Fundamentals
Customer Management Best Practices
Liz Ruddick
Fair Isaac Advisors
FICO
© 2014 Fair Isaac Corporation. Confidential.
This presentation is provided for the recipient only and cannot be reproduced or shared without Fair Isaac Corporation’s express consent.
Agenda
►Customer
Management Functions
►Customer
vs. Account Emphasis
►Making
Decisions Actionable
► Data
► Scores
► High
Risk Recognition
►Exposure
Management
►Authorizations
►The
2
and Fraud
Tie to Collections and Recovery
© 2014 Fair Isaac Corporation. Confidential.
Key Concerns Within the Credit Customer
Lifecycle Framework
Data
Data
External
Data
Internal
Data
Precision
Marketing
Customer
Origination
Customer
Management
Location & geographic
footprint
Target prospect/
customer?
Manage marketing
campaigns?
Tailor offer/message/
incentive?
Tier pricing?
Manage promotional
expense and effect?
Timing/ frequency of
campaigns?
Accept/reject?
Deter fraud?
Verify customer ID?
Anti-money laundering?
Affordability/suitability?
Tier pricing?
Initial line?
Loan-to-value?
Collateral value?
Cross-sell?
Upsell/downsell/offer
alternative?
Promote usage?
Obtain payments?
Manage exposure?
Collateral tracking?
Mitigate risk?
Deter fraud?
Marketing
communications?
Adjust pricing?
Service level?
Cross-sell?
Stress testing?
Reactions
© 2014 Fair Isaac Corporation. Confidential.
Obtain payments?
Allocate resource?
Channel & contact
strategy?
Treatment strategy?
Debt placement?
Debt sale?
Agency strategy?
Collector skills?
Legal/insolvent/ repo
accounts?
Workflow? Incentives?
Actions
Client Prospects
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Customer
Collections
Client Customers
The Policy Focus on Managing Customers
► Account
management is a misnomer—customers
drive behavior
► Where
multiple product relationships exist, there is
often a Halo Effect
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► Customers
with multiple product relationships perform
better on each relationship, and more profitably in total
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► Type
of credit product and types of product
combinations held by the customer drive differences
in approach, represent opportunities for cross-selling
and revenue expansion
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© 2014 Fair Isaac Corporation. Confidential.
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Chief Challenges of CRM
Defining “Customer”
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Defining strategy
ownership
Agreeing
to “Bad” Definitions
Coordinating product
and customer issues
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Aggregating
Development Data
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© 2014 Fair Isaac Corporation. Confidential.
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Maintaining political
will to manage
the customer
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Customer Management Goals Alter Approach
Focus on Risk Minimization
► Restrictive
view toward exposure
► Tight control of authorizations, credit extension
► Tight, sometimes aggressive approach to collections
Focus on Expense Control
► Minimized
customer service approach
► Tight standards for staff—customer contacts
► Treatment approach is to minimize cost rather than to maximize payment
Focus on Profit Maximization
► Recognizes
ability to reward good customers while controlling bad
► Balanced approach to authorizations, credit extension
► Balanced approach to collections
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© 2014 Fair Isaac Corporation. Confidential.
Customer View Creates Value across the Enterprise
Risk Management
► Coincident
loss rates are 14% lower on average for North American
credit card issuers with customer views
Fraud Management
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► Using
application data in conjunction with transaction data
increases fraud detection rates by up to 25%
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Collections and Recovery
► Banks
can achieve greater than 10% improvements in collections
effectiveness by leveraging customer data across products
Marketing
► Using
customer level transaction data to target HELOC cross-sell
offers provides over 200% increase in net conversion rates
(response and approval)
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© 2014 Fair Isaac Corporation. Confidential.
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Key Terms in Customer Management
Monthly Billing Cycle and Cycle-Based Actions
► Assumes
that each month at a defined time, the institution will age the account and may
create a monthly billing statement
► Behavior scores are calculated during this monthly update
► If a statement is created, the lender may wish to incorporate specific statement
messages to targeted customers—includes both promotions and reminders
► Sets and communicates the next “due date” to the customer
Payment History
► Based
on whether payment is received before, on or after the due date,
history retained
► If payment has always been on time, an account is called “clean”
► If payment has sometimes been late, an account is called “dirty”
► A late payment is referred to as “delinquency”
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© 2014 Fair Isaac Corporation. Confidential.
Revolving Products Have More Options for Driving
Customer Treatment
► Revolving
products offer both bells and
whistles that are not available for
installment or fixed term products
► Credit
line management
► Fee and interest rate adjustments
► Promotional pricing
► Merchant promotions
► Revolving
products have transactions
► Purchases,
cash transactions provide extra
insight into customer behavior
► Authorizations strategy enables mid-cycle
control
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© 2014 Fair Isaac Corporation. Confidential.
Scoring Progression
Existing Accounts
Account Status
On-time
Delinquent
Late-stage Collections
Recovery
Behavior score
Custom collection score
FICO® Score
Specialty bureau or
custom scores
Bureau-based
recovery score
Custom recovery score
Transaction score
FICO® TRIAD®
Customer Manager
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FICO® Debt Manager™ solution
FICO® PlacementsPlus® service
FICO® Network
Primary Decision: Reduce Loss
Specialty Risk Assessment
Secondary Decision: Risk-Related
Revolving Credit: Additional Precision
© 2014 Fair Isaac Corporation. Confidential.
360° Customer View Leverages Internal and
External Data
Master File Data
Credit Bureau Data
► Information
► Record
from billing and posting
systems within your organization
► Record how the customer uses his
account(s) with you
Transaction Data
► Record
of individual account usage actions,
the pattern of which can be highly
predictive.
► Summaries of transactions create many of
the master file data fields
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© 2014 Fair Isaac Corporation. Confidential.
of individual consumer and their
interaction with multiple creditors
► Summarizing individual behavior against
cumulative obligations
► Full positive bureau reports include reports
of well-maintained payments and reports of
derogatory performance
► Negative only reports - only information
about customer late payments and defaults
Demographic Data
► Includes
information to use in skip
tracing should customer contact be lost
► Data to use in promotional marketing
campaigns, etc
Notion of “Transactions”
► A Transaction
is a time stamped record of an event
► Purchases/authorizations/settlements
► Payments
and payment reversals
► Cycle billing
► Collection activities
► Customer service records
► DDA debit and credit transactions
► Sorted
and merged transactions provide a complete time series history
► Characteristics
of transactions
► Transactions
are heterogeneous
► Transaction volumes can be enormous
► Transaction timing is irregular
► An opportunity to change the outcome—real time decisions and triggered actions
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© 2014 Fair Isaac Corporation. Confidential.
Transaction Data Elements
Who
► Account
How Much
number, name, cardholder
country
When
► Transaction
► Amount
Authentication
date and time
► PIN
verified, CVV, card present
Where
ISO Response Code
► Merchant
► Approve/decline/referral
location code, merchant
country code
What
► Merchant
ID and description, MCC,
transaction type
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© 2014 Fair Isaac Corporation. Confidential.
► Others—credit
limit, available credit
Behavior Risk Score
Usage:
Tells You:
Likelihood that an account will reach specified degree of delinquency (e.g., 60 days
delinquent, more than twice 30 days) within the performance period, often 6 months
from the date of scoring
Based On:
Analysis of masterfile data, sometimes supplemented by credit bureau or transaction
data
Decisions
Supported:
Reissue, authorizations, over limit, marketing communications, credit line
management, early-stage collections
Type Of Model/
Score:
Delivery:
Systems Used
Within:
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Customer management
Custom model built from analysis of user’s customer data or pooled model built from
analysis of data contributed by a closed user group. Highly robust.
Models embedded within account management software—scoring takes place on
demand and within batch cycles
FICO® TRIAD® Customer Manager, and other leading account management
software
© 2014 Fair Isaac Corporation. Confidential.
FICO® Scores
Usage:
Tells You:
Likelihood that a consumer will have an obligation reported on the credit bureau file
that becomes 90 or more days delinquent within 24 months from the score date
Based On:
Credit Bureau data
Decisions
Supported:
Contributes to all decisions across the customer credit lifecycle and in secondary
markets. Limitations of use on severely delinquent accounts (past the “bad”
standard)
Type Of Model/
Score:
Delivery:
Systems Used
Within:
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General risk prediction
General risk model built from analysis of national sample of credit bureau data
Classic or next generation FICO® Scores; Proprietary algorithms defined by FICO for
calculation by Credit Reporting Agencies (CRAs) on updated credit records, with
distribution through CRAs, subscription to FICO® PreScore® Service or FICO® Score
Delivery Service; Versions offered internationally
All credit, treasury and related systems
© 2014 Fair Isaac Corporation. Confidential.
Risk-Reward Trade-Off Must Address Revenue
Enhancement on Non-Delinquent Customers
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© 2014 Fair Isaac Corporation. Confidential.
Exposure Management
Exposure Management significantly impacts capital requirements
Individual Account Relationship
Multiple-Account Customer Relationship
► Credit
► Allocating
line increases encourage usage,
balance build and revenue for revolving
and line-based products
► Credit line decreases mitigate risk, reduce
contingent liability
exposure appropriately across
multiple accounts can improve profitability,
insure appropriate capital retention
Ability to pay/Affordability concerns make
exposure management including Debt to Income
and Loan to Value levels across the customer
relationship even more critical
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© 2014 Fair Isaac Corporation. Confidential.
Typical Risk-Based Credit Line Strategy
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© 2014 Fair Isaac Corporation. Confidential.
Overlimit Accounts Provide Opportunity for Action,
Should Coordinate with Authorizations Strategy
► For
revolving accounts, customers sometimes seek to complete transactions that
will take balances over the credit limit
► Authorization
strategy can approve, reject or refer the individual transaction for
review
► Approvals:
consider permanent coordinated adjustment of credit line, in real-time;
coordinate line increase with pricing review for greatest impact
► Rejections: consider more thorough risk review of overall customer exposure
► When
accounts are allowed to go over limit, collection treatments may then be
applied—if over limit collections volume grows, review authorizations strategy
► Coordinate
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credit authorizations with fraud authorizations
© 2014 Fair Isaac Corporation. Confidential.
Customer Management and Fraud Deterrence
► Organizations,
markets not targeting fraud become
the targets for transaction fraud
► Fraud
Scores generated while customer is at point of sale
trigger investigation of high fraud potential applications
► As with other transaction authorizations, result can be
transaction approval, transaction decline or transaction referral
► Referrals and rejections risk loss of future transactions/share
of wallet especially if based on false positives
► Referrals also have high cost in terms of both staff and
investigation
► Account take-over and fake ID fraud increasingly prevalent
► Information verification as key
► Increases
in “no contacts” in collection queues, early
defaults could indicate First Party Fraud
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© 2014 Fair Isaac Corporation. Confidential.
FICO® Falcon® Fraud Manager Scores
Usage:
Tells You:
Potential that an individual transaction is fraudulent
Based On:
Transaction data and profiles
Decisions
Supported:
Investigation or authorization of individual transactions after determination of fraud
potential
Type Of Model/
Score:
Delivery:
Systems Used
Within:
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Fraud detection and deterrence
Specialized neural net model built from analysis of transaction data contributed by a
closed user consortium and maintained by FICO
Delivered exclusively from FICO
Virtually all authorization and posting systems
© 2014 Fair Isaac Corporation. Confidential.
High Risk and Early Stage Delinquent Accounts
► Behavior
and transaction scores enable insight into
changing risk patterns
► High
risk accounts can be routed for pre-delinquent
treatment, risk mitigation actions taken
► Early
stage delinquency treatments typically
established through use of behavior scoring
► Later
stage delinquency treatments may require
custom collection scores, more operational focus
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© 2014 Fair Isaac Corporation. Confidential.
Preemptive Treatment: Customer Rehabilitation
Pre-Delinquency Calling of High Risk Customers
being tested and utilized more widely
Plusses
Minuses
► Customers
► For
see enterprise as helpful,
problem solving
► Higher risk customers given more time to
address budgeting, make arrangements to
forestall delinquency and other “harmful
consequences”
► Opportunity to educate less-experienced
consumers in good practices
► Opens potential for restructuring or
referring consumers for counseling
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© 2014 Fair Isaac Corporation. Confidential.
consumers already aware of risk
status, may cause panic and stimulate
insolvency and bankruptcy filing
Adaptive Control System Decision Tree:
Behavior Risk and Origination Score as Focus
Delinquency Level
0-29 DPD
30 - 59 DPD
< 3 mos
Time on Books
L
Balance Amount
L, M
Risk Score*
Collection Strategy
NC
If < 3 months on books, origination risk score
if > 3 months on books, behavior risk score
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© 2014 Fair Isaac Corporation. Confidential.
NC
60+ DPD
3+ mos
H
H
Strategy
1
L, M
H
Strategy Strategy
2
3
NC
< 3 mos
Fee
L
Any
L-H
NC
Strategy
4
3+ mos
Fee
L
Any
NC NC
L-H
Strategy
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Customers Payment Hierarchy Has Changed...
► Evidence
that payment hierarchy has evolved, making capture of payment
share increasingly difficult
Before
Now
► Creditors
using more detailed analytics and feedback to evaluate customers in context
► Earlier collections entry
► More consultative collection approach focused on problem-solving, payment alternatives
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© 2014 Fair Isaac Corporation. Confidential.
The Communication Channel Challenge
► Creditors
increasingly contacting customers on the
basis of their preferences and convenience
► Calls,
letters universal
► SMS text messaging, e-mail contact, e-statements,
contact with cell phones increasingly seen
► Customer opt in, coordination with originations process
creates clear customer consent
► Customer
service tone for problem resolution vs. for
quick call times
► Handling
distressed debtors
► Options to avoid being trapped inside a VRU
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© 2014 Fair Isaac Corporation. Confidential.
As Non-Competitive Product Offerings Can Create Adverse
Selection, Look What Happens in the Existing Portfolio
Keep your product offerings competitive
Adverse Retention: High risk applicants lack other
credit opportunities, while low risk applicants can
discriminate between various credit offers
High attrition and account dormancy should cause
review of product competitiveness
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© 2014 Fair Isaac Corporation. Confidential.
Thank You!
Liz Ruddick
lizruddick@fico.com
© 2014 Fair Isaac Corporation. 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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Liz Ruddick
lizruddick@fico.com
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© 2014 Fair Isaac Corporation. Confidential.