cut off strategies presentation
TRANSCRIPT
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CUTOFF & STRATEGIESPRESENTER: IOANNA ROUSSOU
Bucharest, 20/10/2010
Main Topics
Cut Off Table
Cut Off Objectives
Profitability
Profitability Considerations
Practical Implications
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Main Topics
Cut Off Table
Cut Off Objectives
Profitability
Profitability Considerations
Practical Implications
What is the result of a Score Development?
A Score DistributionA Cut-Off Table
Initial Step
Score
Total TTD -
Applications
Booked
Expected
Goods
Expected
Bads
Interval
Bad Rate
G:B
Odds TTD Above
Approval
Rate
Bads
Above
Portfolio
Bad Rate
169 1,161 1,062 99 8.5% 10.8 52,536 67.5% 2,356 4.5%
170 1,180 1,083 97 8.2% 11.2 51,375 66.0% 2,257 4.4%
171 1,198 1,103 95 7.9% 11.6 50,195 64.5% 2,160 4.3%
172 1,214 1,120 94 7.7% 12.0 48,997 62.9% 2,065 4.2%
173 1,228 1,136 92 7.5% 12.4 47,783 61.3% 1,971 4.1%
174 1,241 1,151 90 7.3% 12.8 46,555 59.7% 1,879 4.0%
175 1,251 1,163 88 7.0% 13.2 45,314 58.1% 1,789 3.9%
176 1,259 1,173 86 6.8% 13.7 44,063 56.5% 1,701 3.9%
177 1,266 1,183 83 6.6% 14.2 42,804 54.9% 1,615 3.8%
178 1,270 1,189 81 6.4% 14.7 41,538 53.3% 1,532 3.7%
179 1,272 1,194 78 6.1% 15.2 40,268 51.6% 1,451 3.6%
180 1,272 1,197 75 5.9% 16.0 38,996 50.0% 1,373 3.5%
Expected Bads at
this score
Estimated Bad
Rate at this score
Estimated Good Bad Odds
at this scoreNumber of
Goods for each BadExpected TTD
Applications at
this score
Number of
Applications
expected at this
score and above
Percent of
Applications
expected at this
score and above
Number of Bads
expected at this
score and above
Cumulative Bad
Rate at this
score and above
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Key Points
Interval Bad Rate
It is the bad rate at that specific score-only if you accept all applications at
score 175
Portfolio Bad Rate
It is the bad rate of the whole portfolio-if you accept all applications from
score 175 and above
Interval vs Marginal Bad Rate
Cumulative vs Portfolio Bad Rate
Score
Total TTD -
Applications
Booked
Expected
Goods
Expected
Bads
Interval
Bad Rate
G:B
OddsTTD Above
Approval
Rate
Bads
Above
Portfolio
Bad Rate
173 1,228 1,136 92 7.5% 12.4 47,783 61.3% 1,971 4.1%
174 1,241 1,151 90 7.3% 12.8 46,555 59.7% 1,879 4.0%
175 1,251 1,163 88 7.0% 13.2 45,314 58.1% 1,789 3.9%
176 1,259 1,173 86 6.8% 13.7 44,063 56.5% 1,701 3.9%
177 1,266 1,183 83 6.6% 14.2 42,804 54.9% 1,615 3.8%
ScoreTTD
Applications
Loss From
Bads
Revenue
From Goods
169 1,161 128,130 107,474
170 1,180 125,541 109,600
171 1,198 122,953 111,624
172 1,214 121,659 113,344
173 1,228 119,070 114,963174 1,241 116,482 116,481
Cut Off table types
Various versions in the industry:Score groups in ranges At Amount Level
Observed Bad Rate vs. Predicted
Score BandIncoming
Applications
Bad Rate per
Band
170 - 179 10% 15%
180 - 189 10% 7%
190 - 199 10% 4%
200 209 10% 3%
Score TTD Applications
Interval Bad
Rate
(Predicted)
Interval Bad
Rate
(Observed)
169 1,161 8.50% 10.20%
170 1,180 8.20% 9.02%
171 1,198 7.90% 7.11%
172 1,214 7.70% 6.93%
173 1,228 7.50% 8.25%
174 1,241 7.30% 8.76%
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Key Question
Bad Definition
60+ with 18 average outcome period or
90+ with 24 average outcome period
What is my Loss Rate?
X Bads Y Losses
Is it included in the table?
Relationship between Bad and Loss definition
6% Bad Rate = 2% Loss Rate
Cut-Off Objectives
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Main Topics
Cut Off Table
Cut Off Objectives
Profitability
Profitability Considerations
Practical Implications
Objectives
Book Better Customers
What is a better customer?
Reduce Losses
Are less credit losses always good for the business?
Increase Market Share
Increase the approval ratewhat is optimal?
Maximise Number of Automated Decisions
Where is manual verification and assessment worthwhile?
Increase Profits
How do I measure profitability?
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Objectives
What is your aim in setting a Cut-Off?
Cut-Off Table
Score
Total TTD -
Applications
Booked
Expected
Goods
Expected
Bads
Interval
Bad Rate G:B Odds TTD Above
Approval
Rate
Bads
Above
Portfolio
Bad Rate
169 1,161 1,062 99 8.5% 10.8 52,536 67.5% 2,356 4.5%
170 1,180 1,083 97 8.2% 11.2 51,375 66.0% 2,257 4.4%
171 1,198 1,103 95 7.9% 11.6 50,195 64.5% 2,160 4.3%
172 1,214 1,120 94 7.7% 12.0 48,997 62.9% 2,065 4.2%
173 1,228 1,136 92 7.5% 12.4 47,783 61.3% 1,971 4.1%
174 1,241 1,151 90 7.3% 12.8 46,555 59.7% 1,879 4.0%
175 1,251 1,163 88 7.0% 13.2 45,314 58.1% 1,789 3.9%
176 1,259 1,173 86 6.8% 13.7 44,063 56.5% 1,701 3.9%
177 1,266 1,183 83 6.6% 14.2 42,804 54.9% 1,615 3.8%178 1,270 1,189 81 6.4% 14.7 41,538 53.3% 1,532 3.7%
179 1,272 1,194 78 6.1% 15.2 40,268 51.6% 1,451 3.6%
180 1,272 1,197 75 5.9% 16.0 38,996 50.0% 1,373 3.5%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
0.5% 0.7% 0.8% 1.1% 1.5% 2.0% 2.6% 3.4% 4.2% 5.1% 6.0% 6.7% 7.3% 7.6% 7.8%
Approv
alRate
Portfolio Bad Rate
Strategy Curve
Strategy CurveCurrent Situation
Current:
Approval Rate: 56%
Bad Rate: 5.2%
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0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
0.5% 0.7% 0.8% 1.1% 1.5% 2.0% 2.6% 3.4% 4.2% 5.1% 6.0% 6.7% 7.3% 7.6% 7.8%
ApprovalRate
Portfolio Bad Rate
Strategy Curve
Strategy CurveCurrent Situation
Strategy Curve
New Score
Current:
Approval Rate: 56%
Bad Rate: 5.2%
Setting Cut-Off-Application Scores
Can set Cut-Off based on a single criteria - a target
Approval Rate
OR
Portfolio Bad Rate
A solution which is a compromise between the two
I want to keep the Approval Rate above 55%
But I dont want the Portfolio Bad Rate to be more than 5%
Use Cut-Off Tables
Simple
Measurable
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0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
0.5% 0.7% 0.8% 1.1% 1.5% 2.0% 2.6% 3.4% 4.2% 5.1% 6.0% 6.7% 7.3% 7.6% 7.8%
ApprovalRate
Portfolio Bad Rate
Strategy Curve
Strategy CurveMaintain Bad Rate
Current:
Approval Rate: 56%
Bad Rate: 5.2%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
0.5% 0.7% 0.8% 1.1% 1.5% 2.0% 2.6% 3.4% 4.2% 5.1% 6.0% 6.7% 7.3% 7.6% 7.8%
Approv
alRate
Portfolio Bad Rate
Strategy Curve
New:
Approval Rate: 78.2%
Bad Rate: 5.2%
Strategy CurveMaintain Bad Rate
Current:
Approval Rate: 56%
Bad Rate: 5.2%
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ObjectivesMaintain Bad Rate
What is your aim in setting a Cut-Off?
Cut-Off Table
Score
Total TTD -
Applications
Booked
Expected
Bads
Expected
Goods
Interval
Bad Rate G:B Odds TTD Above
Approval
Rate
Bads
Above
Portfolio
Bad Rate
155 773 101 672 13.1% 6.7 66,057 84.7% 3,786 5.7%
156 804 102 702 12.6% 6.9 65,284 83.7% 3,685 5.6%
157 835 101 735 12.0% 7.3 64,480 82.7% 3,583 5.6%
158 866 102 764 11.8% 7.5 63,645 81.6% 3,483 5.5%
159 897 103 794 11.5% 7.7 62,779 80.5% 3,381 5.4%
160 927 103 824 11.1% 8.0 61,882 79.3% 3,277 5.3%
161 957 104 853 10.9% 8.2 60,954 78.2% 3,174 5.2%
162 986 104 883 10.5% 8.5 59,997 76.9% 3,070 5.1%
163 1,015 104 911 10.2% 8.8 59,010 75.7% 2,966 5.0%
164 1,042 103 939 9.9% 9.1 57,996 74.4% 2,863 4.9%
165 1,068 103 966 9.6% 9.4 56,954 73.0% 2,759 4.8%
166 1,093 102 992 9.3% 9.7 55,886 71.7% 2,657 4.8%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
0.5% 0.7% 0.8% 1.1% 1.5% 2.0% 2.6% 3.4% 4.2% 5.1% 6.0% 6.7% 7.3% 7.6% 7.8%
Approv
alRate
Portfolio Bad Rate
Strategy Curve
Strategy CurveMaintain Approval Rate
Current:
Approval Rate: 56%
Bad Rate: 5.2%
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0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
0.5% 0.7% 0.8% 1.1% 1.5% 2.0% 2.6% 3.4% 4.2% 5.1% 6.0% 6.7% 7.3% 7.6% 7.8%
ApprovalRate
Portfolio Bad Rate
Strategy Curve
New:
Approval Rate: 56%
Bad Rate: 3.9%
Strategy CurveMaintain Approval Rate
Current:
Approval Rate: 56%
Bad Rate: 5.2%
Objectives - Maintain Approval Rate
What is your aim in setting a Cut-Off?
Cut-Off Table
Score
Total TTD -
Applications
Booked
Expected
Bads
Expected
Goods
Interval
Bad Rate G:B Odds TTD Above
Approval
Rate
Bads
Above
Portfolio
Bad Rate
170 1,180 97 1,083 8.2% 11.2 51,375 65.9% 2,256 4.4%
171 1,198 95 1,103 8.0% 11.6 50,194 64.4% 2,159 4.3%
172 1,214 94 1,120 7.7% 12.0 48,996 62.8% 2,064 4.2%
173 1,228 92 1,137 7.5% 12.4 47,782 61.3% 1,970 4.1%
174 1,241 90 1,151 7.2% 12.8 46,554 59.7% 1,879 4.0%
175 1,251 88 1,163 7.0% 13.2 45,314 58.1% 1,789 3.9%
176 1,259 86 1,174 6.8% 13.7 44,063 56.5% 1,701 3.9%
177 1,266 83 1,182 6.6% 14.2 42,803 54.9% 1,615 3.8%
178 1,270 81 1,189 6.4% 14.7 41,538 53.3% 1,532 3.7%
179 1,272 78 1,194 6.2% 15.2 40,268 51.6% 1,451 3.6%
180 1,272 75 1,197 5.9% 16.0 38,996 50.0% 1,373 3.5%
181 1,270 73 1,196 5.8% 16.3 37,724 48.4% 1,298 3.4%
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0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
0.5% 0.7% 0.8% 1.1% 1.5% 2.0% 2.6% 3.4% 4.2% 5.1% 6.0% 6.7% 7.3% 7.6% 7.8%
ApprovalRate
Portfolio Bad Rate
Strategy Curve
New:
Approval Rate: 56%
Bad Rate: 3.9%
New:
Approval Rate: 78.2%
Bad Rate: 5.2%
Strategy CurveMaintain Approval Rate
Current:
Approval Rate: 56%
Bad Rate: 5.2%
Setting the Cut-Off
As a result of the new scorecard we have many options, amongst them are
But which is the best option?
Booking 22% more of the incoming applications but having the same bad rate
Reducing the bad rate by 1.3 percentage points but still booking 56% of applications
Or Is it something else?
Strategy Criteria Approval Rate Bad Rate
Current 56.0% 5.2%
Strategy 1 Same Approval Rate 56.0% 3.9%
Strategy 2 Same Bad Rate 78.2% 5.2%
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Profitability
This brings us back to the first question
What is the target for the cut-off and the overall aim of business?
In most cases the business target is to maximise profitability
By balancing Risk and Reward the goal is:
Reward (revenue) and Risk (losses) BREAK EVEN POINT
Maximum Profit
Setting Cut-Off-Application Scores
Setting the Cut-Off based on maintaining approval or portfolio bad rate is
straightforward but difficult to optimise:
Still reject profitable business
or
Accept unprofitable business
The answer is to correctly balance Risk and Reward!But what does this mean?
Optimise profitability by use of:
Profitability Analysis
Modeling
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Profitability
Main Topics
Cut Off Table
Cut Off Objectives
Profitability
Profitability Considerations
Practical Implications
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Profitability
The principles are straightforward:
In correctly developed scores we have two categories of accounts:
Goods
Bads
Each individual score has an associated probability that an applicant, if
booked, will become Bad
Therefore if we know
The Reward from a Good
AND The Risk from a Bad
We can use this information to decide on the cut-off
Setting The Cut-OffProfitability
Steps:
Use Bad Definition to create Profit & Loss Accounts for the two sub-
portfolios
Portfolio of Good Accounts
Portfolio of Bad Accounts
Find the Profit and Loss for each at the account level
Use resulting Good/Bad ratio to set score cut-off
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Setting The Cut-OffProfitability
Required Information
Either:
All variables in Profit & Loss accounts calculated on an account by account
basis
Or:
Portfolio Information for all variables
and
Flow Rates and Delinquent Balances
Profit & Loss StatementGood Bad
Gross Interest Revenue 27,205,678 490,000
Cost of Funds 7,773,051 140,000
Net Interest Revenue 19,432,627 350,000
Fees 2,880,000 90,000
Interchange Income 4,760,000 190,000
Total Card Income 27,072,627 630,000
Marketing Costs 4,800,000 200,000
Acquisition Cost 2,400,000 100,000
Operating Expense
Premises 1,350,000 18,000Telecomms 220,000 12,000
Systems etc 420,000 10,000
Customer Service Costs 5,538,000 95,345
Credit Collection Expense 300,500 276,000
Total Expense 15,028,500 711,345
Credit Losses 4,990,370
Fraud Losses 2,332,800 97,200
Total Profits before Tax 9,711,327 -5,168,915
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Profit & Loss StatementGood Bad
Gross Interest Revenue 27,205,678 490,000
Cost of Funds 7,773,051 140,000
Net Interest Revenue 19,432,627 350,000
Fees 2,880,000 90,000
Interchange Income 4,760,000 190,000
Total Card Income 27,072,627 630,000
Marketing Costs 4,800,000 200,000
Acquisition Cost 2,400,000 100,000
Operating Expense
Premises 1,350,000 18,000
Telecomms 220,000 12,000
Systems etc 420,000 10,000
Customer Service Costs 5,538,000 95,345
Credit Collection Expense 300,500 276,000
Total Expense 15,028,500 711,345
Credit Losses 4,990,370
Fraud Losses 2,332,800 97,200
Total Profits before Tax 9,711,327 -5,168,915
Accountsdesignated asGood in Scoredevelopment
Profit & Loss StatementGood Bad
Gross Interest Revenue 27,205,678 490,000
Cost of Funds 7,773,051 140,000
Net Interest Revenue 19,432,627 350,000
Fees 2,880,000 90,000
Interchange Income 4,760,000 190,000
Total Card Income 27,072,627 630,000
Marketing Costs 4,800,000 200,000
Acquisition Cost 2,400,000 100,000
Operating Expense
Premises 1,350,000 18,000Telecomms 220,000 12,000
Systems etc 420,000 10,000
Customer Service Costs 5,538,000 95,345
Credit Collection Expense 300,500 276,000
Total Expense 15,028,500 711,345
Credit Losses 4,990,370
Fraud Losses 2,332,800 97,200
Total Profits before Tax 9,711,327 -5,168,915
Accounts
designated as
Bad in Score
development
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Profit & Loss Statement Account LevelGood Bad
Gross Interest Revenue 283.4 122.5
Cost of Funds 81.0 35.0
Net Interest Revenue 202.4 87.5
Fees 30.0 22.5
Interchange Income 49.6 47.5
Total Card Income 282.0 157.5
Marketing Costs 50.0 50.0
Acquisition Cost 25.0 25.0
Operating Expense
Premises 14.1 4.5
Telecomms 2.3 3.0
Systems etc 4.4 2.5
Customer Service Costs 57.7 23.8
Credit Collection Expense 3.1 69.0
Total Expense 156.5 177.8
Credit Losses 0.0 1247.6
Fraud Losses 24.3 24.3
Total Profits before Tax 101.2 -1,292.20
Cut-Off Set at Score Yielding
12.8 Goods:Bad Odds
1,292.2/101.2 = 12.8
At the score equivalent to Good:Bad Odds of 12.8:1 it is breakeven
At Odds below 12.8:1 bookings are unprofitable
Above Odds of 12.8:1 bookings are profitable
At Score Range Level
Score
Estimated Revenue
From
Goods
Loss From
Bads
Net Profit
At ScoreTotal TTD Goods Bads Bad Rate G:B Odds
169 1,161 1,062 99 8.5% 10.8 107,474 128,130 -20,655
170 1,180 1,083 97 8.2% 11.2 109,600 125,541 -15,942
171 1,198 1,103 95 7.9% 11.6 111,624 122,953 -11,329
172 1,214 1,120 94 7.7% 12 113,344 121,659 -8,315
173 1,228 1,136 92 7.5% 12.4 114,963 119,070 -4,107
174 1,241 1,151 90 7.3% 12.8 116,481 116,482 0
175 1,251 1,163 88 7.0% 13.2 117,696 113,893 3,802
176 1,259 1,173 86 6.8% 13.7 118,708 111,305 7,403
177 1,266 1,183 83 6.6% 14.2 119,720 107,422 12,298
178 1,270 1,189 81 6.4% 14.7 120,327 104,833 15,493
179 1,272 1,194 78 6.1% 15.2 120,833 100,951 19,882
180 1,272 1,197 75 5.9% 16 121,136 97,068 24,068
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Approving only above Good:Bad Odds of 12.8:1 yields the Maximum Total Profit
At Odds below 12.8:1 the portfolio is less profitable
Above Odds of 12.8:1 the portfolio is less profitable
At Portfolio Level
Score T TD AboveApproval
Rate
Goods
Above
Bads
Above
Portfolio
Bad Rate
Revenue
From
Goods
Loss From
BadsTotal Profit
169 52,536 67.5% 50,180 2,356 4.5% 5,078,216 3,049,229 2,028,987
170 51,375 66.0% 49,118 2,257 4.4% 4,970,742 2,921,100 2,049,642
171 50,195 64.5% 48,035 2,160 4.3% 4,861,142 2,795,558 2,065,584
172 48,997 62.9% 46,932 2,065 4.2% 4,749,518 2,672,606 2,076,913
173 47,783 61.3% 45,812 1,971 4.1% 4,636,174 2,550,947 2,085,227
174 46,555 59.7% 44,676 1,879 4.0% 4,521,212 2,431,877 2,089,335
175 45,314 58.1% 43,525 1,789 3.9% 4,404,730 2,315,396 2,089,334
176 44,063 56.5% 42,362 1,701 3.9% 4,287,034 2,201,502 2,085,532177 42,804 54.9% 41,189 1,615 3.8% 4,168,327 2,090,198 2,078,129
178 41,538 53.3% 40,006 1,532 3.7% 4,048,607 1,982,776 2,065,832
179 40,268 51.6% 38,817 1,451 3.6% 3,928,280 1,877,942 2,050,338
180 38,996 50.0% 37,623 1,373 3.5% 3,807,448 1,776,992 2,030,456
-1000000
-500000
0
500000
1000000
1500000
2000000
2500000
107 117 127 137 147 157 167 177 187 197 207 217 227 237 247
Total
Profit
Score
Portfolio Profit
Score 174
At Portfolio Level
So is it possible to set the best cut-off without considering profitability?
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Cut-Off Table
Score TTD AboveApproval
RateG:B Odds Bads Above
Portfolio
Bad RateTotal Profit
161 60,954 78.2% 8.2 3,174 5.2% 1,739,263
174 46,554 59.7% 12.8 1,879 4.0% 2,089,335
176 44,063 56.5% 13.7 1,701 3.9% 2,085,532
Scenarios
Market ShareIncrease
Reduce Losses
Profitability Considerations
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Main Topics
Cut Off Table
Cut Off Objectives
Profitability
Profitability Considerations
Practical Implications
ProfitabilityIs it Easy?
Risk is easy...
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Up to 139 140 - 149 150 - 159 160 - 169 170 - 179 180 - 189 183 - 189 190 - 199 200 - 209 210+Application Score
Ever 90+ Bad Rate
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ProfitabilityIs it Easy?
Product TypeBank PoliciesApproval Rate
Delinquency LevelCollections
Frauds MarketingTerms &
Conditions
Existing
Customers
Cross SellNew
ClientsLimits
UsageAttrition
Account Maintenance
ProfitabilityIs it Easy?
Profitability is not - reality!
735
689
531491
530
427 389366
342309
0
100
200
300
400
500
600
700
800
Up to 139 140 - 149 150 - 159 160 - 169 170 - 179 180 - 189 183 - 189 190 - 199 200 - 209 210+
Application Score
Average Total Revenue by Application ScoreCredit Cards
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ProfitabilityIs it Easy?
Profitability is not - reality!
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
0
100
200
300
400
500
600
700
800
900
1000
Up to 139 140 - 149 150 - 159 160 - 169 170 - 179 180 - 189 183 - 189 190 - 199 200 - 209 210+
%
Inactive
AverageBalance
Score
Inactivity Rate and Average BalanceCredit Cards
Average Balance% Inactive
ProfitabilityIs it Easy?
Profitability is not - reality!
7,164
3,340
1,632
830
0
2,000
4,000
6,000
8,000
10,000
12,000
96 48 24 12Tenor
Instalment Interest Income By TenorLoans Portfolio
Gross Interest Income
Net Interest Income
CoF
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Key Questions
Over What Period do you consider Costs and Revenues?
For Tenor Loans, actual Loan Durations are easy to calculate
For Revolving Loans how long should be considered?
Profitability over 3 or 5 years will be very different to 20 years!!
Many Credit Cards will have active life of 20+ years
Key Questions
What is the Real Value of a Customer?
Should we consider Renewals?
How should we consider the propensity of a customer to desire further
products in the future?
Handling of these questions greatly affects the cut-off decision Profitabilityrenewals, multiple products and greater time period
Type of Applicants we want to approve
Young applicants have greatest potential for growth
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Cut-Off Strategy
Main Topics
Cut Off Table
Cut Off Objectives
Profitability
Profitability Considerations
Practical Implications
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Single Score Cut-Off Strategy
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
1.6%
1.8%
107 117 127 137 147 157 167 177 187 197 207 217 227 237 247
PercentofPopulation
Application Score
Score Distribution
AcceptReject
Multiple Score Cut-Off Strategy
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
1.6%
1.8%
107 117 127 137 147 157 167 177 187 197 207 217 227 237 247
PercentofPopulation
Application Score
Score Distribution
Reject AcceptGrey Area
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Multiple Score Cut-Off Strategy
In the Grey Area customers are referred for additional underwriting
It generally shows a Lack of Confidence in Score
It can make Sceptics more comfortable
Can be useful as a temporary measure when the applicant distribution or
performance is not known for instance:
Generic scorecard
- New Products
- New Sources
Multiple Score Cut-Off Strategy
Considerations to be taken into account with this strategy are:
What additional criteria are being considered?
Are they already in the scorecard?
Is it judgmental or can these be converted in to rules?
Can underwriters make a better decision than the score?
Can it be appropriately tracked and monitored?
Are there comprehensive reject and approval codes?
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0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Up to 139 140 - 149 150 - 159 160 - 169 170 - 179 180 - 189 183 - 189 190 - 199 200 - 209 210+
BadR
ate
Score Ranges
Probability of Default
Cut Off
Implications
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Up to 139 140 - 149 150 - 159 160 - 169 170 - 179 180 - 189 183 - 189 190 - 199 200 - 209 210+
BadR
ate
Score Ranges
Probability of Default
Cut Off
Implications
Low Sides PerformanceGrey Area objectives
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Implications
Significant Profitability Implications:
Your cut-off strategy effects your populations of customers
Depending on the score type
Attrition
Risk
Usage, etc.
The score cut-off will impact
Balances
Delinquency Risk
Ultimately, each score cut-off will impact your Profitability!!
Additional Aspects
1. Complicated Structures of 2 or 3+ Scores
2. Risk Based Pricing
3. Limits
4. Macro Environment
5. Basel II RequirementsPDE, LGD, EAD
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Thank you!!