Changing consumer behaviors caused by the COVID-19 pandemic have made it difficult for businesses to make good lending decisions. Maintaining a consistent lending portfolio and differentiating good customers who are facing financial struggles from bad actors with criminal intent is getting more difficult, highlighting the need for effective decisioning tools.
As part of our ongoing Q&A perspective series, Jim Bander, Experian’s Market Lead, Analytics and Optimization, discusses the importance of automated decisions in today’s uncertain lending environment. Check out what he had to say:
Q: What trends and challenges have emerged in the decisioning space since March?
JB: In the age of COVID-19, many businesses are facing several challenges simultaneously. First, customers have moved online, and there is a critical need to provide a seamless digital-first experience. Second, there are operational challenges as employees have moved to work from home; IT departments in particular have to place increase priority on agility, security, and cost-control. Note that all of these priorities are well-served by a cloud-first approach to decisioning. Third, the pandemic has led to changes in customer behavior and credit reporting practices.
Q: Are automated decisioning tools still effective, given the changes in consumer behaviors and spending?
JB: Many businesses are finding automated decisioning tools more important than ever. For example, there are up-sell and cross-sell opportunities when an at-home bank employee speaks with a customer over the phone that simply were not happening in the branch environment. Automated prequalification and instant credit decisions empower these employees to meet consumer needs. Some financial institutions are ready to attract new customers but they have tight marketing budgets. They can make the most of their budget by combining predictive models with automated prescreen decisioning to provide the right customers with the right offers. And, of course, decisioning is a key part of a debt management strategy. As consumers show signs of distress and become delinquent on some of their accounts, lenders need data-driven decisioning systems to treat those customers fairly and effectively.
Q: How does automated decisioning differentiate customers who may have missed a payment due to COVID-19 from those with a history of missed payments?
JB: Using a variety of credit attributes in an automated decision is the key to understanding a consumer’s financial situation. We have been helping businesses understand that during a downturn, it is important for a decisioning system to look at a consumer through several different lenses to identify financially stressed consumers with early-warning indicators, respond quickly to change, predict future customer behavior, and deliver the best treatment at the right time based on customer specific situations or behaviors. In addition to traditional credit attributes that reflect a consumer’s credit behavior at a single point in time, trended attributes can highlight changes in a consumer’s behavior. Furthermore, Experian was the first lender to release new attributes specifically created to address new challenges that have arisen since the onset of COVID. These attributes help lenders gain a broader view of each consumer in the current environment to better support them. For example, lenders can use decisioning to proactively identify consumers who may need assistance.
Q: What should financial institutions do next?
JB: Financial institutions have rarely faced so much uncertainty, but they are generally rising to the occasion. Some had already adopted the CECL accounting standard, and all financial institutions were planning for it. That regulation has encouraged them to set aside loss reserves so they will be in better financial shape during and after the COVID-19 Recession than they were during the Great Recession. The best lenders are making smart investments now—in cloud technology, automated decisioning, and even Ethical and Explainable Artificial Intelligence—that will allow them to survive the COVID Recession and to be even more competitive during an eventual recovery.
Financial institutions should also look for tools like Experian’s In the Market Model and Trended 3D Attributes to maximize efficiency and decisioning tactics – helping good customers remain that way while protecting the bottom line.
About our Expert:
Jim Bander, PhD, Market Lead, Analytics and Optimization, Experian Decision Analytics
Jim 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. He has over 20 years of analytics, software, engineering and risk management experience across a variety of industries and disciplines. Jim has applied decision science to many industries, including banking, transportation and the public sector.