Leveraging Data Through Optimisation
Neill Crossley
Consulting Director, Analytic Solutions
FICO
16 November, 2010
Confidential. This presentation is provided for the recipient only and cannot
be reproduced or shared without Fair Isaac Corporation's express consent.
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© 2010 Fair Isaac Corporation.
Agenda
» Beyond Basel II - Optimisation
» Optimisation??
» FICO Decision Modelling & Optimisation
» Latest DM&O Developments
» What’s Next?
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© 2010 Fair Isaac Corporation. Confidential.
© 2010 Fair Isaac Corporation. Confidential.
Beyond Basel II - Optimisation
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Basel II Analytic Adoption Curve
Many of you will have gone through this process
Use Test
% ADOPTION
Stress Testing
Model
Development
Independent
Validation
Discovery
TIME
Decision to adopt Basel
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IRB Approval
FICO Connected Decisions
Manage Strategies and Make Connected Decisions Across Products and Lifecycle
Decision Management Applications
Marketing
Originations
Customer
Management
Collections &
Recovery
Basel 2 Calculation Platform
Analytic Platform
Other
Decision Management Tools
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© 2010
Fraud
Using Basel II Parameters
to improve business decisions
PD
Basel II Infrastructure
EAD
LGD
Provides Framework for Risk Adjusted
Capital and Profit Calculations
Optimise Business Decisions
Strategic
Capital
Customer
Loan Amount
Incorporate Other Factors:
Economic Changes
Stress Tests
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Optimisation??
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Optimisation
Optimisation
Optimisation
Optimisation
Optimization
Optimization
Optimisation
Optimisation
Optimisation
Optimization
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© 2010
Optimization
Optimisation??
Dictionary
Enhance Effectiveness
Make Something Function at its best
In Mathematics & Operations Research
Optimization, or mathematical programming, refers
to choosing the best element from some set of
available alternatives.
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FICO - What is Optimization?
Optimization is a mathematical process of finding the “best”
decision for a given business problem
By "best" we usually mean highest profit, or lowest cost, within a
defined set of constraints (= restrictions on possible values)
Objective Function
Constraints
Decision Variables
Data
Algorithm
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FICO Decision Modelling & Optimization
Key concepts
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Summary
Decision Modelling & Optimisation
is about developing better decision strategies
Using an Open Framework & Methodology
Refined on over 100+ projects
That builds on existing Scores & Systems
Focused on Business Goals & Constraints
Provides Business Insight & Understanding
With proven Business Benefits
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Proven Development Methodology
Provides Decision Making and Learning Environment
INPUTS
Customer & Bureau Data
Segmentations & Scores
Product Metrics
Design
Framework
Accelerated
Learning
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© 2010 Fair Isaac Corporation. Confidential.
Establish mathematical
relationships between Actions,
Reactions and Profitability
Optimisation
Software
DEPLOYMENT
Engineer final strategy and
deploy challengers as
Decision Trees or Rule Sets
DECISION
MODELING
Reporting &
Analysis
SIMULATION &
OPTIMISATION
Identify best strategy
scenarios subject to
multiple business goals,
constraints and forecasts
Decision Model Design
Provides A Complete Profit Framework
Inputs
Decisions
Predictions
/ Outcomes
Objectives
Offer Take Up
Application
Data
Early
Repayment
Who to Accept
Bad / Chargeoff
Loan Amount
Time to
Credit Bureau
Data
Loan
Requested
Time to
Regulatory
Capital
© 2010 Fair Isaac Corporation. Confidential.
Profit
Loss
Cost
early-repay
charge-off
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Revenue
Subject To..
Goals &
Constraints
Economic
Scenario
Key Decision Modelling Feature
Capture the effect of different decisions on different segments
Action Effect Models
Action
Offer
#1
Customer
Credit Card
£1000 Limit Offer
Offer
#2
Free Income = £100
Risk Score = 650
CB Balances = £2,250
Segment = D
Credit Card
£3000 Limit Offer
Offer
#3
Credit Card
£7000 Limit Offer
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© 2010 Fair Isaac Corporation. Confidential.
Reaction
P (Take Up) = 40%
P (Bad) = 5.5%
E(Revenue) = £100
E(Loss) = £55
E(Profit) = £45
P (Take Up) = 80%
P (Bad) = 6.0%
E(Revenue) = £225
E(Loss) = £160
E(Profit) = £65
P (Take Up) = 83%
P (Bad) = 8.0%
E(Revenue) = £400
E(Loss) = £450
E(Profit) = £-50
Simulation & Optimization
Compare different scenarios to current actions
EFFICIENT FRONTIER
Profit v Loss for Different Levels of Risk-Based Pricing
STANDARDIZED RELATIVE TO BASELINE
225%
Profit per Application
200%
175%
150%
125%
100%
Baseline
75%
50%
60%
70%
80%
90%
100%
110%
Loss per Application
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© 2010 Fair Isaac Corporation. Confidential.
120%
130%
140%
Simulation & Optimization
Compare different scenarios to current actions
EFFICIENT FRONTIER
Profit v Loss for Different Levels of Risk-Based Pricing
STANDARDIZED RELATIVE TO BASELINE
225%
Profit per Application
200%
175%
150%
125%
Vary losses where
Non Std Pricing
< 28% Accepts
100%
Baseline
75%
50%
60%
70%
80%
90%
100%
110%
Loss per Application
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© 2010 Fair Isaac Corporation. Confidential.
120%
130%
140%
Simulation & Optimization
Compare different scenarios to current actions
EFFICIENT FRONTIER
Profit v Loss for Different Levels of Risk-Based Pricing
STANDARDIZED RELATIVE TO BASELINE
225%
Vary losses where
RBP < 33%
Profit per Application
200%
175%
150%
125%
Vary losses where
RBP < 28%
100%
Baseline
75%
50%
60%
70%
80%
90%
100%
110%
Loss per Application
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© 2010 Fair Isaac Corporation. Confidential.
120%
130%
140%
Simulation & Optimization
Compare different scenarios to current actions
EFFICIENT FRONTIER
Profit v Loss for Different Levels of Risk-Based Pricing
STANDARDIZED RELATIVE TO BASELINE
225%
Profit per Application
200%
175%
150%
125%
Vary losses where
RBP < 28%
100%
Baseline
75%
50%
60%
70%
80%
90%
100%
110%
Loss per Application
20
Vary losses
where
RBP < 28%
(Stressed)
© 2010 Fair Isaac Corporation. Confidential.
120%
130%
140%
Things to think about …..
if you’re considering using an DM&O approach
You may be more ready than you think!
Data:
» Breadth of data is important – range of different actions
» If you’ve run challenger strategies then great
» Ensure you are capturing relevant data – non financial?
» Have range of techniques to help make most of data
» Or as 1st Phase we can help design learning strategies
Business Problem:
» Focus on a current business pain or opportunity
» Optimisation can actually help with new regulations
» Work with Finance to agree Profit metrics
Systems:
» Don’t have to be FICO or the latest versions – although it helps
» Ability to champion/challenge and deploy rules / trees
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© 2010 Fair Isaac Corporation. Confidential.
Latest Decision Modelling & Optimisation Developments
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Credit Line Optimization Starter Kit
The Power of Credit Line Optimization –
Now Available in TRIAD 8.5 !
Credit Line Optimization Starter Kit is also
available for TRIAD versions: 8.1.2, 8.2.2,
8.3 and 8.4
Take your strategies to the next level of
performance with FICO’s Decision Modeling
& Optimization capabilities embedded in a
Credit Line Optimization Application
» Make the best use of limited exposure
» Find profitable customers while limiting
losses, with precision analytics
» Configure to your portfolio and business
constraints
» Tap into FICO’s best practices for optimizing
credit lines
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© 2010 Fair Isaac Corporation. Confidential.
Efficient Frontier
Assess Impact of Losses with efficient frontier report
This efficient frontier allows us to understand the trade-offs
between Loss and Profit
Average Incremental Profit
per Account
£10.00
Unconstrained
£7.50
£5.00
Resource
Constrained
Treatments
£2.50
£0
£85
£86
£87
-£2.50
Baseline
Strategy
-£5.00
Loss per Account
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£88
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£89
Efficient Frontier
Assess Impact of Collection Expenses
This efficient frontier allows us to understand the trade-offs
between Collection Expenses and Profit
Significant profit improvement can be obtained by maintaining (or
decreasing) collection expenses
Average Incremental Profit
per Account
£8.00
£7.00
Unconstrained
£6.00
£5.00
Resource
Constrained
Treatments
£4.00
£3.00
£2.00
Baseline
£1.00
Strategy
£0.00
£1.00
£1.50
£2.00
Expense per Account
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£2.50
£3.00
Loan Modification
Decision Modelling & Optimisation
Inputs
FICO® Score
Loan Behavior:
Delinquency Cycle,
Time-on-books, relationship
indicators
Change in Monthly
Payment and LTV
Through Loan
Modification*
Modifications
Predictions
Business Metrics
Objective
P(Redefault)
Property: LTV, HPI, BPO
P(Self-cure)
Demographic: State/MSA,
owner-occupied
Time to Foreclosure/REO
Cost of Liquidation,
e.g., Short Sale,
Foreclosure, etc.
NPV
Future Value of
Home
Historical changes in HPI
Economic Forecast
*Changes are made via interest rate reduction, term extension and principal forbearance
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Debt Consolidation: Real Time
Real time Optimization Problem
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Debt Consolidation: Dashboard
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Debt Consolidation: Data
Data for the individual Customer
Credit Card B — owe $1000
Annual Interest 15%
Credit Card C — owe $5000
Annual Interest 17.5%
Credit Card A — owe $2000
Annual Interest 12.5%
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Debt Consolidation: Customer’s Goals
Objectives for the Customer
» Reduce monthly payment
» Shorten repayment period
» Reduce Closing costs
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Debt Consolidation: Analytics
Analytic Functions
» Ability to Repay
» Response functions
» Competition Data
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Debt Consolidation: Rules
Rules for generation
of eligible products
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Debt Consolidation: Eligible Products
Eligible products
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Debt Consolidation: Decisions
» Optimal Solution
» Show also optimal solution
for the customer
» Negotiation tool
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Decision Model Design - Customer Level
High Level Design
OD
Revenue
Profit
Loss
CC
Profit
Customer Limits
Free
Income
Revenue
Loss
Total
1. OD, CC, PL, MG
2. OD, CC, PL, MG
Profit
PL
Revenue
3. OD, CC, PL, MG
Profit
4. ............................
Loss
MG
Revenue
Profit
Loss
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© 2010 Fair Isaac Corporation. Confidential.
The Retail Action Manager from FICO™
Rules Engine
Prediction Engine
Optimization Engine
Deliver consistent and
precise messages across
the enterprise
Know which products each
consumer is most likely to
buy, and when
Achieve optimal results
while managing business
constraints
Test-Learn-Adapt
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FICO
Retail Client
Client Data
Retail Action
Reporting
PIM
Manager
EDW
Datamart
Prediction Engine
3rd Party
Campaign
Optimization
Engine
Campaign
Business Rules
Customized Product Offers
Campaign
Management
Test-Learn-Adapt
Purchases
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2010 Fair Isaac Corporation. Confidential.
Campaign
Optimisation is starting to hit the news!
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What’s Next?
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© 2010 Fair Isaac Corporation. Confidential.
FICO Technology & Innovation
Methodology Innovation
» Causal Modelling – Enhanced Action Effect Assessments
» Rapid Development & Roll Out Approaches
» Methodology Transfer Projects
Software Innovation (already in place)
» Industry Leading solvers – Xpress Optimisation Suite
» Patented Algorithms & Heuristics
» Developer & Business User Interfaces
Software Innovation (already used in R&D)
» Optimised Decision Tree Output
» Interactive Decision Model Design Interface
» Additional Optimisation Frameworks – Xpress based
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Q&A
THANK YOU
Neill Crossley
16th November, 2010
Confidential. This presentation is provided for the recipient only and cannot
be reproduced or shared without Fair Isaac Corporation's express consent.
41
© 2010 Fair Isaac Corporation.
FICO Optimization Software Solutions Overview
Xpress - MP
Decision Optimizer
Suite of Flexible Optimization Tools
Financial Services Focused Packaged
Software and Methodology
Flexibility
Solver Power
Solver Speed
Ease of Use
Interconnectivity
Software
Model Development
Interface
♦♦♦♦♦
♦♦♦♦♦
♦♦♦♦♦
♦♦♦
♦♦♦♦
Professional
Services
Custom Developments
Flexibility
Solver Power
Solver Speed
Ease of Use
Interconnectivity
Software
♦♦♦
♦♦♦♦
♦♦♦
♦♦♦♦♦
♦♦♦
Professional Services
Design Interface &
Scenario Interface
Custom Strategy
Developments
Integrated OLAP
Reporting
Custom Pre Configured
Software Developments
Xpress Solvers (LP) +
other Algorithms
Methodology Transfer –
Detailed and Quick Start
options
Software Training
Range of Solvers
Custom User Interface
Developer
Sample Client Results
Deployment APIs
Software Training
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»©
2009Fair
FairIsaac
IsaacCorporation.
Corporation.Confidential.
Confidential.