Have the BIG scorecards gone BUST? Q2 Trends in credit scoring

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2 2 Have the BIG scorecards gone BUST? Q2 Trends in credit scoring Presented by: Thomas Maydon TMaydon@principa.co.za

3 3 Agenda What do we see? an economic view Adjusting for a new economic cycle Amnesty storm in a T-test? Credit unaware some new ideas

4 4 Agenda What do we see? an economic view Adjusting for a new economic cycle Amnesty storm in a T-test? Credit unaware some new ideas

5 Economic trends Inflation Indebtedness Increase in defaults Legislation Current Account Deficit Impairments Interest Rates Unemployment

6 South African Economy SA GDP has more than recovered the value lost during the 2008/2009 recession but tracking well below Sub-Saharan Africa average. Some African countries are showing impressive and sustained growth.

7 7 Economic Issues We re entering a new economic cycle (a series of increases on the way) This will have a direct effect on scorecards: Scorecard variable shifts Credit bureau shifts Score-to-odds relationship shifts However this is not new What can be done?

8 8 New economic cycle Scorecards can be adapted Dynamic characteristics Stable characteristics Macro-economic forecasting Interest rates CPI Benefits Debt-to-income Better capital allocation decisions Better profit-based decisions

9 9 New economic cycle Solutions are available Re-calibration of scorecard Adjust models dynamic characteristics Utilise an economic model in a matrix with the score Other options are available

10 10 Agenda What do we see? an economic view Adjusting for a new economic cycle Amnesty storm in a T-test? Credit unaware some new ideas

11 11 Amnesty The Amnesty has come-and-gone, what s happened? Shifts - up, down and none Unexpected problems with a bureau s retro process Some lenders increased cut-offs, some introduced policy rules Few lenders rebuilt cards (relying less on defaults and judgments)

12 12 Amnesty next steps Originations: Short-term: realign cut-offs for volumes/early delinquency, input temporary policy rules utilising payment profile string Long-term: consider scorecard rebuild Account management: Where bureau scores and/or bureau characteristics are used: Collections: Cut-off amendments Re-alignment based on post-amnesty early delinquencies Caution with limit-increases, authorisations, anti-attrition in mid score-ranges Where bureau scores and/or bureau characteristics are used: Adjustment of scorebands, incorporation of other bureau characteristics

13 13 Agenda What do we see? an economic view Adjusting for a new economic cycle Amnesty storm in a T-test? Credit unaware some new ideas

14 14 Credit Unaware From an acquisitions perspective, the credit unaware population remains a focus of many lenders: Untarnished credit reports Affordability South African Population 52.5 Million Adults 33 Million Credit Unaware (employed) Credit Aware = 21.7 Million Unemployed 8.6 Million

15 15 So what s going on elsewhere? It s useful to consider countries where the credit bureau infrastructure is not what it is here ~11 Million people are un-scored in South Africa (22%) ~5 Billion people are un-scored worldwide (70%) Mobile is providing a major lending platform in many territories Quick-apps are very popular even for the credit unaware

16 16 So what s going on elsewhere? 6 Million RSA users

17 17 So what s going on elsewhere? Machine learning Virtual Credit Cards Social media What are they doing? Short-term loans Thousands of data points Big Data

18 18 So what s going on elsewhere? This is the formula: Expert application scorecards Evolve into customised scorecards through genetic algorithms Enrich data from non-traditional data sources (is there not data being captured elsewhere?) Big Data Emphasis on revolving loans Introduction of revolving facilities virtual credit card

19 19 The price of privacy? Cookies Purchases Mobile apps Data enrichment Social Media fingerprint PC programs Hardware

20 20 Process? Application Form Mobile Authentication Loan Amount Up/Cross-sell Dataenrichment (repayment discount) Decision

21 21 Have the BIG scorecards gone BUST? Q2 Trends in credit scoring Presented by: Thomas Maydon TMaydon@principa.co.za