Profitably Managing Risk in Your Credit Portfolio

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1 Profitably Managing Risk in Your Credit Portfolio An Equifax White Paper February 2007 Author: Richard Becker Assistant Vice President, Product Development Equifax Inc.

2 As Acquisition Marketing Cools Off, Account Management Heats Up Over the past three years, credit issuers have aggressively acquired new consumer accounts in order to gain critical mass within their portfolios. With consumer friendly affinity offers, attractive teaser rates, and innovative credit terms, credit marketers have spared no expense in attempting to "one up" their competitors, emphasizing portfolio growth over profit margins and prudent portfolio risk. In recent months, however, the consumer credit market has drastically changed. As routine economic indicators such as interest rates and inflation have reversed their trends, so has the consumer voracity for credit in the mortgage / refinance markets and the credit risk profile of the prized new credit acquisition. It s not surprising that credit risk management as a discipline, and the process of portfolio and account management are areas of renewed emphasis for financial institutions and, as of late, often the primary concern of institutional lenders. Account Management Emerges as Key Growth Driver As evidenced by the most successful credit issuers, true account management is more than just a cursory risk review of consumers within a portfolio. Today, progressive credit portfolio managers are interested in not only achieving profitability through risk management, but also actively identifying retention, cross-sell, and up-sell opportunities within their consumer base. The Evolution of Account Management Legacy - Reactive View of Account Management What is the profile of those accounts within my portfolio that represent the greatest degree of delinquency or charge off? What is the profile of consumers within my portfolio that represent the highest attrition rate? What is the demographic and lifestyle profile of profitable segments within my portfolio? Progressive - Actionable View of Account Management What credit behaviors are occurring with consumers in my portfolio that represent emerging risk? Which of my customers are currently shopping for new credit? What life changes or transactional behavior recently occurred within a consumer profile that indicates a need for new credit? 2

3 No longer can a portfolio manager rely solely on a narrow risk management perspective, assessing existing credit risk, benchmarking credit risk performance against a peer group, and perhaps recommending positive or negative action on consumers with evolving risk profiles. Rather, the portfolio manager must embrace his/her role in driving both profitability and revenue, assembling tools and methodologies that balance the traditional portfolio management goal of business assurance with the more progressive need for near real-time consumer credit insight that will drive actionable lending practices, ultimately impacting both top and bottom line financial metrics. The mission of today s portfolio manager must be to capitalize on predictive insight, with the goal of taking both positive and negative action to assure profit and generate revenue. Driving Competitive Advantage through Improved Account Management Utilizing account management strategies to drive competitive advantage, portfolio managers must adopt more comprehensive and systematic techniques to address fundamental, yet complex, business challenges. Naturally, the sophistication level of the analytics, data, and methodologies used in your account management strategy must align with the resources at your disposal and the level of investment that matches your required rate of return and budget. Recognizing the demand for tools specifically designed for these varying resource levels, Equifax supports three tiers of service for account managers, enabling effective management of portfolios of all sizes. Basic Account Management Services - Equifax Accel TM ScoreCheck serves the most basic need, cost-efficient access to consumer data for ad-hoc analysis. This automated account management tool provides consumer score and attribute data for a lender s portfolio. Utilizing this service, portfolio managers are able to receive current risk score and consumer credit attribute data on a monthly or quarterly basis, enabling fundamental yet solid profiling, risk assessment, and collections prioritization. Intermediate Account Management Services - Slightly more sophisticated tools, such as Equifax s Readi- Review SM, offer routine account level risk assessments, identifying and categorizing marginal and high risk accounts in order to take timely action against potential consumer credit delinquency or risk of loss. 3

4 Advanced Account Management Services - For high impact portfolio management, Equifax offers trigger-based solutions such as TargetPoint TM Portfolio Review, TargetPoint TM Cross-Sell, and TargetPoint TM Retention. These event-based trigger products scan your portfolio on a daily, weekly, or monthly basis, identifying recent inquiry, trade line, and loan maturation events that reflect emerging credit risk mitigation, cross-sell, and retention opportunities in near real time. Effective account management must incorporate more than a historical review of risk events and consumer credit profiles. The mission of today s portfolio manager must be to capitalize on predictive insight, with the goal of taking both positive and negative action to assure profit and generate revenue. To this end, portfolio managers must necessarily engage in routine, automated analysis of key consumer credit factors - leveraging predictive analytics, complete and accurate consumer credit data, and near real-time credit event processing - in order to extract maximum value from their portfolio and realize the full potential of their investment in account management resources and methodologies. About the Author Richard Becker, assistant vice president of product management, joined Equifax in Leveraging 15 years of experience developing data and technology-driven solutions for four Fortune 500 companies and one venture capital funded start up, Becker currently leads Equifax's U.S. Information Solutions online and offline product development. He holds an M.B.A. from the University of Georgia and a B.A. from Wake Forest University. 4

5 Contact Information Equifax is a global leader in information technology that enables and secures global commerce with consumers and businesses. The company is one of the largest sources of consumer and commercial data. Utilizing its databases, advanced analytics and proprietary enabling technology, Equifax provides real-time answers for our customers. This innovative ability to transform information into intelligence is valued by customers across a wide range of industries and markets. Headquartered in Atlanta, Georgia, Equifax employs approximately 4,900 people in 14 countries throughout North America, Latin America and Europe. Equifax was founded 107 years ago, is a member of Standard & Poor's (S&P) 500 Index, and its common stock is traded on the New York Stock Exchange under the symbol EFX. Equifax offers a wide array of risk, collections, and marketing tools for managing portfolios of all sizes and types. Visit for additional details. Equifax Inc Peachtree Street, NW Atlanta, Georgia This publication contains many of the valuable trademarks, service marks, names, titles, logos, images, designs, copyrights and other proprietary materials owned, registered and used by Equifax Inc. and its affiliated companies, including but not limited to the registered mark "Equifax"; any unauthorized use of same is strictly prohibited and all rights are reserved by Equifax Inc. and its affiliated companies. All other trademarks and service marks not owned by Equifax Inc. or its affiliated companies that appear in this publication are the property of their respective owners. Copyright 2007, Equifax Inc., Atlanta, Georgia. All rights reserved. 5