| Something New About Risk |
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bankerstuff The Challenge It’s a fair challenge. Who would know more about risk than bankers? But the current credit crisis, with its explosion of charge-offs and foreclosures, has created its own crisis of confidence in risk management. Hence, this prompted our client’s appeal for something new to take into this new decade’s battle. In response, five fresh perspectives on risk: 1. Be Cautious Fast Forgiven but not indulged. Everybody in risk management has to be faster in this environment, not slower. They have to react more quickly to the initials signs of potential problems before they cause losses. And they have to be ready with individualized remedies for customers who emit new signs of risk. If they’re not at the front of the line helping "good" customers remain current, they are unlikely to be paid. And if they are not at the front of the line offering an appropriate amount of credit to credit-worthy customers, they will lose opportunities they can never recover. Earlier detection of risk, good or bad, isn’t just risk hygiene – it’s a pure competitive advantage. A large credit card issuer is perfecting its ability to identify, on the very first day of its new cardholders’ activity, whether the customer is likely to pay or default. On that same day, they can choose from a set of pretested treatments and take action – perhaps a "soft" call asking for a business phone number, or a slightly more pointed call reminding the new customer of the payment due date. Another bank is examining its risk detection, finding a hitch here that slows up the process, or a gap there that expands the time between event and response. Its goal is to collapse the time between the existence of information that signals a change in risk and the appropriate reaction. 2. It’s not quality versus quantity, but quantity of quality That’s good, but it has its own set of problems because mistakes now carry compounded risk. Every customer counts more. And new regulations prohibit some strategies that made it possible to manage each customer toward profitability. If lenders are not now using a scalpel rather than a hatchet to reduce exposure with the wrong customers – if they are slashing credit on the credit-worthy – they make it easy for those customers to pack up and go to the competition. In effect, lenders are shifting from a core competency of managing a fast-growing volume of customers, to one of getting a greater share of a smaller pool of credit-worthy customers, then increasing their credit utilization, and holding on to those customers – the same ones everybody else wants. 3. A great collections shop is good for lending Forget about the old ways of agents delivering a single, aggressive script as often as possible. Today’s agents can be richly informed and equipped on a number of fronts. They can know the very latest employment and contact information about the customer – not just what happened months ago. They can know each customer’s communication channel preferences. They can be equipped with individualized offers already pretested for effectiveness and with predefined boundaries for agents’ adjustments. They can be incented on customer retention, not just promises to pay and payments received. They can be trained in how to help customers, beyond just maximizing payments, by aligning their interactions to the customer’s situation. Just as marketing can make a huge difference in risk by attracting the right customers, collections can make a huge risk difference in retaining the right customers and maximizing payments from others. 4. Crisis catalyzes innovation Product innovation alone cannot carry the day. Some of it will have to involve execution – innovative execution of risk management. Fortunately, there are great examples already at work. We see it in lenders who consolidate account management across multiple channels and integrate a customer’s history. We see it in tools that help lenders effectuate better debt settlements through more complete pictures of the customer. We see it in rapidly installed risk models and solutions that require minimal IT. Some institutions are looking all the way across the enterprise to find risk-averse ways to broaden each good customer relationship. We see lenders moving away from the once-a-month paradigm to assess and manage risk on more timely, event-based patterns. 5. Risk management has two faces – and one of them is marketing Talking about managing risk in the future without integrating marketing into the discussion means failing to seize control of one of the most significant risk factors – what types of customers are attracted in the first place, then retained and ideally expanded. The same predictive analytics that inform risk management when accounts start looking shaky are the same predictive analytics that can and should guide marketing decisions about retention, promotion, and new account acquisition. When risk and marketing are on the same page, marketing can find means to increase good customer spend while risk can curtail high-risk relationships. This requires competencies that may be rusty or in thin supply. One such competency is product innovation that captures response from the credit worthy while avoiding adverse selection of high-risk applicants. Another involves increasing the credit utilization of these customers, a revenue source notoriously neglected in the past. Now that so many other fee sources have dried up, neglecting utilization means leaving free money on the table. It also involves retention. In the past, much attention has been paid to heroic efforts to keep customers once they show signs of leaving. But such efforts can be costly and temporarily effective at best. Now, when more lenders are competing more aggressively for the smaller pool of highly desirable customers, retention must start on day one and become an ongoing effort of enlightened use of predictive analytics. ________
It’s a new world in credit risk. Old suppositions about credit worthiness and risk no longer apply. Old processes no longer serve today’s needs. Customers have changed their ways and their expectations. It’s a good time for lenders to retool their risk management weapons for the times. About the Author About bankerstuff |