This story appears in the February 2009 issue of Cards&Payments.
Will tried-and-true risk defenses be enough this time around? It's a critical question at a time of rising credit card delinquencies and the most difficult collections environment in recent memory. Already, issuers are rushing to traditional defenses such as tightening approvals, paring credit lines and expanding collections staff.
These basic measures definitely are in order. Yet there are compelling reasons to adopt progressive new approaches as well. For one thing, a changed lending atmosphere has weakened the applicability of traditional measures. And new sources and uses of customer information have surfaced which, in the hands of skilled practitioners, promise new levels of precision in dealing with varying types of problems and customer profiles.
The fundamental opportunity is improving risk management by gaining customer insight beyond credit scores. Credit card issuers can develop a far richer picture of risk exposure by expanding their analyses to include more detailed credit-bureau information and the customer's total relationship with the financial institution. The payoff is precision modeling of likely customer responses to various initiatives.
There are at least four major applications of advanced risk analytics, including modeling customer responses to delinquency-instigated repricing, curbing losses by anticipating impending borrower distress, competing for collections in a world of multicreditor defaults and finding pockets of attractive growth in a tight market.
To be sure, new federal rules on credit card practices will limit issuer flexibility in using new techniques. Both the speed and the extent of permitted changes in account relationships will be restricted when the guidelines become effective in July 2010.
Significant opportunities remain, however, given all the new possibilities for segment-based customer responsiveness. In marketing, issuers long have known about consequential differences between various customer groups, or segments.
And they are quite familiar with test-and-learn programs that scientifically measure the degree to which different customer segments respond to changes in various details of an offer. Increasingly, these same principles can be applied in refining risk mitigation initiatives.
We see this as an urgent priority. Under current approaches that fail to distinguish among differing categories of borrowers, lenders risk misdirecting their efforts with large numbers of customers and prospects who are unreceptive to blanket treatments and offers–or were never good candidates in the first place.
For example, issuers can hurt repayment prospects and salvageable cardholder relationships by overaggressive default repricing, tightening or extending credit suboptimally among various current customers, and overlooking borrowers' individual circumstances in collections.
By contrast, a more progressive, segment-based approach to default repricing should include an investigation of the extent to which sounder borrowers react by taking their business elsewhere and the extent to which the most distressed borrowers react by ceasing all attempts at repayment.
Similarly, a segment-based approach recognizes that credit scores and monthly payment trends may not provide adequate guidance on credit extension to current customers. In some cases, an analysis of risk-adjusted account profitability reveals stretched-but-solid borrowers who actually may warrant credit line increases. In other cases it reveals the need for active intervention with households having clean payment histories but who are teetering at the brink of financial crisis.
Even among delinquent borrowers, understanding variations in segment responsiveness is invaluable in guiding negotiating tactics and mass-customized workout programs. Troubled borrowers having substantial remaining assets, few credit lines and deep ties to the institution, for example, present a starkly different profile than debtors in the opposite condition.
Certainly, issuers should continue with traditional risk defenses. That said, segment-based strategies provide substantial additional opportunities to interact more effectively with borrowers. CP
Richard Tambor is a managing director in the New York offices of Novantas LLC, a management consultancy. He can be reached at email@example.com.