The Right Perspective: Better Risk & Collections Decisions Through a Holistic Customer View eBook

The Right Perspective:Better Risk & Collections Decisions Through a Holistic Customer View

©2014 Fair Isaac Corporation. All rights reserved. 2

Maximizing each customer’s lifetime value

Financial organizations’ customer relationships can be a lot like the elephant. When risk management and collections groups see a customer situation exclusively from their perspective, they often lose sight of the broader relationship and their institution’s most important goal: maximizing lifetime customer value.

A broad customer perspective is necessary to avoid short-sighted customer decisions. Good long- term customers can go through temporary bad financial periods, and bad customers can appear to be good ones.

Ancient fables and today’s customers

Long ago, according to an Asian fable, six blindfolded men all touched

different parts of an elephant, but only one part, and then argued about what the creature actually was. Since none could visualize the complete creature,

none could identify the elephant.

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A tale of three customers Let’s see how three customer types illustrate the need for collaboration between Risk Management and Collections, and a balance of actions.

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José is a long-term, great credit card customer who recently lost his job.

� Has missed a few credit card payments in the last six months. � Prior to this incident, had a perfect payment history.

José: The stellar customer in a temporary downturn

Risk Management Collections Results

Perception

Believes José will rehabilitate when his situation improves and is looking ahead to future lending opportunities.

Wants the past-due balance repaid the fastest way possible.

After the collections process is implemented, José, his confidence shaken, lets the credit card account fall into deeper delinquency.

When José finds a new job, he immediately stops using this credit card, due to the aggressive treatment.Strategy

Take a tactful and respectful approach with a letter offering a one-year interest rate reduction.

Implement an aggressive collections strategy.

Vs.

?©2014 Fair Isaac Corporation. All rights reserved. 5

Suzy is a decade-long bank customer with credit card, checking and savings accounts, and a certificate of deposit (CD).

� Has a pattern of missing a few credit card payments every year.

Suzy: The forgetful customer

Risk Management Collections Results

Perception

Sees Suzy as generating sufficient short-term revenue and excellent long-term revenue.

Wants Suzy to get current in her credit card account by making up the past-due payments.

Suzy is insulted by the collections letter, posting angrily about the bank’s actions on social media. She takes her checking and savings accounts to a new bank, and puts her credit card charges on another card.

With Suzy’s departure as a customer, her original bank loses the profits she’ll generate for years to come, and its reputation suffers a drubbing on social media.

Strategy Do nothing

Send a formal letter notifying Suzy of her credit card payment delinquencies and demanding the full amount of the past-due payments.

Vs.


Todd has been a bank customer for several years, with two credit card accounts: one for personal use and the other for his business.

� Has carried a low-to-no balance until recently spending to his limits on both cards in a short period.

� Was making regular payments, but has missed one month’s payment on both cards.

Todd: The reckless spender

Risk Management Collections

Perception

Believes Todd is close to financial peril and wants to stem any future losses.

Wants to collect on the late payments, but believes Todd may return to his previous behavior, and continue to be a profitable customer.

Strategy

Cut off Todd’s cards, decline any credit increases, and escalate Todd’s case to Collections, with an aggressive strategy.

Send a friendly reminder letter in the mail, notifying Todd that he is late on payments on each of his two credit cards.

Vs.

Results

Turned off by the aggressive strategy implemented by Risk Management, Todd pays the past-due payments, but then, cut off from use of the cards, his accounts go into full delinquency and a formal collections process begins.

All of these customer situations illustrate the need to improve transparency between Risk Management and Collections, and provide an outlet for them to collaborate.

©2014 Fair Isaac Corporation. All rights reserved. 7©2014 Fair Isaac Corporation. All rights reserved. 7

In the balance: Managing reputational risk

Financial institutions have their hands full managing operational risk and compliance risk. Today, these risks are joined by another important category that also must be carefully managed: reputational risk.

Consumers are vocal about what they perceive as poor service or egregious handling of their personal finances. Individual opinions broadcast on social media can quickly go viral and damage a bank’s reputation, whether the criticism is substantiated or not.

Along with the long-standing need to maximize profit by taking the “right” actions, institutions now have more incentive than ever to ensure all the right information is used to make the right decision.

When the efforts of Risk Management and Collections are transparent, and these departments coordinate their efforts to enforce the right decision, all parties benefit—especially customers.

1 “Risk Management Resolutions for 2013,” Susan Palm, American Banker, December 28, 2012.

Reputational risks are increasingly linked to operational missteps and compliance violations, civil money penalties and fines. Thanks to social media, pervasive content sharing and strong opinions are the new norm. Smartphones, real-time newsfeeds and geo-located review sites enable stakeholders to publish content that can put entire organizations – or individual employees – in the hot seat.1


Take a look at how the tale of three customers could conclude differently

Integrated Strategy Happy Ending

José: The stellar customer in a temporary downturn

FICO® TRIAD® Customer Manager flags José’s account for review by Risk Management and Collections as a team. They recognize that he will continue to be a good customer once his financial situation stabilizes. They offer to reduce his interest rate for a year after he becomes current.

He accepts, and finds a way to become current on his account.

Suzy: The forgetful customer

An analysis of Suzy’s bank-wide relationship showed that she makes consistent, automated deposits into her checking and savings accounts. Reassured by her consistent cash flow, and ability to make her payments, Suzy’s bank decides to do nothing.

Suzy keeps paying her bills and recommends her bank to all her friends on social media.

Todd: The reckless spender

A review of Todd’s complete credit situation reveals that his balances on other cards are well below their minimum. The combined Risk Management and Collections team decides to send Todd a friendly reminder letter.

While Todd’s account is flagged to decline any over-limit approval requests, Todd becomes current on his payments and brings down his balances.


Up to a 25% increase in interest income

Up to a 30% increase in revenues

Up to a 25% decrease in delinquencies


Lift portfolio performance across multiple dimensions

Companies using FICO® TRIAD® Customer Manager typically experience results including:

Intellectual Property/Business

Expertise

Analytics

Strategies Decision Automation

� Make efficient, profitable decisions reflecting the total customer relationship

� Improve risk separation to sharpen segmentation and targeting

� Expand analytic insights to balance risk with reward

The benefits of TRIAD


By blocking only .25% of accounts, the bank has achieved savings equal to about 1.5% of monthly credit losses.

“Whether retention or loss reduction, we can use TRIAD to balance risk and marketing goals to attack each problem separately—and successfully.”

The bank increased authorization approval rates by 8% and cut delinquencies in half.

“We’ve made tremendous performance and customer service improvements—and the industry took notice.”

The bank increased net income by 33% to 44%, utilization by 15% and average balance by 35%.

“Using TRIAD on the data lets us be far more refined than before when it comes to how we deal with our customers.”

Greater profitability from more satisfied customers

For nearly 30 years, FICO® TRIAD® has been used by financial services risk managers. Today, this market-leading FICO solution improves and automates decisions for credit cards, debit cards, loans, auto financing and other business lines.

Debt Manager 9

� Evolve beyond basic customer segmentation

� A proven framework for automating collections and recovery

� Easily deployed on-premises or via the cloud

The benefits of Debt Manager 9


A balanced approach: Optimizing debt collection

FICO also has a rich history in debt collections and recovery. FICO® Debt Manager™ 9 has analytic and decisioning capabilities that allow institutions to operationalize all aspects of collection.

The Trustee’s office increased receivables collections by an overall 80 basis points, resulting in an additional $6 million in revenue.

“With FICO Debt Manager, we can reach more delinquent accounts without having to add more collectors.”

The bank realized a 70% increase in cash collected per net working hour as a result of improved collections capabilities.

“Debt Manager gives us the foundation to keep refining our strategies and it is an important factor for achieving our collections and risk goals.”

The bank improved collection agency efficiency by 14% while driving more precise risk segmentation.

“FICO Debt Manager solution offered immediate advantages in terms of its workflow automation capabilities.”


How Risk and Collections can work together

FICO® TRIAD® Customer Manager and FICO® Debt Manager™ 9 can both deploy analytic models, which are typically different, but complementary, types. This allows Risk Management and Collections groups to collaborate on analysis and decision making.

In TRIAD, models can be implemented at the customer level, the account level or both. Customer-level models allow Risk and Collections managers to view the big picture, and make more strategic decisions about how to handle delicate situations, such as a customer being delinquent on a single product.


The likelihood of missing a payment

Also known as payment risk, this determination is most used in pre-delinquency and early-stage delinquency. It helps to focus resources only on those customers with the highest chance of going delinquent, or becoming further delinquent.

Likelihood of a customer moving their relationship elsewhere

Collections often uses attrition risk in conjunction with payment risk to help decide whether or not to expend resources to collect. Customers with low payment risk but high attrition risk constitute an “avoid contact” group.

Does the bank have the same level of credit risk as other lenders?

Credit bureau scores provide insight into payment risk across multiple institutions. By assessing internal and external data, institutions can avoid being the last creditor holding all the risk for a potential charge-off.

FICO® Benchmark Reporting Services offer additional analytic information, supplementing internal efforts.


Typical analytic investigations include:

Get the complete picture on customer relationships

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FICO, TRIAD and Debt Manager are trademarks or registered trademarks of Fair Isaac Corporation in the United States and in other countries. Other product and company names herein may be trademarks of their respective owners. © 2014 Fair Isaac Corporation. All rights reserved.

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The Right Perspective: Better Risk & Collections Decisions Through a Holistic Customer View eBook