New Information Key to Keeping Best Customers

Director of Analytic Solutions, CL Verify Credit Solutions

In today’s shifting consumer economy, capturing and keeping the best customers demands the relentless pursuit and use of real-time information.

To quickly and accurately predict consumer performance, this information must constantly keep lenders updated about changes and trends in their customers’ financial profiles.

Rapid and frequent fluctuations in consumers’ credit worthiness is unique to short term lending. Those fluctuations often are not sufficiently profiled by a traditional evaluation of their credit history or simple score-based decision strategies.

As consumer demand for short-term, small-balance loans increases, lenders can safely use non-traditional credit and banking data to identify, capture and retain profitable customers.

At the same time, they can avoid troubled loans and boost approval rates for qualified applicants who might otherwise be declined.

Tough Decisions

However, deciding which new data sources to include in your decision strategy can appear to be a complicated and daunting task.

Adding to the complexity are the macro changes in consumer economic trends, including an all-time-high unemployment rate of 9.5 percent as reported by the United States Bureau of Labor and Statistics in October 2009, as well as increased bankruptcy filings and home foreclosures.

Yet many state and federal agencies, regulators and auditors openly support the use of new, objective information, particularly when reviewing the credit needs of banked but underserved consumers.

Research suggests the vast majority of short-term borrowers have at least three or more trade line records with one of the traditional credit bureaus. Yet the true credit risk profile of these applicants is unique by lender and cannot be accurately determined by traditional credit scoring.

Portfolio performance is driven by many factors, such as a lender’s target populations, acquisition and pricing practices, customer service and retention strategy, as well as recovery operations.

Underserved consumers are much more susceptible to macro-economic trends such as housing prices and unemployment trends, with the impact much more quickly reflected in their credit behavior and performance.

For these reasons, it is vitally important for lenders and financial services providers to continuously challenge their existing risk management strategies, understand their performance dynamics and adjust decisioning rules to allow for changes and trends in consumer behavior.

Testing, Incorporating New Information

Introducing new data into your portfolio management process starts with a commitment to continuous learning and improvement.

Since data is the backbone on which the entire account life cycle can be optimized, a robust, actionable approach to reporting information which leverages a sound data acquisition and retention infrastructure must be employed across all phases of the cycle.

This reporting provides disciplined, constant monitoring to capture the chronic variations of each customer’s performance. Reporting that is focused, efficient and effective ensures critical data is available for timely analysis.

Analysis of portfolio trend data, including an understanding of internal (marketing) and external (economic or competitive) business influences, will enable lenders to identify the primary contributing factors to changes in portfolio profitability, make adjustments accordingly and proactively drive changes to ensure lenders hit their targeted return on investment.

Non-traditional Credit Data

Near-prime credit profiles move in and out of credit worthiness twice as fast as prime borrowers. To apply an approve/decline strategy that manages the allocation of available lending capital and identifies lower-risk, more-profitable customers, lenders must consider a long-term view of the customer relationship.

Non-traditional credit performance data derived from near-prime application and reported loan data identifies high risk inquiry and loan activity, and can help decrease loan default rates and maximize profitability.

This unique, “quick turnaround” performance data helps address and keep pace with the rapid profile migration of short-term borrowers and other underserved consumers.

Real-time performance trends on short-term loan products allow lenders and financial services providers to quickly determine how to maximize profitability in new relationships and proactively control those that are not beneficial to their business strategy.

Posted in Spring 2010.