s Analytics and Optimization Market Lead discusses the ways that data, analytics and models can help during a crisis. Check out what he had to say:
What implications does the global pandemic have on financial institutions’ analytical needs?
JB: COVID-19 is a humanitarian crisis, one that parallels Hurricanes Sandy and Katrina and other natural disasters but which far exceeds their magnitude. It is difficult to predict the impact as huge parts of the global economy have shut down. Another dimension of this disaster is the financial impact: in the US alone, more than 17 million people applied for unemployment in the first 6 weeks of the COVID-19 crisis. That compares to 15 million people in 18 months during the Great Recession.
Data and analytics are more important than ever as financial institutions formulate their responses to this crisis. Those institutions need to focus on three key things: safety, soundness, and compliance.
- Safety: Financial institutions are taking immediate action to mitigate safety risks for their employees and their customers.
- Soundness: Organizations need to mitigate credit and fraud risk and to evaluate capital and liquidity. Some executives may need a better understanding of how their bank’s stress scenarios were calculated in the past to understand how they must be updated for the future. Important analytic functions include performing portfolio monitoring and benchmarking—quantifying the effects not only of consumer distress, but also of low interest rates.
- Compliance: Understanding and meeting complex regulatory and compliance requirements is crucial at this time. Companies have to adapt to new credit reporting guidelines. CECL requirements have been relaxed but lenders should assess the effects of COVID, and not only during their annual stress tests.
As more consumers seek credit, from an analytics perspective, what considerations should financial institutions make during this time?
JB: During this volatile time, analytics will help financial institutions:
- Identify financially stressed consumers with early warning indicators
- Predict future consumer behavior
- Respond quickly to changes
- Deliver the best treatments at the right time for individual customers given their specific situations and their specific behavior.
Financial institutions should be reevaluating where their organizations have the most vulnerability and should be taking immediate action to mitigate these risks. Some important areas to keep an eye on include early warning indicators, changes in fraudulent behavior (with the increase in digital engagements), and changes in customer behavior. Banks are already offering payment flexibility, deferments, and credit reporting accommodations. If volatility continues or increases, they may need to offer debt forgiveness plans. These organizations should also be prepared to understand their own changing constraints—such as budget, staffing levels, and liquidity requirements— especially as consumers accelerate their move to digital channels. In the near future, lenders should be optimizing their operations, servicing treatments, and lending policies to meet a number of possibly conflicting objectives in the presence of changing constraints and somewhat unpredictable transaction volumes.
What is the smartest next play for financial institutions?
JB: I see our smartest clients doing four things:
- Adapting to the new normal
- Maintaining engagement with existing customers by refreshing data that companies have on-hand for these consumers, and obtain additional views of these customers for analytics and data-driven decisioning
- Reallocating operational resources and anticipating the need for increased capacity in various servicing departments in the future
- Improving their risk management practices
What is Experian doing to help clients improve their risk management?
JB: During this time, banks and other financial institutions are searching for ways to predict consumer behavior, especially during a crisis that combines aspects of a natural disaster with characteristics of a global recession.
It is more important than ever to use analytics and optimization. But some of the details of the methodology is different now than during a time of economic expansion. For example, while credit scores (like FICO® and VantageScore®) will continue to rank consumers in terms of their probability to pay, those scores must be interpreted differently. Furthermore, those scores should be combined with other views of the consumer—such as trends in consumer behavior and with expanded FCRA-compliant data (data that isn’t reported to traditional credit bureaus). One way we’re helping clients improve their credit risk management is to provide them with a list of 140 consumer credit data attributes in 10 categories. With this list, companies will be able to better manage portfolio risk, to better understand consumer behavior, and to select the next best action for each consumer.
Four other things we’re doing:
- We’re quickly updating our loss forecasting and liquidity management offerings to account for new stress scenarios.
- We’re helping clients review their statistical models’ performance and their customer segmentation practices, and helping to update the models that need refreshing.
- Our consulting team—Experian Advisory Services—has been meeting with clients virtually–helping them update, execute their crisis and downturn responses, and whiteboard new or updated tactical plans.
- Last but not least, we’re helping lenders and consumers defend themselves against a variety of fraud and identity theft schemes.
Experian is committed to helping your organization during these uncertain times. For more resources, visit our Look Ahead 2020 Hub.
Jim Bander, PhD, Analytics and Optimization Market Lead, Decision Analytics, Experian North America
Jim Bander, PhD joined Experian in April 2018 and is responsible for solutions and value propositions applying analytics for financial institutions and other Experian business-to-business clients throughout North America. Jim has over 20 years of analytics, software, engineering and risk management experience across a variety of industries and disciplines. He has applied decision science to many industries including banking, transportation and the public sector. He is a consultant and frequent speaker on topics ranging from artificial intelligence and machine learning to debt management and recession readiness. Prior to joining Experian, he led the Decision Sciences team in the Risk Management department at Toyota Financial Services.