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Organisations are increasingly looking to automate the origination process in order to provide faster and more efficient operational decisioning whilst trying to ensure that new prospective customers have a positive ‘buying experience’. A swift decision with the customer receiving their requested credit facility promptly is the first step in turning applications into loyal and profitable customers.
Implementation of automated solutions also provides the opportunity to control credit risk through the implementation of consistent credit strategies to reduce bad debt losses, improve their accept rates, improve take-up rates and provide appropriate terms of business.
Ultimately, all these reasons are linked to the drivers of profit or regulatory compliance. Understanding the key profit drivers - operational costs, losses and revenue - and what levers can be used to influence these drivers can make the credit risk strategy an influential tool in improving the profitability of any organisation.
Financial payback period
Financial payback is the point where the profitability of the accounts on book have generated sufficient revenue to cover the costs of acquisition, operations and losses. After this point, the lender starts to see a return on its investment in the customer. Some lending markets will generate quick financial returns but it is becoming increasingly common that the financial payback period for a new account is becoming extended.
There are many influences on this break even point. These include increasing marketing and customer acquisition costs such as 0% balance transfer rates, competition forcing down overall interest rates charged, increased servicing costs, falling customer loyalty, high costs of processing not taken up offers, capital adequacy constraints etc. The result of these factors is that it may be that a new customer will not return a profit for an organisation within the first 12 months.
If these factors remain unmanaged, then the payback period can start to drift out, resulting in a portfolio that takes longer and longer to reach a profitable position.
The introduction of automated decisioning into a process that is currently fully or partly manual will have a significant impact on the overall cost of acquisition. However, if we assume the process is already automated and the acquisition costs are fixed (e.g., a fixed cost per account deal with a financial intermediary), there remain many levers that can be used at account origination to impact the payback period as illustrated by the green line in the graph below. These can include risk-based pricing to increase interest income, cross-sell strategies to increase commission income, application of advanced scoring and limit strategies to reduce losses or offering accounts with lower servicing costs (e.g., Internet). All these strategies are made more effective by statistical analysis and segmenting the portfolio appropriately to ensure that the most appropriate offers are made to the most appropriate applicants.
The Profit Levers
There are many profit levers that an organisation can use within its customer origination solution. Some of the most obvious ones are outlined below.
Revenue levers
- Select the right customers to meet growth and quality targets by accurately assessing applicants risk / return profile to identify and select the customers that will enable financial goals to be met and exceeded
- Increase conversion rates, revenue and generate loyalty by exceeding expectations with a rapid, relevant and personalised service, creating individual pricing, terms and offers for each applicant
- Achieve higher acceptance rates with risk-based pricing, enabling more appropriate offers to be made to more customers
Loss Levers
- Reduce bad debt losses with accurate risk assessment to set appropriate terms of business
- Reduce losses from fraud by embedding fraud detection in the origination process
Operational Cost Levers
- Decrease operational costs with streamlined automation, increasing processing volumes, decreasing response times and reducing manual intervention
- Improve unit cost efficiency through better use of specialist underwriters, improved automation in low risk segments and more targeted referrals processing.
The Decision Analytics division of Experian has over 20 years experience and has delivered over 1,000 origination systems to clients all over the world. Understanding the profit levers when designing data capture and application processing solutions, determining data enrichment strategies, implementing scorecards and credit strategy policy rules, setting terms of business, defining fraud strategies, calculating affordability, cross-sell strategy and risk-based pricing opportunities are all just a few of the tools that are now available to a portfolio manager and supported by Experian’s market leading decisioning tools.
Richard Topham
Head of Origination Core Solutions
Decision Analytics
Experian
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