September 2008 - Feature
Credit Risks in a New Economy
By Eric Lindeen
Scoring Models Being Updated
Established credit scoring models still work, but the experts agree it is time to make them more effective. That’s why companies like Ford Credit, Chrysler Financial and AmeriCredit have announced the adoption of risk-based pricing models, and why GMAC Financial Services
recently employed credit risk officers for consumer credit.
Lenders now understand that as the economy changes so does consumer behavior. The need right now is to better understand what those changes are and be able to react to them as quickly as possible.
“If a significant change in consumer behavior occurs, the effectiveness of the system is impacted until the change can be understood and explained statistically,” said Tim Bates, a senior credit risk management executive, during the Webinar. He also said it’s imperative lenders understand the drivers that cause changes in consumer behavior and to measure those drivers as quickly as possible.
During the same presentation, Tom Johnson, vice president of product development at Zoot Enterprises, a provider of decisioning and loan origination solutions, explained how the use of analytics, additional data sources and champion/challenger testing is helping lenders
establish better policies to meet their changing needs.
“Testing allows you to predict and understand consumer behavior better, and in turn, respond rapidly to market changes,” said Johnson. “Using additional data from both internal and external sources gives a broader picture of your consumers and allows better credit decisions to be made.”
Andy Callen, executive vice president of CG2 Direct, agreed. “You need to be able to change with the market monthly if not quarterly. Simplistic scoring models just aren’t enough anymore. Custom scoring
helps to better manage risk while allowing you to enter new markets effectively and in a much shorter time frame.”
In order to attract profitable customers that aren’t a credit risk,
financial institutions need to employ strategies and technology solutions that allow them to adapt quickly and take advantage of opportunities. Based on his experience, Callen believes automated decisioning systems provide the best option. “Financial institutions that can adjust dynamically to stay in sync with the market can better
compete for good loans,” he said.
Johnson said lenders are already moving to real-time tools that accelerate their ability to adjust to a changing market, as well as allow for greater complexity in decisioning logic. “Financial institutions that use internal and external data more effectively can individualize offers differently based on numerous factors, including
geographic location and customer behavior segmentation,” said Johnson. “By better utilizing available data and more complex logic, institutions can focus on their most profitable customers.”