the originations imperative

Confidential. This presentation is provided for the recipient only and cannot be reproduced or shared without Fair Isaac Corporation's express consent.© 2010 Fair Isaac Corporation. 1

The Originations ImperativeOrganic Growth by attracting New Customers

Daniel Melo Director Pre Sales [email protected]

16 November, 2010

mailto:[email protected]

© 2010 Fair Isaac Corporation. Confidential.2

Originations: path for growth

Many “leaks” in the Portfolio!Everybody drinks your beer...

With few sources of replenishment...

Voluntary AttritionCollectionsInactiveCompetitionCapital Requirements

BuyOriginations


Originations: The New Credit Consumer

» There is a new client around the block

» With different origination needs» Traditional Branch, not much credit appetite, no appetite for consumer

credit, can wait decisions, prefers papers and documents;» Normal Semi virtual, with credit needs but careful, likes fast decisions,

accepts virtual contracts;» Webbie Branch? What is this?, consumer above all, love (and

sometimes do only know) plastic cards, not careful, demands real time decisions, paperless;

» Emerging no previous bank experience, uneducated regarding product characteristics, insecure when decisions delayed, prefers papers, documents and personal attention;

» ..... » Keen for price and service levels» Overwhelmed with many different banking and credit proposals» “Good”/low risk customers? Focus of everybody!


Originations: The New Credit Market

» Regulatory issues» Capital requirements and sometimes “cap” over credit limits» Increased emphasis on alignment of provisions to risk appetite» Demanding more customer protection, more transparency» Local regulation versus Basel versus “the world” demanding more control

» Internal Bank issues» Mergers / “forced marriages” involving weak banks taken over by more

stable entities – legacy systems or multiple operating jurisdictions result» Emphasis on strong Governance in wake of banking crisis – increased

scrutiny on Risk avoid same mistakes…» Tensions between desire to grow and compete successfully, reality of highly

cautious approach to risk and capital allocation» As attention refocuses on originations, operational and resource issues can

arise as the market resets the neglected element?


Originations in the Resetting Economy

» Multiple decision moment / Not a silo decision:» Credit Risk evaluation» Fraud Risk evaluation for First and Third Party Fraud» Return on Allocated Capital» Price definition based on Risk (any evaluated risk)» Commercial Offer (Up Selling / Cross Selling)

» Pressure for fast decisions (internal/external)» Multiple sales points to integrate

» Traditional face –to-face interviews and paper applications» Internet and Mobile Channels increasingly popular» Applications without paper trail can be riskier due to lack of data

proof

» Adapt decisions to a fast market change» Reshape on the fly the offer, risk decision/appetite.


Key Concerns within the Originations Function

Location and geographic footprint strategy?

Target prospect / customer?

Manage marketing campaigns?

Tailor offer / message / incentive?

Tier pricing? Manage promotional

expense and effect? Timing of campaigns?

Accept/reject? Deter fraud? Verify customer data? Anti-money laundering

compliance? Tier pricing? Initial line? Loan-to-

value? Collateral value? Cross-sell? Upsell / downsell /offer

alternative?

Manage payments? Promote usage? Manage exposure? Collection & recoveries? Collateral tracking? Mitigate risk? Deter fraud? Marketing

communications? Adjust pricing? Service level? Cross-sell? Stress testing?

Precision Marketing Originations Managing

CustomersExternalData

InternalData

D A

T A

D A

T A

Client Prospects Client CustomersActionsReactions


Data Entry and Information Capture Has Impact Across Originations Process and Beyond

» Tension: more information requested, less likely customer will complete application » Adapt for each customer type offer/proposal segmentation will

drive commercial offer» Balance between Risk x Marketing x Sales x Finance» “Short-cuts” where the customer is already well-known to you

» Application data needed to perform:» Credit review» Fraud evaluation» Activation probability» Marketing / Commercial offer review

» Yes, external data is usable and important» Conform with local/EU regulations in Data Protection

» Yes, internal data is usable and perhaps most important» Insights from existing credit, liability relationships with the customer


Minimum Mandatory Information — How Do You Know?

» Information is typically considered mandatory if it: » Is legally required to open an account and/or satisfy “know the

customer” and ID protection requirements» Example: Mailing address, date of birth, vehicle ID number

» Is legally required to obtain a credit report» Example: Evidence of customer consent

» Is needed to perform the multiple decisions » Example: Income - reviewed from fraud, credit, marketing, other

perspectives

» Is required for downstream contact» Example: Telephone numbers at home and business

» Would invalidate the statistical correctness of a score calculation if too many elements were missing


What Can You Do to Control Fraud at Originations?

» Have reps observe application clues» Handwriting characteristics indicative of fraud rings» Abnormal inclusion or exclusion of detail (income = 10.000 vs. 10.023,15)» Unable to correctly spell occupation, other key words

» Implement a Rule and Decision Platform» Can routinize simple checks for repeated use of phone numbers, addresses, names» Can create unlimited, highly sophisticated rules and flexibility – highly scalable» Enables the bank to manage complete detection system by themselves» Must take care to avoid “training” fraudsters how to cheat through frequent update

» Fraud Consulting» Review policies and procedures across the life cycle» Help identifying most effective rules for originations fraud deterrence» Apply industry best practices

» Models» FICO builds models to detect First Party Fraud at application stage» A decision platform will allow other score cards or hot list to be called to improve the

intelligence and decision


Blocking Fraud: Analytics at Originations

New Customer Application

AccountProfile

Manual Review

CustomerProfile

» Optional

Application models can be stand-alone scorecards or include advanced capabilities that detect and address differences in channel

and product fraud trends

Data Includes:» Application» Credit Bureau» Existing Customer Master File» Linked Accounts» Hits on Hot lists/files

APP Model


Fraud Model Results

0

5

10

15

20

25

30

0 100 200 300 400 500 600 700 800 900 1000Score Cut Off

Fraud To Non-fraud Score SeparationPercent

While minimising

the false-positives

Advanced Analytics increases the concentration

of fraud relative to good transactions

at high score thresholds

While minimising

the false-negatives

Advanced Analytics decreases the concentration

of fraud relative to good transactions at

lower score thresholds

% Goods % Bads


Multi-Product and Counter-Offer Strategies Make Sense for Many Full Service Retail Creditors

Current Account/ Checking

Debit Card

Credit Card

Education Loan

Mortgage / HELOC

Overdraft Protection

Vehicle Loan

Customer

» Counter-offer makes sense if customer could qualify for a product other than the one requested» Up-sell — better product or

multi-product offer» Down-sell — lesser product or

product with more restrictive terms

» Counter-offer typically communicated in place of decline, but with same communication requirements

» Where multi-product lending is possible, may make sense to establish customer exposure and offer additional products beyond the one for which customer immediately applied


General Challenge to Create Competitive Advantage Magnified in Crunches

Keep your product offerings competitive

Adverse Selection: High risk applicants will respond to any product opportunity, while low risk applicants can discriminate between various credit opportunities

» High response rate is not always good news


Decision Management

Open Originations Platform

Bank DataHosts

Branch

Kiosks

Retail Stores

Flyers

WEB Offer

Data Normalization

Application Sources

ATM Offers

Dealers

Workflow, queues, manualhandling

Application Processing

Telephone

Online Banking

Management

ParametersReports

3rd Party Data


Competition, Technology Channel Proliferation


Risk-based Pricing: Business Goals

» Caveat: Risk-based Pricing may be subject to government restrictions including rate caps, fee caps, may need to meet “transparency” requirements

» Good Credit Quality Customers will expect lower costs, more attractive offers; Higher Risk Customers more accepting of high fees, high rates, less compelling products» Risk-based pricing can improve profitability » Enhance Revenue from Riskier accounts

» Enable approval of riskier customers based on risk-adjusted returns» Increase rates and fees to enhance revenue on high risk customers» Reduce losses (spark Positive Rejection)

» Encourage interest revenue from lower risk accounts» Increase activation and retention» Enhance customer relationships

» Small changes in price will yield larger changes in Profit


How Does Penalty Pricing Work?

» Event driven or criteria driven Penalty Pricing most common» Event: History of Multiple Delinquencies

» Example: Two times one cycle delinquent within a set period» Example: Once Two cycles delinquent

» Criteria: High Risk Originations Score

» In practice, ranges from: » The Simple - One defined “From” and “To” Price ( from 9 to 11%)» The Complex:

» Score driven ranges of increasing rates (low risk goes to 9% and all the way to high risk at 11%)

» Based on Score AND/OR Criteria

» Should be empirically derived, including test for Actual vs. Expected Payment Rates

» CAUTION: Penalty pricing under increasing regulatory scrutiny» CAUTION: Penalty pricing that is too onerous can become a self-

fulfilling prophecy of degraded performance


How Does Promotional Pricing Work ?

Many Approaches» Lower Risk = Lower Interest Rate at originations» Lower Risk = Lower Fee» Upgrades to gold products under same Fee (not a selling act, an

upgrade)» Upselling» Fee Waiver» Added Rewards Points» Time-restricted offer where rate varies after a fixed period» Behaviour-restricted offer where promotion award occurs when

customer makes specific purchases, maintains specific balances, etc.


Connected Decisions – Setting Up the Booked Account

Originations

Customer

Manag

emen

tCollections &

Recoveries

Marketi

ng

Fraud

Servic

e

Distribution

» Important to transfer information to the billing system master file that will» Enable customer contact» Permit ID verification» Satisfy legal requirements» Enable score and policy

tracking» Permit performance

capture to tie back to originations criteria

Customer


Originations in the Resetting Economy

» There is a new Originations need around the corner» Changes in Clients, Markets and Regulations

» Not just a Credit Risk decision anymore» Remove silos» Be proactive internally and externally» Maximize opportunity with the customer

» Control with flexibility» Fast adoption of changes with proper control and performance

following

» Do not wait for the call» Prepare now for the resetting economy

Confidential. This presentation is provided for the recipient only and cannot be reproduced or shared without Fair Isaac Corporation's express consent.© 2010 Fair Isaac Corporation. 22

THANK YOU

Daniel Melo Director Pre Sales [email protected]

16 November, 2010

mailto:[email protected]

the originations imperative

Documents

credit appetite

consumer credit

credit needs

risk decisionappetite

new credit consumerthere

originations functionlocation

real time decisions

new client