All posts by Roger Ahern
To calculate the expected business benefits of making an improvement to your decisioning strategies, you must first identify and prioritize the key metrics you are trying to positively impact. For example, if one of your key business objectives is improved enterprise risk management, then some of the key metrics you seek to impact, in order to effectively address changes in credit score trends, could include reducing net credit losses through improved credit risk modeling and scorecard monitoring. Assessing credit risk is a key element of enterprise risk management and can addressed as part of your application risk management processes as well as other decisioning strategies that are applied at different points in the customer lifecycle. In working with our clients, Experian has identified 15 key metrics that can be positively impacted through optimizing decisions. As you review the list of metrics below, you should identify those metrics that are most important to your organization. • Approval rates • Booking or activation rates • Revenue • Customer net present value • 30/60/90-day delinquencies • Average charge-off amount • Average recovery amount • Manual review rates • Annual application volume • Charge-offs (bad debt & fraud) • Avg. cost per dollar collected • Average amount collected • Annual recoveries • Regulatory compliance • Churn or attrition Based on Experian’s extensive experience working with clients around the world to achieve positive business results through optimizing decisions, you can expect between a 10 percent and 15 percent improvement in any of these metrics through the improved use of data, analytics and decision management software. The initial high-level business benefit calculation, therefore, is quite important and straightforward. As an example, assume your current approval rate for vehicle loans is 65 percent, the average value of an approved application is $200 and your volume is 75,000 applications per year. Keeping all else equal, a 10 percent improvement in your approval rates (from 65 percent to 72 percent) would generate $10.7 million in incremental business value each year ($200 x 75,000 x .65 x 1.1). To prioritize your business improvement efforts, you’ll want to calculate expected business benefits across a number of key metrics and then focus on those that will deliver the greatest value to your organization.
By: Roger Ahern It’s been proven in practice many times that by optimizing decisions (through improved decisioning strategies, credit risk modeling, risk-based pricing, enhanced scoring models, etc.) you will realize significant business benefits in key metrics, such as net interest margin, collections efficiency, fraud referral rates and many more. However, given that a typical company may make more than eight million decisions per year, which decisions should one focus on to deliver the greatest business benefit? In working with our clients, Experian has compiled the following list of relevant types of decisions that can be improved through improvements in decision analytics. As you review the list below, you should identify those decisions that are relevant to your organization, and then determine which decision types would warrant the greatest opportunity for improvement. • Cross-sell determination • Prospect determination • Prescreen decision • Offer/treatment determination • Fraud determination • Approve/decline decision • Initial credit line/limit/usage amount • Initial pricing determination • Risk-based pricing • NSF pay/no-pay decision • Over-limit/shadow limit authorization • Credit line/limit/usage/ management • Retention decisions • Loan/payment modification • Repricing determination • Predelinquency treatment • Early/late-stage delinquency treatment • Collections agency placement • Collection/recovery treatment
The value of a good decision can generate $150 or more in customer net present value, while the cost of a bad decision can cost you $1,000 or more. For example, acquiring a new and profitable customer by making good prospecting and approval and pricing decisions and decisioning strategies may generate $150 or much more in customer net present value and help you increase net interest margin and other key metrics. While the cost of a bad decision (such as approving a fraudulent applicant or inappropriately extending credit that ultimately results in a charge-off) can cost you $1,000 or more. Why is risk management decisioning important? This issue is critical because average-sized financial institutions or telecom carriers make as many as eight million customer decisions each year (more than 20,000 per day!). To add to that, very large financial institutions make as many as 50 billion customer decisions annually. By optimizing decisions, even a small 10-to-15 percent improvement in the quality of these customer life cycle decisions can generate substantial business benefit. Experian recommends that clients examine the types of decisioning strategies they leverage across the customer life cycle, from prospecting and acquisition, to customer management and collections. By examining each type of decision, you can identify those opportunities for improvement that will deliver the greatest return on investment by leveraging credit risk attributes, credit risk modeling, predictive analytics and decision-management software.
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