cards&loans reengineering kl - · pdf file• further rises in interest rate likely...

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Paul SwynySenior Manager, Solutions Management FICO

Cards & Loans Reengineering – Why Now?

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Agenda

» Introduction

» Market overview

» Typical Client Issues

» Five Key Areas to focus on

» Client Case Study

» Why now?

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Introduction

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Cards re-engineering – why?A view from USA

» In 2007, the top 12 card issuers earned a combined $19 billion from credit cards, according to The Nilson Report.

» 1 year later, amid the financial meltdown, profits for those companies fell more than 65 percent to $6.32 billion. » The plunge was largely because defaults ballooned as unemployment soared.

» Banks wrote off about $35 billion in credit card debt last year, as the unemployment rate topped 10 percent. Analysts predict the default rate will remain at least twice as high as normal through this year, and longer if unemployment stays high.

» …the law is expected to cut into future profits. FICO projects the average card will generate less than $100 a month in revenue within three years, down from $200 a month before the law.

NYTimes, 21ST Feb 2010

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» The Credit Card Act in the USA came into effect in Feb 2010 – highlights include:» Interest Rate Changes

» None in 1st year» 45d written notice rule (as of Aug ’09)

» Payment Allocation» Issuers must pay-down the highest rate balances first

» Overlimit opt-in» No overlimit fees unless customer has expressly elected to allow overlimit transactions

» Double-cycle billing» Issuers not allowed to levy new finance charges on balances associated with the

previous bill cycle

Cards re-engineering – why?

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“Card issuers are going to need to rethink their entire business model.”

Sandra Braunstein, Director»Federal Reserve Consumer & Community Affairs

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Market Overview

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What’s happening in our region:AUS – Current Outlook

• GDP growth of 3% tipped for 2010• Business confidence up-to highest levels• Reducing unemployment – 4.75% by year-end• Further rises in interest rate likely – a 1% increase tipped by year-end• In 2008 & 2009 we’ve seen a lot of consolidation in the market

• CBA & Bank West• Westpac & St George• ANZ expansion into Asia with RBS portfolio purchases• NAB & Challenger Financial

• However, the regulator (ACCC) has ruled out further consolidation within Australia –banks will need to look internationally to add scale

• Delinquencies are generally expected to be stable BUT further rate rises may increase mortgage delinquencies:• 30 day mortgage arrears rose across all borrower classes during the December

quarter (FITCH)

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And around Asia…

» Singapore expects economy to grow up to 6.5 pct

The Associated Press February 19, 2010

» Malaysian Economy Emerges From Recession… Gross domestic product increased 4.5 percent in the fourth quarter from a year earlier

» Thailand and Taiwan also exited recession last quarter

Bloomberg February 24, 2010

» Asian economies - excluding Japan - will likely grow 8.5 percent this year, led by 10.5 percent growth in China

The Associated Press / Robert Subbaraman, an economist with Nomura in Hong Kong

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Typical Client Issues

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Cameron Clyne, chief executive of NAB, said that earnings had felt the impact of higher wholesale funding costs,competition in the retail deposit marketand lost revenue at its personal banking division as the lender had either cut or axed fees.

Money-au.com.au

Major Concerns:

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Cards and Loans re-engineering:The main issues & questions we hear from clients

» Balances are declining as savings increase and balances decrease, lenders are seeing less interest income

» Delinquencies are on the rise (US and EMEA)» Not witnessed in Australia or the rest of Asia, yet.

» Increasing regulations and tighter controls (US)» Lower fee income (AUS)

» Consumers are moving away from credit cards to debit cards and pre-pay

» How do our risk management practices compare with best practice?

» How can we optimise our line management

» How can we increase the accuracy of our current predictions

» How can we increase and manage deposits better

» How can we cut debit fraud?» A hot topic in Australia right now

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Five Key Areas to Focus on

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WHYWHYWHYWHYdo it

WHATWHATWHATWHATwe bring

HOWHOWHOWHOWyou can

gain

Increase Accuracy & Manageability of Strategies

The speed & accuracy with which policy changes can be made will greatly affect cost of compliance and the ability to react to changing circumstances. Relying on constant IT support isn’t feasible anymore.

» Fast, efficient response to regulatory change and competition

» Large, complex strategies easier to understand, easier to work with, easier to document & explain

» Industry-leading applications & tools for strategy design & execution

» New tools for developing and comparing complex strategies

» Unmatched expertise in financial services strategy development, simulation, deployment & testing

Agenda / Diagnose portfolio performance / FICO solutions

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New tools provide:» More powerful ways for business users to rapidly modify policy rules & create/maintain

more granular segmentation

» Better ways to demonstrate & discuss compliance with regulators

Increase Accuracy & Manageability of Strategies

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Use Adaptive Control:

» Use Champion-Challenger Scenarios to:» Implement/trial new corporate initiatives

» Implement regulatory change

» Continuously improve risk management practice

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Adaptive Control in action

Delta Change from Current Strategy after 5 MonthsDelta Change from Current Strategy after 5 Months

RESULTS Chall 1 Chall 2 Chall 3

Referrals -10.2% -39.0% -42.3%

% Accounts 60 +9.6% -16.6% -8.5%

% Accounts 90+ +15.5% -31.1% -27.3%

% Balance 60 +1.3% -24.1% -7.0%

% Balance 90+ +37.6% -7.0% -8.7%

Sales N/C +1.0% +32.8%

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WHYWHYWHYWHYdo it


HOWHOWHOWHOWyou can

gain

Optimize Strategies for Likely Future Scenarios

Optimization identifies the best strategy so you can implement it now instead of working toward it incrementally. The sooner you’re at optimal, the longer you reap the benefits before conditions change. Optimizing for future scenarios prepares you to jump to a new optimal operating point without delay when change occurs.

» Strategy results improvements of 10-30%

» Ability to direct scarce resources (staff, budget, exposure) where they make the biggest impact on your top objectives

» Greatly increased agility & competitive advantage in the face of economic & market change

» Advanced decision modeling for pinpointing true-optimal strategies—in complex, high-volume customer decisioning

» Rapid development & deployment frameworks (1/2 time usually required for optimization projects)

» 100+ successful optimization projects for FSIs

/ Diagnose portfolio performance / FICO solutionsAgenda

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Optimize Strategies for Likely Future ScenariosNot just better, but best

» In financial services, optimization typically boosts profit 10-30%

» Use in acquisitions, ICL, CLM, marketing & cross-selling, collections

» Applicable anywhere you must decide how to allocate a limited resource while balancing risk-reward tradeoffs & multiple business constraints

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Some Results from CLM Optimization:

/ Diagnose portfolio performance / FICO solutionsAgenda

2020

WHYWHYWHYWHYdo it


HOWHOWHOWHOWyou can

gain

Early intervention when customers are experiencing financial difficulty—often through simple, but well-timed actions—can prevent delinquencies and negative balance build, improve retention & help build loyalty & lifetime value.

» Stop more customers from going into collections queues

» Increase customer value by helping them become better performing customers

» Predelinquent strategy expertise

Agenda / Rebuild portfolio strength / FICO solutions

Pre-delinquent strategies - Help Customers Maintain Good Credit Standing

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Help Customers Maintain Good Credit StandingKeep the relationship going in the right direction

• The time to act is before delinquencies develop

• There are timely actions banks can take to mitigate risk & prevent negative balance build

• These include unobtrusive account monitoring & friendly, proactive interventions

• Segmentation is key – FICO analytics can identify accounts most likely to go delinquent

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Increase the speed and accuracy of existing predictions

WHYWHYWHYWHYdo it


HOWHOWHOWHOWyou can

gain

In markets where consumers may be struggling to pay multiple card & loan balances, creditors who are quick to recognize & act upon rising risk have a better chance of being paid.

» Significant lift in risk scoring accuracy when transactional score used with behavior score

» More granular segmentation & timely alerts than behavior scores alone can provide

» Ability to recognize different levels of risk in consumers who appear similar in cycle-end summaries

» Advanced transaction analytics based on 12+ years of application in risk management, nearly 20 in fraud

» Streamlined approach & deployment platform that simplifies implementations & speeds ROI.

Agenda / Reduce losses & collection costs / FICO solutions

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Take Action Faster When Risk ChangesScore risk with every transaction

» Transaction Score increases decision timeliness when used with existing cycle-based behavior scores

» Detects changes in risk faster, as it occurs between cycles

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Increase Accuracy of Customer Risk Prediction

» Transaction-level risk assessment provides significant incremental lift over traditional risk scores alone

» Effective for both current and delinquent accounts

» Lift is significant for moderate risk segments as defined by traditional behavior score and credit bureau score

» Lift cannot be reproduced by finer segmentation of traditional scores

» Leads to greater risk purity of strategy segments» Improved action assignment

» Better financial results

» Transaction-driven score refresh leads to earlier detection of risk and more timely actions

» More frequent refreshed scores triggered by new transactions

» Intra-cycle decisions can leverage a more recent risk evaluation (vs. cycle-based behavior score alone)

» Early life cycle management decisions» Transaction-level assessment results in more accurate risk evaluation for young accounts

» Enables more aggressive/more confident approach to early life decisions

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Manage and Leverage the Deposit Relationship

WHYWHYWHYWHYdo it


HOWHOWHOWHOWyou can

gain

Each Customer is unique –manage their relationship focused on who they are and what they need consistently to support their value and risk and deliver the right decision to all points of financial contact

» Industry-leading analytics – e.g. Deposit Behaviour Scores

» Consulting & best practices experience

» Innovations in our whole lifecycle solutions for managing customers

Agenda / Rebuild portfolio strength / FICO solutions

» Banks don’t realize between 6% and 17% of the revenue they assess due to fee waivers

» In a $60B Bank, this can translate into $24.6M per quarter of non realized non interest income on the Deposit Portfolio alone

» Retaining only 30% of the waivers based on risk and value will increase non interest income by $29.5M annually

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The Message: Liquidity—Focus on Deposits

» The need for capital to fund assets has never been more obvious than the current economic crisis and recovery

» This is increasing pressure on banks to grow and retain core deposits and manage them more efficiently

» Understanding the importance of your depository accounts and actively managing and growing them in a coherent and strategic way is vital to improving liquidity and profit

» To achieve this, banks need to look toward automation and innovation and targeted deposit customer strategies

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Building the Deposit Relationship

• Managing the Customer Experience: Consistent and Appropriate Decisions for each Customer

• Cross Selling the Deposit Account: Growing loyalty and profit

• Using the Deposit Behavior Score as a leading indicator of risk

• Fee Waiver Management: Are you retaining non interest income on the right Customers?

• Real time fraud detection and protection: Preventing 3rd Party Fraud during the Transaction

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Client Case Study

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Agenda

» Company Overview

» Westpac Credit Card Portfolio

» Managing Risk Effectively

» Data Driven Decisioning

» Strategy Monitoring

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Westpac Group Company Overview

» Westpac began trading on 8 April, 1817 as the Bank of New South Wales and in 1981 changed its name to Westpac Banking Corporation.

Today:

» The Westpac Group has branches and affiliates throughout Australia, New Zealand and the near Pacific region and maintains offices in key financial centres around the world including London, New York, Hong Kong and Singapore

» As at 30 September 2009 The Westpac Group employed approximately 37,000 people in Australia, New Zealand and around the world, and had global assets of $590 billion

» Westpac is ranked in the top 5 listed companies by market capitalisation on the Australian Securities Exchange Limited (ASX). As at 30 September 2009, our market capitalisation was $77.2 billion.

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The Westpac Group has 5 key customer facing divisions through we server around 10 million customers.

» Westpac Retail and Business Banking

» St.George Bank

» BT Financial Group Australia

» Westpac Institutional Bank

» New Zealand Banking

Other Brands

» BankSA

» RAMS

Westpac Group Company Overview

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Westpac Credit Cards Portfolio

» Full range of Rewards and Low Rate products offered across MasterCard, Visa and American Express schemes

» 2.8m accounts

» AUD $9.5b outstandings across a full range of card products

Rewards Cards –Altitude & Earth

Low Rate Cards Westpac Credit Cards

No Annual Fee Credit Card

Rewards Cards –Altitude & Earth

Low Rate Cards Westpac Credit Cards

No Annual Fee Credit Card

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Managing Risk Effectively

» The Westpac group utilises a range of tools to manage credit Risk on our consumer credit card portfolios, these include:

» TRIAD

» Credit Line, Authorisations, Delinquent Collections, Overlimit Collections, Marketing Communications

» Model Builder for Decision Trees

» All account management strategies are build and validated using MB4DT

» A number of origination strategies are developed and validated using MB4DT, including bureau call and income verification strategies

» MB4DT has delivered substantial portfolio growth and bad debt mitigation benefit through enhanced segmentation and predictive capabilities

» Customer level risk and profitability metrics

» Customer level risk data is utilised within key TRIAD decision areas.

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Data Driven Decisioning

» Through structured investment in data management over the past seven years, Westpac has been able to benefit from the adoption of a data driven strategy development process.

» TRIAD Segmentation – Data Driven Process:

» Data driven strategy design is based on the assumption that “past” can be used to predict “future” reliably.

» Data driven strategy design typically requires taking two snapshots of the Data:

» Observation Data: Used to identify behaviour patterns that lead to the events we see during the performance window.

» Performance Data: Used to observe the events we are focusing on based on the objective to capture as much of the rolling balance as possible.

» MB4DT has been used extensively in the alignment of Westpac and St George risk strategies since the merger of the two banks on 1 December 2008.

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Data Driven Decisioning – Providing Portfolio Insight

Performance Measure

26% of accounts will roll

28% of accounts will roll

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Data Driven Decisioning – Providing Portfolio Insight

Performance Measure

$600k that will roll

$8m that will roll

Performance Measure

$600k that will roll

$8m that will roll

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Data Driven Decisioning – Monitoring is Critical

» Monitoring of strategy performance is given equal priority as the development of strategies

» Combination of base TRIAD data, TRIAD Reports and bespoke strategy monitoring reports provide management with the ability to identify strategy performance

» It is important to understand the effectiveness of the ‘component parts’ of an overall strategy. Often the benefit of effectiveness of timed actions is diluted by poor or ineffective segmentation

» Our Strategy review processes are formalised and form part of our risk management framework enabling timely strategy changes and roll out of new challengers

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Data Driven Decisioning – Monitoring is Critical

Outstanding Balance ($K) vs Cure Days Since Billing

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

Total Products Core Virgin Premium Strategy N/A

Strategy N/A Strategy N/A Random Digit 90 - 99 Random Digit 20 - 29 Random Digit 10 - 19

Outstanding Balance – Cure Rate by Days Since Billing

Days since Billing

Days since billing cure rate

analysis enables monitoring of

effectiveness of both

individual timed actions and the strategy as a whole

Both Challengers outperform the

champion earlier and

throughout the cycle

Collections Challenger 1 Collections Challenger 2 Collections Champion

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Why Now?

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“The risk to the credit card business model is pervasive…issuers that do not adapt to the new realities will fall behind more innovative issuers.”

TowerGroup report, May 2009

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Thank you

Paul Swyny

[email protected]

Mar, 2010

cards&loans reengineering kl - · pdf file• further rises in interest rate likely...

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