why lenders should focus on profitability, not first payment default
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Why Lenders Should Focus on Profitability, Not First Payment Default (FPD)Fall 2016
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Many Lenders Base Decisions on FPD> FPD = First Payment Default – the likelihood that a customer will
miss the due date for their first payment on a loan> Lenders assume that FPD is a reliable predictor of customers missing
future payments, too.> So they use to FPD to predict which accounts will turn out to be losses.> If the model predicts an FPD, the lender turns down that consumer.> To avoid loss, the lender rejects that consumer’s business.
FPD Limits Losses But Constrains Growth
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But FPD Turns Out to be Unreliable> Our analysis of business results from multiple lenders shows that FPD
predicts loss only about 50% of the time.
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A Better Strategy: Focus on Profitability> Make decisions based on
profitability, not FPD> Benefits:
– Open more accounts– Grow profits 20% or more– Avoid costly losses
> Fine-tune your data waterfallfor the mix of profitabilityand FPD that suits yourgrowth plans and risk model
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Case Study: Small-Dollar Loan Lender> WITHOUT DATA-DRIVEN INSIGHTS ABOUT PROFITABILITY
– Based lending decisions on FPD– FPD rate was low: only 9%– To achieve this low rate, accepted only 25% of applicants– Missed out on revenue from a large population of good accounts
> WITH DATA-DRIVEN INSIGHTS ABOUT PROFITABILITY– Switch to basing lending decisions on profitability, while controlling for FPD– FPD rate rose to 15%– Now able to accept nearly 70% of applicants– Profits go up nearly 50%
• Increase in profits more than compensates for increased FPD rate
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Our Mission at DSi
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Learn More
Get the FPD Solution Brief Get the FPD White Paper
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How Can DSi Help You?Craig Moore
SVP – Business [email protected]
(415) 842-7700 ext. 1