How To Improve Your Business

Transcription

1 Business Lending - Automated Scoring and Other Best Practices Sharon O Connor-Clarke Principal Consultant, Government FICO David Smith Lead Consultant, PreSales FICO

2 Welcome Housekeeping - Control panel on the right side of your screen displays your audio information. Provides a Questions pane for you to type/send us your questions during Q&A. You can send questions to us at any time during the presentation. Minimize the pane during the presentation: Click the double arrows icon top-left (circled) of the control panel. Need help? Call

3 Who is WebEquity? Leader in on-demand lending software 27 years serving financial institutions Over 750+ customers (De Novos - $50B in assets) Industry ICBA Preferred Service Provider NBA Endorsed Solution The WebEquity Advantage Single Solution Agriculture, Commercial & Industrial, Commercial Real Estate, Construction, Small Business, and more. Automates full lending life-cycle - Relationship Management, Credit Analysis, Credit Presentations, Decisioning, Risk Rating Models, Workflow, Portfolio Risk Management On-Demand cloud-based, fully-hosted solution, reduces IT burden, anytime access from anywhere Flexible Design - configure to fit your bank s processes

4 Survey Results Has your bank worked directly with FICO representatives in the past?

5 Survey Results How would you describe your concentration in small business lending in the next 12 to 18 months?

6 Survey Results Do you use FICO scoring today to decision small business loans?

7 Today s Speakers Sharon O Connor-Clarke Principal Consultant, Government FICO David Smith Lead Consultant, Pre-Sales FICO

8 Agenda Introduction Impact of Data and Analytics Vision and Execution Automation

9 Introduction Loan demand is down Financial institutions have tightened credit risk requirements

10 Definition of Small Business SMALL BUSINESS ADMINISTRATION DEFINITION OF SMALL BUSINESS DEFINITION OF SMALL BUSINESS The Official U.S. Definition: A small business is a US business that is independently owned and operated, is not dominant in its field of operation and can qualify under criteria concerning number of employees, average annual receipts or other criteria as outlined by the U.S. Small Business Administration (CFR Title 13, Part 121, as amended) Generally 500 or fewer employees A 42-page table provides clarification on acceptable size in average number of employees and average annual sales by industry category The FICO Analytic Definition of Small Business: A business with annual turnover of $8,000,000 to $10,000,000 Credit transactions creating exposures up to $750,000

11 Small Business Statistics According to the SBA, there are 27.5M businesses in the US 99.9% are businesses of < 500 employees Employ half of all US workers Creates 65% of all net new jobs As of Q2 2012,small businesses were tentatively optimistic* Q2 of 2012, small businesses reported a net difference of +37 percent on their future expectations for their financial condition, up 8 points from the previous quarter For the first time since late 2010, more small businesses (sales $100K <$10MM) reported an improvement in the financial condition of their company during the last 12 months than deteriorating financial condition Expectations to undertake capital expenditures and increase employment Minority and women owned businesses demonstrate a significant increase in proportion of self-employed business owners * Commercial Insights Commercial Spotlight May 2012 ABA Center for Commercial Lending & Business Banking aba.com Copyright 2012 American Bankers Association

12 Dynamic Economy Impacts Small Business As of Q3 2011, the U.S. economy grew for the fifth consecutive quarter, with real gross domestic product up 2 percent in the third quarter. Personal consumption, which makes up 70 percent of real GDP, increased at a 2.6 percent annual rate Recession officially ended 6/09 according to the National Bureau of Economic Research American Recovery and Reinvestment Act (ARRA) Stimulus to small business Added % to real GDP Projected employment increase of 1-2.1M jobs Banks have begun easing tight lending conditions Current lending remains tighter than pre-recession Loans < $1M totaled $695M in 2009 Small businesses borrow $1Trillion per year Less than half of small business loan applications are approved Small businesses are adding banking relationships 18 percent of small businesses reported actively adding banks over the last 12 months Response to lower fees Additional services Access to credit President urged Congress to pass a bill that would give a 10 percent tax credit to small businesses that create new jobs or increase wages this year. Venture and angel capital increase mid-2010 Expanding businesses outnumber contracting businesses for the first time since 2007 Expanding business at the root of job creation

13 Small Businesses Fail and Become Insolvent Bankruptcy filings Increased to 60,837 in 2009 Dropped to 56,282 in of 10 survive at least 2 years 50% survive at least 5 years 1/3 survive 10 years 1/4 survive 25 years Results are similar across industries Factors determining survival include Ample supply of capital Has employees Owner s education level Owner s reason for starting the business

14 And Yet, There is a Strong Case for SME Lending Benefits: Less penetration than in consumer lending segment Risk is inherently diversified Many small bets instead of a few large ones It s profitable 30% not unusual Not all lending-based Source: Barlow Research Associates relationship banking Lending opens the door to deeper relationships Small business owners wealth management McKinsey estimates of pretax financial services profit The business generates around 14% The owner generates another 12% And employees generate another 14% Small-business lending is up 14% year over year About $600 billion of small-business loans are outstanding, according to FDIC data The largest 1% of banks manage more than 40% of these loans.

15 What Solutions Exist? Analytics Modeling and Validation Optimization

16 High impact analytics without reinventing the wheel!

17 Execute on the Basics Data, data and more data Customer level data aggregation: business owners are consumers too Unique data sources: Multiple product assessment Attrition mitigation Total exposure Opportunity Basic analyses What are the drivers of profitability? Multiple levels: customer, line of business, product Analysis to include profit, revenue and risk Track performance metrics over time Discover where impacts occur now and are likely to occur in future Where does interchange rate show up in your calculations? Where does overdraft impact revenue? How does these changes effect revenue, risk and capital requirements? What do you look for in portfolio mix? What does your call center hear in terms of customer understanding and satisfaction?

18 Value of Data, Relative Source Importance Changes with Business Size Personal High Data Source Business Value Low Size of Company

19 Types of Credit Reports and Scores Used» Most lenders use both business and consumer credit reports» All combinations of generic scores» When customer scores used, generic scores are a variable in the custom score Courtesy of SBFE

20 Small Business Access to Credit Consumer financial instruments used to fund small business: Home equity lines and personal credit cards Decisioned using consumer credit bureau scores Predicts performance on consumer products Adequate for small dollar amounts with low risk Startups and new businesses have limited business trade line data Small business financial instruments used to fund small business: Business cards, lines, leases, loans, etc. Decisioned using small business specific models Contribution of consumer score and key variables Contribution of business trade line data Contribution of business financial trade line data

21 Discover Advanced Analytics Segmentation Segments driven by profit with rich profiles Include additional data sources, i.e., customer service calls, response profiles, demographics, non-traditional data sources Strategic exercise that leads to tactical execution Customer level analysis and action becomes important small business can shore up shrinking revenues in consumer portfolios Understand strategic levers Drive portfolio mix Modeling Validation and performance monitoring

22 Portfolio Level Segmentation Transform your business by quantifying the impact of regulations and understanding which strategies/segments require profit remediation Gain insights into other small business and consumer customer profiles and behaviors that generate profit Focus strategy changes on matching revenue generating strategy on those customers who are less sensitive to fees and higher pricing This allows you to Create intelligent strategies Develop relevant product innovation Refine descriptive and predictive analytics Accurately report KPIs Expand performance metrics used Creates sustained earnings growth!!

23 FICO Custom Modeling Solutions Modeling adoption services Variables creation using transaction data Advanced models Account/customer and/or transaction data Expert models 5-25% 10-25% Judgmental decisioning

24 Modeling and Validation Opportunity to develop custom if appropriate, but Be aware of the trade offs Single custom model vs. breadth of pooled models Validation and performance monitoring Pooled and generic models» Use scores, performance and attributes» Population shifts» Characteristic analysis Does the model work?» rank order, KS, divergence, etc. Is the model used appropriately?» Strategies» Performance monitoring» Over-ride reports

25 Addressing OCC/Fed Regulatory Requirements A lot to remember Suitable dataset Suitable dataset, development method, cutoff strategies development Model validation emphasis Demonstrate model stability and accuracy, as well as separation Heavy focus on documentation Underwriting criteria Credit risk policy for all products where scores are used Can you defend your strategies? Overrides Define and document score cutoffs clearly and consistently If underwriters are consistently overriding a score isolate reason Document thoroughly Timing validation reports, report approval process, actions Inventory all models in operating environment Degree of model functionality Audit trail

26 Building a Profitable Business: Analytic Best Practices Discovery Assess where you are with respect to compliance and profitability compared to the industry and best practices Determine a strategic analytic roadmap to identify opportunities and gaps Value-based segmentation Identify your most (and least) profitable customer segments in the new environment Champion/challenger testing Maximize your learning and data gathering with smart, efficient testing strategies Decision modeling and validation Meet compliance requirements Maintain strategy efficacy through monitoring Simulation & Optimization Discovery Champion/Challenge r Value-based segmentation

27 Vision without execution is hallucination. Thomas Edison

28 How Can We Use The Score? The Credit Life Cycle Prospect Solicitation Origination and Underwriting Account Management DECISIO NS Target prospect? Tailor offer? Mail? Approve / decline? Tier pricing? Initial credit line? Monitor? Collect? Renew? Tier pricing? Line increase / decrease?

29 Issues That Impact Business Effectiveness and Efficiencies Technical Issues Inadequate internal resources Inhibits timely analysis, modeling, reporting, and responsiveness Inhibits management of complex application processing and account management system Legacy systems limits efficient and timely data accessibility Questions of data completeness and freshness Concerns with house-holding algorithms and match rates Inability to develop a customer level view to manage exposure and implement CRM (customer relationship management) IT efforts are largely code based, slow, and expensive. Lack of understanding of the business Organizational Issues Silo and product driven mentality Marketing vs. risk, retail vs. commercial Customer ownership Adherence to historical but irrelevant risk requirements: old habits die hard! Centralization vs. de-centralization

30 The Competitive Environment Impacts Asset Quality The use of small business specific products is gaining greater momentum with small business owners as they strive to separate their business and personal expenses Even in a volatile economy, small business competition has increased more than ever Commoditization of products Attrition is on the rise prospects have many choices banks see small business as their sweet spot most small business lenders/issuers expect to grow their portfolios by double digits implementation of consumer lending practices and price expectations middle market expansion High net worth customers are likely utilizing anybody but the bank for their needs beyond DDA (direct deposit accounts) and business cards

31 Credit Screening: Score and Policy Rules to Reduce Potential for Loss Policy declines Applicants automatically declined without scoring: outside geographic region, under minimum age, too little time at present address, exposure Credit bureau declines regardless of score: bankruptcy, public record, insufficient time on file, level of delinquency Mandatory information declines or review: key information missing, preventing good decision Score declines: Grey area strategy Over-ride reasons defined and tracked

32 Strategy Development and Competition Exclusion criteria What s redundant, excessive, useless or missing? Policy driven? Strategy segmentation Unique actions, including approval/decline and product assignment Pricing based on risk Champion/Challenger test and learn Performance monitoring What worked and what didn t Success of your strategy reflects: Products In your market(s) Against your competition Overrides Tracked and Defined

33 Savings Using SBSS applicants scored $40,000 per bad account and half go to loss % Above Cutoff FICO SBSS 6.0 % Change 60% 60% 0% % of Approved Bad Rate 4.7% 3.9% (17%) # Bads (24) Annual Savings $480,000

34 Decision Area Renewals DECISION KEYS Status Current Behavior Score Low Medium High SBSS Score High Low High Med Low Strategy C D A B D A Strategy A B C D Auto-renewal Request additional data New application Close

35 Decision Area Delinquent Collections Delinq Balance Behavior Score SBSS Score Low Med Low Med-Hi High Low High 1-Cycle Low-Med High Low Med-Hi Med-Hi Low Med DECISION KEYS Accel Entry Accel Entry Norm Entry Delay Entry/ Soft Corres Super Accel/ Harsh Corres Accel Entry Accel Entry Norm Entry Delay Entry/ Medium Corres Action

36 Best Practices for Financial Institutions Analytics Becoming more similar to retail in segmentation and trending Calculate strategic summary variables across business and consumer relationships Exploring non-traditional data sources Business data contribution including transaction and DDA Capture all internal and external data Modeling Custom, generic and pooled across the lifecycle Forecasting and stress testing Validation Required by regulators Used in strategy and forecasting Strategy development Analysis of exclusion criteria Empirical development of strategies driven by data and scores Competition Increasing from banks to non-traditional lenders Marketing and attrition activities Banking cross selling and upselling

37 Automation

38 Benefits of Automating Originations Up to 60% increase in operational efficiencies Up to 25% increase in top line growth Up to 30% increased Approval rates Up to 45% increase in profit per app 15% 50% Cost Reductions Fewer bad accounts Up to 80% reduction in time to approve

39 Upcoming Webinars Upcoming Topics: July 19 Real Estate Valuation for Commercial Loans Beyond the Basics August 30 Dr. Kohl The Wild World of Global Economics Register Today!

40 Thank You Sharon O Connor-Clarke Principal Consultant, Government FICO David Smith Lead Consultant, PreSales FICO Much More Information Available on FICO.com For more information on WebEquity Solutions or info@webequitysolutions.com