As the economic environment changes on what feels like a daily basis, the importance of having information about consumer credit trends and the future direction of credit becomes invaluable for planning and achieving strategic goals. I recently had the opportunity to speak with members of the collections industry about collections strategy and collections change management — and discussed the use of business intelligence data in their industry. I was surprised at how little analysis was conducted in terms of anticipating strategic changes in economic and credit factors that impact the collections business. Mostly, it seems like anecdotal information and media coverage is used to get ‘a feeling’ for the direction of the economy and thus the collections industry. Clearly, there are opportunities to understand these high-level changes in more detail and as a result, I wanted to review some business intelligence capabilities that Experian offers – and to expand on the opportunities I think exist to for collections firms to leverage data and better inform their decisions: * Experian possesses the ability to capture the entire consumer credit perspective, allowing collections firms to understand trends that consider all consumer relationships. * Within each loan type, insights are available by analyzing loan characteristics such as, number of trades, balances, revolving credit limits, trade ages, and delinquency trends. These metrics can help define market sizes, relative delinquency levels and identify segments where accounts are curing faster or more slowly, impacting collectability. * Layering in geographic detail can reveal more granular segment trends, creating segments for both macro and regional-level credit characteristics. * Experian Business Intelligence has visibility to the type of financial institution, allowing for a market by market view of credit patterns and trends. * Risk profiling by VantageScore can shed light on credit score trends, breaking down larger segments into smaller score-based segments and identifying pockets of opportunity and risk. I’ll continue to consider the opportunities for collections firms to leverage business intelligence data in subsequent blogs, where I’ll also discuss the value of credit forecasting to the collections industry.  

By: Amanda Roth Doesn’t that sound strange: Pricing WITH competition?  We are familiar with the sayings of pricing for competition and pricing to be competitive, but did you ever think you would need to price with competition?  When developing a risk-based pricing program, it is important to make sure you do not price against the competition in any extreme.  Some clients decide they want to price lower than the competition regardless of how it impacts their profitability.  However, others price only for profitability without any respect to their competition.  As we discussed last week, risk-based pricing is 80 percent statistics, but 20 percent art — and competition is part of the artistic portion. Once you complete your profitability analysis (refer to 12/28/2009 posting), you will often need to massage the final interest rate to be applied to loan applications.  If the results of the analysis are that your interest rate needs to be 8.0 percent in your “A” tier to guarantee profitability, but your competition is only charging 6.0 percent, there could be a problem if you go to market with that pricing strategy.  You will probably experience most of your application volume coming to an end, especially those customers with low risk that can obtain the best rates of a lender.  Creativity is the approach you must take to become more competitive while still maintaining profitability.  It may be an approach of offering the 6.0 percent rate to the best 10 percent of your applicant base only, while charging slightly higher rates in your “D” and “E” tiers. Another option may be that you need to look internally at processing efficiencies to determine if there is a way to decrease the overall cost associated with the decision process.  Are there decision strategies in place that are creating a manual decision when more could be automated?  Pricing higher than the market rate can be detrimental to any organization, therefore it is imperative to apply an artistic approach while maintaining the integrity of the statistical analysis. Join us next week to continue this topic of pricing with competition which is, again, an important consideration when developing a risk-based pricing program.  

By: Ken Pruett I thought it might be helpful to give an example of a recent performance monitoring engagement to show just how the performance monitoring process can help.  The organization to which I'm referring has been using Knowledge Based Authentication for several years. They are issuing retail credit cards for their online channel. This is an area that usually experiences a higher rate of fraud.  The Knowledge Based Authentication product is used prior to credit being issued. The performance monitoring process involved the organization providing us with a sample of approximately 120,000 records of which some were good and some were bad.  Analysis showed that they had a 25 percent referral rate — but they were concerned about the number of frauds they were catching.  They felt that too many frauds were getting through; they believed the fraud process was probably too lenient. Based on their input, we started a detailed analytic exercise with the intention, of course, to minimize fraud losses.  Our study found that, by changing several criteria items with the set-up, the organization was able to get the tool to be more in-line with expectations.  So, by lowering the pass rate by only 9 percent they increased their fraud find rate by 27 percent.  This was much more in-line with their goals for this process. In this situation, a score was being used, in combination with the organization's customer's ability to answer questions, to determine the overall accept or refer decision.  The change to the current set-up involved requiring customers to answer at least one more question in combination with certain scores.  Although the change was minor in nature, it yielded fairly significant results. Our next step in the engagement involved looking at the questions. Analysis showed that some questions should be eliminated due to poor performance.  They were not really separating fraud; so, removing them would be beneficial to the overall process.  We also determined that some questions performed very well.  We recommended that these questions should carry a higher weight in the overall decision process.  An example would be that a customer be required to answer only two questions correct for the higher weighted questions versus three of the lesser performing questions.  The key here is to help keep pass rates up while still preventing fraud.  Striking this delicate balance is the key objective. As you can see from this example, this is an ongoing process, but the value in that process is definitely worth the time and effort.