This situation makes it even harder to understand why so many firms simply decide to operate without an effective system of debt management. If a customer falls behind in his payments, this usually entails the beginning of a process which often ends with the termination of this person’s credit, leasing or telephone agreements, or his insurance policy.

Differentiation Through a Payment Prognosis

This seemingly “egalitarian” approach fails to take into account the considerable differences among customers with payment difficulties. Of course, with many of them, it is often a helpless case, and a waste of time trying to put things back on track. However, the majority are usually willing to pay their bills – and at some point they will have the financial means to do so. These particular customers should not be treated as relics of the past which need to be discarded, but as valuable, existing customers. They need to be treated in a cooperative, considerate manner, in order to create a win-win situation. Any other approach would be counterproductive. Acquiring new customers is not only extremely costly and time-consuming (up to 12 times more expensive than retaining existing customers), but it is much riskier. It is a fact that a company has precious little information about newly-acquired customers at its disposal, whereas quite a lot is known about existing ones.

But how can a company know which category a particular customer belongs in? The solution is a modern collection scoring system. This process develops a prognosis based on the systematic evaluation of internal and external sources of information. The aim is to assess the future ability of a person in arrears to meet repayment obligations. How the company then proceeds depends on how the particular person is categorised.  Customers rated with a positive payment prognosis are not simply cancelled, but are personally contacted and provided with constructive suggestions on optimizing their financial situation, for example deferring payment on installments, extending the period in which repayments can be made or reducing interest rates. Those debtors with an unfavorable behavioral scorecard are processed in a quick and decisive manner.

Save Money – And Retain Customers

This systematic approach enables a company to kill two birds with one stone. For one thing, the good, worthwhile customers are not only “rehabilitated“, but are generally retained and their loyalty ensured. In addition, in the good customer segments, the debt recovery ratios improve, whereas fewer resources need to be dedicated to the remaining groups of customers. A differentiated debt management program is the basis for companies to save a lot of money. Debt collection scorecards are the key to a profitable debt recovery performance.

But there is even more to it: the debt recovery ratios could turn out to be important paramaters for Basel II. According to prevailing regulations, the amount of capital which must be deposited as reserves depends on how high the probability is that debts will be paid back, and the expected number of debts which must be written off. If the anticipated debt recovery ratio is systematically taken into account, banks could significantly reduce both the losses which are likely to be incurred and the capital resources that must be allocated to reserves.

*Source: Insolvenzen in Europa. Jahr 2004/05 (Bankruptcies in Europe. 2004/05), Creditreform Wirtschafts- und Konjunkturforschung.

Saudi Arabia has an oil-based economy with strong government controls over major economic activities. The government is encouraging the private sector growth to lessen the Kingdom's dependence on oil and increase employment opportunities for the swelling Saudi population. Currently, the country is enjoying a phenomenal growth in the stock market and at the same time, the credit market infrastructure is under development. The Credit Bureau is still a new concept and a fair credit sharing mechanism is still under discussion.

Saudi Arabia has the largest reserves of petroleum in the world (25% of the proved reserves), ranks as the largest exporter of petroleum, and plays a leading role in OPEC. The petroleum sector accounts for roughly 75% of budget revenues, 45% of GDP, and 90% of export earnings. About 40% of GDP comes from the private sector. Roughly five and a half million foreign workers play an important role in the Saudi economy, for example, in the oil and service sectors. In 1999 the Government announced plans to begin privatizing the electricity companies, which follows the ongoing privatization of the telecommunications company. The government is encouraging private sector growth to lessen the kingdom's dependence on oil and increase employment opportunities for the swelling Saudi population. Priorities for government spending in the short term include additional funds for education and for the water and sewage systems. Economic reforms proceed cautiously because of deep-rooted political and social conservatism.

Although Saudi Arabia is not considered as a money laundering centre, the government is proactive in instituting regulations for anti-money laundering. Charitable organisations are also subjected to prudent scrutiny to dry up potential support sources of terrorism. The Kingdom was the target of a number of terrorist attacks during 2004. Those kinds of attacks usually affect investors' confidence which impacts capital markets. The Saudi stock market, however, was not affected by those events; it actually continued its strong surge. 

After the September 11th attack on the WTC in New York, there was a forced Saudi capital shift from foreign bank accounts to local Saudi banks. This shift has created a huge amount of capital ready to be invested in the local economy. Latest figures released by the Saudi Arabian Monetary Agency (SAMA, the central bank) indicates that there is unprecedented growth in money supply (known as "M2" which is money outside banks + deposits under order + time deposits) where it amounted to SAR406 Billions by the end of November 2004, up 24% against the same period in 2003.

The record prices for crude oil, which represents the majority of the budget revenues, resulted in an enormous surplus in the fiscal budget for the second year in a row. 

The announced budget shows a balanced expectation for 2005 where revenues and expenditures were equally estimated at SAR280 Billions. The budget also showed that actual revenues for 2004 were SAR393 Billions where expenditures were SAR295 Billions resulting in a SAR98 Billions surplus, against previous projections of a SAR30 Billions deficit, the main engine for this surplus was growing oil revenues.

Major petrochemical and basic industries which are heavily dependent on the crude oil prices are shielded from energy price fluctuation. This has made the export of these products highly competitive in the international market, which in turns resulted in high profits for these publicly held companies.

The recently approved capital market law and the appointment of the capital market authority commissioners is a historical turning point for the Saudi stock market, this will drastically help strengthen market confidence in a highly transparent environment. The decision by the Saudi Council of Ministers to appoint the capital market authority (CMA) members in mid 2004 was among the most influential economical events directly relating to the Saudi stock market, which complemented the approval of Capital Market Law in 2003. CMA had approved the publishing of three important set of executive bylaws. The CMA started a tough mission of monitoring trading activities in the Saudi stock market and taking appropriate action needed, for example, CMA temporally limited the volatility band of "SEC" as a result of price manipulation by some speculators. Furthermore, CMA dealt firmly with listed companies that had not announced their financial results on time. Additionally, CMA investigated violations committed by some IPO subscribers for irregularities of using others' identification cards for IPO subscription. These are strong indicators that the CMA is committed to the "Fair Trading" practices.

These factors in unisons have profoundly changed the fiscal landscape of the Kingdom. 

Currently the country is enjoying a phenomenal growth in the stock market. Most of the mutual funds have a rate of return of 100% for the past 12 months. During the year 2004, the Saudi stock Market was up by 85%. This situation resulted in a shift in cash allocations from vital sectors of the economy to the stock market.

 Information courtesy of Bakheet Financial Advisors. WWW.BFASAUDI.COM

As a result, many speculators put their capital in the stock market and turned to finance institutions to borrow for their other needs and projects. The reason was the disparity between the costs of borrowing and the ROI from the stock market. The credit market was caught by surprise without much legal cover and without a comprehensive credit bureau. There are two main Credit Bureaux in the Saudi Market, the first of which is ALJISR Credit Bureau designed and delivered by Experian Decision Analytics. The second bureau is the new comer in the market and is owned by the ten major banks in the kingdom.

There was and to some extent still is a lack of awareness for the need of a credit bureau. This is a new concept and data privacy is not well developed, and a fair credit sharing mechanism is still under discussion in the halls of the mighty technocrats of the government. A single company started the credit bureau revolution and it is taking it upon itself to educate and introduce the concept to the market. Abdul Latif Jameel Co. for Information and Service Ltd, "ALJISR" enjoyed some success, and it is continuing its efforts to bring the Saudi Market to grip with the reality of the need for such mechanism to share credit information.

Risk management, even in some of the banks is still an immature practice. The lack of demographics data, including proper street address and location numbering is making the introduction of such tools as Credit Scoring very slow. Developing proper score cards require many vital pieces of information which are not readily available. Most of the current risk management practices involve minimizing the risk by requiring a co-signer – a primitive tool at best, that no doubt will become obsolete for obvious reasons. Until recently, requiring collateral was illegal in the Kingdom. 80% of the operating banks in the Kingdom employ credit scoring tools, but still the majority of the decisions are being made subjectively. Credit scoring tools are used as a supplementing guide and not as the main credit risk determining mechanism. 

At some point, it is certain that the banks will be required to implement the Basel II Accord guidelines, if not mandated by the market forces, then by the government. The Kingdom is keen on participating in the WTO. This participation will definitely force the local banks to adopt and implement Basel II.  One of the tools to minimise exposure is credit scoring.

"I believe that to have a mature and responsible lending model, the Kingdom will have to do this through phases. One possible scenario is to first consolidate and aggregate the credit data into a single "virtual source". Parallel with this or even before this would be to bring to light clear regulations on fair credit sharing, data privacy, and mandatory reporting requirements. Incorporation of other non-financial data such as public records, court judgments, returned checks, and other data will certainly help to enhance the risk assessment process. This will form the base of "Maslow's pyramid of needs". A higher layer or the second step would be to introduce Credit Scoring on the application level and then behavioral scoring afterward.

It is expected that the Credit Bureaux  and the other primitive tools such as "black lists" will begin to consolidate. No single player has exclusivity over the information and the situation of information islands will prove to be inefficient. A mature and conclusive Credit Bureau will definitely become a reality once clear regulations on information sharing and data privacy are put in place.

Barclays will improve communications to its eight million customers by using Experian Decision Analytics’s marketing optimisation solution to automatically determine:

• the most appropriate offer to make to each customer

• the best time to make the offer; and

• the optimal channel through which to send the offer

Barclays will combine information about actual and potential customer events, such as insurance renewal date and credit products reaching the end of term, with channel and product propensity scores.  Using mathematically based decisioning, Barclays will be able to make truly optimal decisions to proactively plan its marketing campaigns over time, taking into account day-to-day resource and business targets.  

Matt Harris, Head of CRM for Barclays Customer Insight, commented: “We looked at a number of optimization vendors in the market and we chose Experian Decision Analytics’s solution because it delivered the ability to optimize individual customers over time, which is key to our business requirements.  Experian Decision Analytics’s Marketswitch software also enables us to easily and dynamically alter the optimized actions for each customer as our budget, resources and product plans change.  It will revolutionise the way we plan our customer contact plans, reducing the time required from days to hours.

Jo Buxton, Director of Business Development for Experian Decision Analytics, added: “We worked very closely with the Barclays CRM team to understand its requirements and built a prototype system, in just 10 days, which demonstrated the flexibility of the solution and the return on investment required for the business case.

“Marketing optimization represents a technological breakthrough in managing a financial services retail portfolio.  It enables organisations to significantly improve their business profitability and provides greater control over specific customer management strategies and how they impact profits.  As a result, Barclays will be able to recommend the best action or decision for each individual customer: the ‘segment of one’.”

The first step in setting up an application scoring system is to build a prediction model. Initially, existing clients with a satisfactory behaviour must be separated from those who have shown an unwelcome behaviour. Then, a representative sample of mature accounts needs to be extracted and all available criteria at the time of the application is analysed in relation to their discrimination power between good and bad accounts. When building an application scoring model, all interesting variables are examined in a multi-variable model. The optimisation algorithm will select the best variables and the final model will have the maximum possible discrimination power.

“Experian-Interfax is the first major operator to offer Credit Bureau services in Russia and the first major international player to operate in Russia,” said Experian’s CEO, John Saunders. “We are happy that our project is developing well in Russia and that the Experian-Interfax system will be ready for launch in time for the Russian Law on Credit Bureaux coming into effect in June. We are excited and encouraged by the fact that about 20 banks and other lenders are already co-operating with us.”

Experian-Interfax was established in late 2004 and is the first company to create a Credit Bureau system to cover all of Russia.  From a technical centre in Moscow, it intends to work with clients from all over Russia which are interested in promoting the development of the credit bureau institution and in protecting consumers' rights. 

“Experian has chosen to enter into the partnership with Interfax at this time because of the size and potential of the Russian market, which now benefits from a stable political and economic environment,” continued John Saunders.  “Consumer lending is growing very fast, and has been for four years, and the legal infrastructure to enable the new bureau to be created has been established with the new law for credit reporting signed by President Putin at the end of 2004.

“The prospects for the market are good," said Interfax Group Chairman Mikhail Komissar, “because not only is the market stable and growing, but Russian and foreign banks are investing heavily in their systems, lending to consumers and businesses is increasing strongly and this demand for credit from businesses and consumers continues to increase. This, coupled with increasing disposable income of Russian consumers, has created good conditions for sustained growth, providing there is an infrastructure mechanism for assisting in controlling risk properly – the credit bureau.

"Experian and Interfax each have a 50% stake in the project.  Experian-Interfax, established jointly with a global leader in the sector, has given Russian banks and companies access to well-tested, reliable and convenient technical solutions, which are already used in over 60 countries.”

See the agenda
Spanish >>
English >>

The “Credit Risk 2005” Seminar, organised by the Business Circle, will be held in Vienna on 20th & 21st June 2005. It aims to offer an in-depth knowledge on Credit Risk Management and this year's event programme will offer three parallel Streams focused on Retail and Corporate Banking, Portfolio management and Methods, technology and Case Studies.

Experian Decision Analytics will be present at the Conference delivering a speech during the first day of the Retail and Corporate Banking session. The topic will be focused on the efficient bad debt management as a measure to cut costes and manage customer relations.

The “Advanced Credit Risk Management Solutions” seminar, an event dedicated to the analysis of strategies and solutions for credit risk control and directed at the Italian banking and financial organisations.  The event focuses on the strategic credit risk control analysis in each phase of the customer’s life cycle: acceptance, innovation and behavioural management. Specific presentations will be dedicated tothe analysis of strategies and solutions for the collection process. International consultants will present best practices and case studies already implemented for foreign banking groups. Leading market players in banking and leasing sectors will share their experiences on the management of small business and private customers. A workshop entitled:  “Optimization of Credit Risk Management Strategies”, will inaugurate the event on Thursday 7 July at 17.00. On Friday 8 July the event will initiate at 8.45 and finish at 16.00. A simultaneous Italian-English translation will be provided.

For further information please see the agenda and registration form or contact Ms.Laura Ippolito (email: laura.ippolito@experian-scorex.mc)

Fighting financial crime is not an optional activity. Recent attention by both regulators and the press has highlighted the need for business lenders to be proactive in combating financial crime. Due to the wake of an increased number of Middle East and Turkish companies that face fraud risk on an ongoing basis, Experian Decision Analytics has decided to conduct a Fraud Prevention seminar in Istanbul on Tuesday July 19th 2005. The event will focus on issues that will help companies comprehend how to prevent, measure, report and prosecute fraud. It will elaborate on the ways companies can better identify potential fraud and present diverse fraud tools that can be utilised to reduce revenue costs and protect customers. This one-day seminar will offer a practical approach to financial risk management that can help companies avoid theft and misappropriation of assets; it is intended for Head of Retail and Credit Risk Managers from Turkish and Middle East banking and financial institutions. The main topics of the discussion will be: the rule of data sharing, application fraud solutions, as well as transactional fraud and merchant monitoring. The agenda will be enriched with a case study presented by a Turkish market player, as well as with demo systems and operational examples of the application fraud solutions Hunter II and Secana.

For further information please see the agenda and registration form or contact Ms. Clementina Papagianni (email: clementina.papagianni@experian-scorex.mc)

This one-day interactive seminar introduced credit scoring concepts. Attendees had the opportunity to learn about the use of scoring and risk management techniques with emphasis on the application processing phase. The event also elaborated on fraud prevention/detection tools to fight fraud. The seminar was enriched with case studies and practical exercises.