In order to implement this strategic project, Sanpaolo IMI relied on the enterprise-wide decisioning solution provided by Experian Decision Analytics, which integrates:

- highly predictive scorecards for the Small Business segment;
- industry-specific Basel II compliant rating models, which include both quantitative and qualitative data;
- segmentation & business rules.

Paolo Di Biasi, Head of Retail Credit Policies for Sanpaolo IMI, commented: “Our enterprise-wide decisioning solution is a major strategic project for the bank to enhance the loan acquisition and monitoring process for the SMEs business segment. Strategy Management is a key enabler in this solution. The flexibility of the decision engine, coupled with the advanced simulation capabilities within the desktop tool, will allow us to continually improve our business model. The implementation of the current Internal Rating Based approach allows Sanpaolo IMI to carry out an effective risk-based pricing strategy and evaluate the actual profitability of each single customer. These two elements enable us to settle a coherent and effective marketing strategy for the Small Business and Corporate segment, enhancing the customer relationship whilst monitoring the performance of our credit policy”.

The roll-out phase of the system was completed in December 2005 for the whole network of the Group: more than 3,000 branches are now operating with the new evaluation system, both in the origination and renewal phases.


About Sanpaolo IMI Group
Today, Sanpaolo IMI is one of the major Italian banking groups. It has a strong network of more than 3,200 bank branches and operates in 33 countries throughout the world via branches and agencies. The Group has approximately 43,000 employees and a network of 4,200 financial advisers, at the service of more than 7 million retail clients, of which 400,000 are enterprises.

For more information, visit the company’s website on www.grupposanpaoloimi.com

The subprime segment for the mortgages lending sector is getting more and more important and some surveys indicate a high potential of development in countries like Germany, Italy, France and Spain. In order to face the higher risk, banks and specialised companies must implement more sophisticated approaches in terms of risk management, adopting a real Risk Based Pricing strategy.

Recent research¹ indicates that there is an unsatisfied demand for residential mortgages estimated at over €500 billion (around 15% of current market size) in Europe. With favourable regulatory and house price developments this figure could be as high as €1,600 billion across Europe in the medium term. Forecasts suggest that over 80% of this growth potential is likely to be in the subprime mortgage segment. Subprime mortgages are house loans with a higher interest rate than the standard prime rate, offered to borrowers who represent a higher level of risk with respect to standard mortgage underwriting guidelines.

The most common categories of applicants who fall into this segment are:

- Borrowers with a poor credit history (previous credit problems);
- Borrowers asking for high Loan to Value mortgages (less than 20% down payment);
- Borrowers with a high Debt to Income ratio;
- Borrowers who cannot document all of the underwriting information in their application.

The subprime mortgage market in Europe is less developed than in the United States, as mortgage loans availability is limited for high risk applicants. For example, in most European countries it is very difficult for borrowers to succeed in obtaining a mortgage with a loan to value higher than 80%. Loans to people with poor credit histories are also rare. In the USA, the subprime mortgage market share equalled 9% of total originations in 2003 and subprime mortgage originations grew at approximately 44% CAGR between 2001 and 2003 compared to 30% for the prime segment².

The increased risk in subprime lending needs to be carefully assessed and managed. Clearly, a lender who decides to enter the subprime mortgage market needs to be prepared to deal with higher delinquency rates than those relative to standard prime mortgages. An analysis of a real portfolio showed that subprime loans’ delinquency rates can be even 10 times higher than for prime loans.

Two alternatives for dealing with the higher risk are:

1) Mortgage insurance;
2) Risk based pricing.
 

By requiring that a loan should be covered by a mortgage insurance, the lender is able to transfer part of the risk to the insurer. If the borrower defaults on his payments and the loan is subsequently written off, part of the lender’s loss is covered by the insurance underwriter. With mortgage insurance, many lenders are willing to offer mortgages with a loan value of up to 100%.

Risk based pricing is the practice of charging different interest rates depending on the risk of the loan. This interest rate is determined analytically according to different objectives such as the maximisation of returns or risk adjusted measures.


An overview of the Risk Based Pricing methodology

The first step in following a risk based pricing approach is to build a scoring model to predict the probability of default of an applicant. For example there is significant evidence that default rates are highly correlated with the loan to value, and rise sharply when the LTV is higher than 80%. Credit bureau scores are also excellent predictors of default rates. The second step is to perform a cost/revenue analysis considering the characteristics of the loan that is to be offered. Costs can be categorised broadly into expected losses (that depends on the probability of default, loss given default and exposure at default), cost of funding, cost of capital and operational costs. Revenues depend on the loan amount, the loan duration and the interest rate charged, although the analysis can be more detailed taking into account the possibility of early repaying options, induced revenue and service margins. The final step consists in determining the interest rate for which revenues are equal to costs or alternatively, the interest rate that maximises profits or risk adjusted measures, such as the Risk Adjusted Return on Capital.

Risk based pricing (RBP) can guarantee an appropriate return on regulatory and economic capital and avoids the adverse selection effect. It also allows for a differentiated set of strategies to be implemented (i.e. access to credit to previously rejected applicants, retention strategies for good customers). The applicability of Risk Based Pricing depends on the constraints set by regulators on the maximum interest rate that can be legally charged.

Subprime lending offers many opportunities for growth and profitability in a very competitive European mortgage market. To be successful, lenders will need to address the issues of funding and risk management. Risk based pricing is an excellent tool to deal with regulatory compliance and to manage risk effectively. Lenders that will promptly realise the potential of this market and that will arm themselves with the right tools have the chance to acquire a dominant position.

 1 - Source: Mortgage Insurance Trade Association & Mercer Oliver Wyman "Risk and Funding in European Residential Mortgage" - April 2005 

 2 - Source: Inside B&C Lending "Mortgage Market and enterprises in 2003" - October 2004

For further information on our solution on Mortgage sector click here >>

CreditChex is a joint venture between the JS Group, a leading financial services group in Pakistan, and DCD Group, a global finance and real estate company. CreditChex will provide valuable decision-making tools to any company or financial institution extending consumer credit in Pakistan. These companies range from financial institutions issuing credit cards or extending loans to consumers through to mobile phone and other utility companies.

CreditChex will use the world-leading Experian software to offer the following services to these businesses:

- Positive credit information on individuals seeking credit;
- Bureau score;
- Fraud detection and prevention;
- Loan classification for the purpose of financial regulation.

“We already operate credit bureaux in 12 international markets, including the UK and USA, where the consumer credit markets are highly developed, and others, such as Russia and Bulgaria, where they are still at an early stage in their development,” said John Saunders, Chief Executive, Global Operations, Experian. “We also provide software for credit bureaux for third party operators in additional countries.

The economy in Pakistan is growing steadily and has developed to a stage where there is significant growth in the consumer loans and auto loans markets, as well as in the credit card market. We believe that CreditChex’s credit bureau, which will be run on the Experian software platform and offer Experian decision support tools, will result in better risk management for lenders and greater financial stability for lenders and consumers.

We have been working closely with lenders, governments and regulators for many years. The demand for fast, accurate information in decision-making is growing rapidly in financial markets across the world, and Pakistan is no exception. Lenders need to base their decisions on relevant information about consumers, so automated and sophisticated credit information retrieval systems are key to managing credit risk. The predictiveness of decision-making solutions has been enhanced by the introduction of shared credit information via credit bureaux, resulting in better risk management for lenders and improved profitability.

Credit bureaux are key enablers for the growth of a nation’s consumer economy and the quality of consumer credit portfolios, whilst protecting the privacy and credit exposure of individual consumers".

“With the consumer credit market booming alongside a buoyant economy, the time is ripe for a world-class credit information service in Pakistan,” commented Munaf Ibrahim, Director, JS Group.

“Financial institutions and utility companies in Pakistan are coming under increasing pressure to take well-informed, intelligent and timely business decisions as to whom they should extend credit to and on what terms. The CreditChex partnership is an important addition to the JS Group’s financial services platform, which now operates market leading companies in financial sectors ranging from retail and investment banking, securities brokerage and asset management to insurance, trade finance and, now, credit bureau services.”

Zilay Wahidy, Director of DCD Group in the USA, added: “We are excited about the prospects for the CreditChex business. Experian is the world leader in the provision of credit bureau services and its decision to partner with us is an endorsement not only of DCD’s and JS’s strong presence within Pakistan’s financial services industry but also of the Pakistani consumer credit market, which has reached a critical mass.

A credit bureau is a vital risk management tool that is necessary to ensure that the consumer banking sector in Pakistan continues to expand in a sustainable manner. We are proud to be a part of this development.”

The agreement with CreditChex is consistent with Experian’s global strategy to enter into new vertical or regional markets, while leveraging the core assets of Experian.
 

Transact SM will enable Resurs Bank to operate an application processing service across the region, including Denmark, Norway and Finland.The solution, which is designed to link to local credit bureaux, will allow Resurs Bank to deliver rapid risk-based decisions, maintaining high levels of customer service and continued portfolio growth while minimising risk and bad debt and maximising its profitability.

Resurs Bank was established in 1980 in Sweden and is today the country’s market leading retail finance provider. The Bank expanded into Denmark in 1998 and into Finland and Norway in 2000. The retail sector continues to be Resurs Bank’s key focus and drive, and it now has a portfolio of around 800,000 cards in circulation across a number of retailers. The Bank also specialises in Internet and telephone banking and is able to provide customers with instant access to credit.

Transact SM receives, validates and processes applications from multiple channels. It supports multi-bureau connections, the deployment of credit scorecards, customer segmentation, credit decisioning and terms setting in order to make appropriate lending decisions. The solution enables the credit manager to improve efficiency and effectiveness, controlling the complete acquisition decisioning process from the point of application to new account set-up. 

Ronny Persson, Credit Manager from Resurs Bank commented: “We recognise that each of our customers is different and, therefore, it is important for us to tailor our products and services to suit their needs. We believe that this is our unique selling point that gives us a huge advantage over our competitors. We chose to work in partnership with Experian Decision Analytics because it can offer us this same flexibility. Transact SM is not simply an ‘off the shelf’ product, but has been tailored to fit our exact business requirements. One of our key requirements is to manage applications over the Internet, as this is becoming a vital part of the way in which we do business. Through this channel, customers expect a quick decision and 24-hour availability, which means that data capture and processing are key. The Transact SM solution, part of the Strategy Management suite of products, will allow us to meet this challenge of providing better service to our customers without losing decision quality.”

Jorn Hulgard, Regional Director of Experian Decision Analytics Northern Europe, said: “We are very pleased that Resurs Bank chose Experian Decision Analytics and look forward to a long and productive relationship. Transact SM will enable Resurs Bank to capture, validate and manage application data. This solution provides connectivity to different credit bureaux, to enable Resurs Bank to retrieve, aggregate and interpret data with minimal operational overhead. When you combine this data enrichment with comprehensive application workflow capabilities, you end up with an application processing solution that delivers safe automation of a risk critical business process.”
 

Connect+ will be used in the new business application process to enable PFS to obtain up-to-date customer information from local credit bureaux, combine it with details from the application and apply credit scoring and policies, all of which will allow PFS to make rapid and appropriate decisions about applications for car leasing and financing.

PFS will initially use Connect+ to support its business in Germany, Italy and the USA from its base in Bietigheim-Bissingen, with Experian Decision Analytics also delivering the credit scoring models that PFS will use within Connect+.

Porsche Financial Services GmbH (PFS), located in Bietigheim-Bissingen, is a fully owned subsidiary of the Porsche AG Stuttgart. It provides a range of financial services from motor finance and leasing to car insurance and credit cards. PFS operates worldwide.

Connect+ offers a fully integrated set of risk management and information services solutions specifically designed to connect to external data sources, such as credit bureaux, provide powerful predictive scores and enable an organisation to determine the likelihood of a customer repaying their debt.Sophisticated logic within Connect+ enables only relevant data to be accessed from different sources and integrated to create one single view of the customer. With links to over 70 credit bureaux worldwide, Experian Decision Analytics is able to offer the depth of data required by lending organisations to process each application in seconds. Connect+ adds intelligence to the data through models for risk, fraud or other purposes and decisioning for application processing and customer management.

Rainer Woidich, General Manager of Experian Decision Analytics, Germany commented: "For an international company like PFS, Connect+ is an ideal cross border solution. Connect+ will enable PFS to manage and control its lending decisions centrally but use local market data to ensure that its lending decisions are appropriate and profitable. Porsche is an internationally prestigious and respected name and we look forward to working closely with them to support their international business."
 

Honda Finance Europe Plc (HFE) offers both businesses and individuals a wide range of finance options and leasing products for new and used cars and motorcycles purchased through its UK network of Honda dealers. The operations side of HFE was set up in 2005. Prior to this, the operations side of Honda Finance Europe plc was carried out through a partnership with a third party organisation. In 2003, HFE took the decision to bring its finance operation ‘in-house’, then following a strategic review HFE selected Experian as a valued partner due to the breadth and quality of its offering.

HFE’s customers include both commercial and private individuals, so the solutions provided by Experian incorporate third party data compliant commercial and consumer credit bureau information, predictive scoring through Commercial Delphi (for business credit checking) and Delphi for New Business for consumer applications. HFE is also using Detect, Experian’s leading anti-application fraud system, to identify and prevent potentially fraudulent applications for finance. 

In addition, Experian is also helping to power Honda’s Approved Used Vehicle Programmes with its vehicle provenance service, Car Data Check.  Experian’s Car Data Check is based on the most comprehensive vehicle database ever assembled and is able to verify the history, identity and risk associated with any vehicle on which finance has been requested. 

Jonathan Chenoweth, Head of Finance & Credit at Honda Finance Europe plc, said: “The breadth and standard of Experian’s offering meant that we could obtain all of our credit reference needs from one supplier and we are able to work closely with one organisation rather than having several relationships in order to meet our requirements for now and the future. 

Another reason for our choice was the quality and accuracy of Experian’s information on consumers, businesses and vehicles. This ensures that Experian is able to support our needs.The solutions provided by Experian are enabling us to gain a better understanding of our customers, helping us to protect our business, customers and dealers from risk and providing us with a more accurate way of identifying that risk. They provide us with the means to trade with confidence and offer the most appropriate finance and leasing arrangements to our customers, both businesses and consumers.”

The solutions in use by HFE include a unique and highly predictive credit scorecard for commercial credit. Commercial Delphi is able to generate highly accurate and predictive risk scores, enabling HFE to reduce bad debt costs and save money. On the consumer-side, Delphi for New Business is enabling HFE to further strengthen its new business decisioning capabilities, providing the company with the tools to assess new business more effectively and better predict the value of potential customers whilst minimising exposure to risk. 

Chris Clark, Senior Sales Manager in Experian’s Information Solutions division, said: “Experian’s solutions are used by the majority of the motor finance houses in the UK, so we are really pleased to have HFE on board too. HFE is a great example of a motor finance company that is utilising a wide range of our solutions and information on consumers, businesses and vehicles to help them trade profitably and with confidence, whilst reducing risk and helping to prevent the impact of fraud on its business.We are also delighted to announce that as well as the UK, we are also working with Honda Finance Europe plc in Germany.”
 

The "Mortgage Lending in South East Europe: Heading for International Best Practice" seminar, organised by the Urban Institute,  will be held in Bucharest on April 5th & 6th 2006
The event will provide a unique opportunity to meet leading players in South East Europe´s mortgage market and focus on its future development. Experian Decision Analytics will participate in the conference delivering a speech during the first day in the "Selling Mortgages and New Products" session. The presentation's topic will be new product developments: the Subprime Loan Products.


For further information, please contact laura.ippolito@experian-scorex.mc
 

Albanian Association of Banks & Experian Decision Analytics held  the "Practical Application of Scorecard Technology" seminar - Tirana, 22 February
Experian Decision Analytics held a Scoring Training seminar at Tirana on February 22nd 2006 in collaboration with the Albanian Association of Banks.

The “Practical Application of Scorecard Technology” workshop gathered senior level executives from prominent Albanian banking institutions, who had the opportunity to enrich their knowledge on credit scoring techniques and methodologies and comprehend better the concepts illustrated through various international case studies.

The General Secretary of the Albanian Association of Banks, Mr. Elvin Meka, commented this training opportunity as well-organized seminar with valuable content. We hope that this is the initial step toward a fruitful cooperation in the future”.


For further information, please contact clementina.papagianni@experian-scorex.mc