Sailing on stormy seas: Analytics for the downturn
The economic turbulence that has swept across many of the world's major economies poses significant challenges to organisations that extend credit to people and small businesses.
Recession is putting pressure on disposable incomes and the ability of people to service debt. Rising unemployment is driving delinquencies and managing risk in these circumstances is a real problem.
One side effect of this economic turbulence is the impact it has had on the performance of credit scorecards. Evidence drawn from around the world suggests that while the rank-ordering properties of scorecards remain strong the relationship between score and risk (the so-called calibration) is moving: Many lenders are seeing default rates at a given score rise with time. This is not surprising as traditional methods of scorecard development have not included aspects of economic performance in their specification which makes them insensitive to rapid changes in the economic environment.
This raises a number of problems:
- Most organisations' decisioning strategies are based on the credit score to some degree. Changes in the calibration will hamper the effectiveness of these strategies
- The credit score underpins many organisations' profitability models and any change to the calibration will have a negative impact on profitability forecasts
- Re-calibration of scorecards to correct for these effects can increase businesses' costs at a time when budgets are under severe pressure
The technology now exists to build economic data into scoring models in such a way as to pick up changes in household disposable income and employment prospects as the economy changes. This technology ensures that as the economy changes the score changes while keeping the scorecard calibration stable.
Scoring, while under-used, has a significant role to play in collections. Collections systems hold valuable information about the performance of customers while in collections and this, allied to credit bureau data, can have a significant impact on an organisations' ability to maximise the value of collections revenues. With collections volumes increasing there has never been a greater need for tools to prioritise cases to manage volume.
Implementation strategies should also be kept under close review. Having stabilised the scorecard calibration it is important to optimise the strategy set for the current conditions. Although constrained optimisation tools have been around for some time, the current global economic situation means the time is right to look at them again. In these difficult times organisations will be facing different constraints which will force them to re-assess their goals and this is the ideal scenario for optimisation technology.
The business environment may be tough, but basic principles for success still apply: Gather the right data, extract the maximum value from it by building predictive models, and embed those models within a strategy framework that is optimised to the organisations' goals and constraints. This technology will not make the seas any less stormy but it will help you cross them in safety.
Paul Russell
Head of Analytics
Decision Analytics
Experian
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