Risk & Compliance For Online Lenders, Greater Regulatory Scrutiny Is a Matter of Time

Time concept

I recently returned from New York City where I attended LendIt, a conference bringing together nearly 2,500 current and prospective participants in the rapidly growing online lending space. A number of my FICO colleagues also attended, leading several engaging sessions – on credit scoring basics, our new alternative data credit score, origination strategies with online lending client Kabbage, as well as industry best practices that featured FICO’s new alternative lending platform in China.

I was at the event to moderate a panel focused on regulatory trends impacting the online lending community. Regulatory compliance is a prominent theme at nearly every industry gathering in the financial services industry. However, of the 48 hours of session content at the LendIt conference, less than two directly addressed regulatory issues.

During our panel discussion, I raised this topic with my colleague and FICO’s regulatory counsel, Vance Gudmundsen, along with the head of PepperHamilton’s Financial... [Read More]

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Customer Engagement How Can Auto Financing Keep Pace with Market Change?

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The auto financing industry has seen major market fluctuation over the past decade. When the recession hit and more cautious consumers deferred borrowing for new cars, auto financing sources consolidated and looked towards more conservative options themselves.

2013 saw the market start to rebound. Consumers once again became optimistic borrowers, and the industry took the opportunity to increase financing options to meet demand. For the most part, these loans have fueled strong growth for automotive financing sources.

However, since subprime financing has also grown, there has been an increase in borrowers getting loans who don’t have the ability to pay. To protect profitability, auto financing sources should employ two important tactics:

Identify customers likely to become delinquent and take preemptive action. By taking a proactive and analytic approach to customer management, auto financing sources can prepare for the likelihood that certain customers may go delinquent and require greater attention. Understanding... [Read More]

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Analytics & Optimization Do You Recall When Business Rules Management Was All The Rage?

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Does anyone remember when the term “Business Rule Management Systems” (or BRMS) was coined?

Think back…to when “Don’t Stop” by Fleetwood Mac was the musical theme of Bill Clinton’s run for the White House. Or when Beanie Babies were first introduced (how much are yours worth?). Laptop computers were roughly as portable as bowling balls, and odds were pretty good that if you had a 1 TB portable drive in your office, you acquired it from an alien life form.

Like the early ‘90s, BRMS is also getting a bit long in the tooth. Nobody in the early days imagined the impact that the internet, mobile devices, Big Data, and a shifting consumer paradigm would collectively have. In business, the “need for speed” – as well as regulations and customer-centricity – demanded that organizations think beyond business rules when it came to decision management. Like Business Intelligence, which provided organizations... [Read More]

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Fraud & Security Security and Apple Pay Adoption: A Discussion with Datamonitor

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I recently had the pleasure of speaking with Kit Carson, who is the head of Banking Products for Datamonitor Financial, based in the UK.  Kit most recently presented his views on Apple Pay during Payments International, the leading payments event in Europe for banks, corporations, technology and infrastructure providers, regulators and service providers from around the globe.  Kit was nice enough to share some of his thoughts with FICO on Apple Pay and how the marketplace will continue to evolve and adopt this new payment option.

FICO: Kit, thank you for taking some time to speak with FICO about your latest presentation at Payments International.  Your session was entitled “Making Sense of Wallet Wars – Where will Apple Lead Us?”  I understand that you spoke to a packed house of executives during your session on Apple Pay.  Can you describe where the payment industry is right now with regards to... [Read More]

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Risk & Compliance Model Management Best Practices: Part 7

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Welcome to the latest Model Management Monday. This is the eighth in my blog series on model management, each post highlighting a best practice that supports both compliance and improved performance.

Best Practice #7: Defend Decision Strategies

No matter how complex your decision strategies, regulators will expect you to explain and defend them with empirical results. Regulators will want to know how you develop, track and implement your strategies. You must also show the results of your strategies, including the realized losses, gains and exposures arising from your decisions. Most importantly, regulators will want to know how you balance the need to increase profits with the need to contain risk.

Carefully document all your strategy decisions, as well as changes to those strategies. You should document what your subpopulations are, what actions you’ve taken and where cutoff scores are applied. You must also demonstrate that your segments are homogeneous and... [Read More]

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Analytics & Optimization AI: Can an Algorithm Be Curious?


In my last post about artificial intelligence, I discussed analytic technologies that are making smart machines smarter. But even the smartest machines lack fundamental human characteristics that enable us to solve problems. One of these is curiosity — surely a computer can’t replicate that?

Welcome to the world of neuro-dynamic programming.

This is an analytic technique based on reinforcement learning, which mirrors the way we learn complex tasks that result in long-term positive results. Neuro-dynamic programming enables smart machines to think ahead.

To illustrate this, let’s say we want to increase customer lifetime value and business cash flow. Each time the business takes an action, the customer reacts, the business responds to the new state of the relationship with another action, the customer reacts, and so on.

At any point in the sequence, the current state of the customer relationship is the result not only of the just-taken action, but... [Read More]

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Customer Engagement Growing Small Business: Q&A with Alternative Lender Kabbage


I recently sat down with Kathryn Petralia, cofounder and head of operations  at Kabbage, to talk about how origination management supports her business.

Q: First, how is Kabbage different from traditional lenders?

Kathryn: The biggest difference is that we were established in the digital age, so data is at our core. We fill a niche in that we focus on small companies who need modest loans to further their businesses. We also recently launched our consumer program, Karrot, which lends to start-ups and individuals who may lack the necessary credit history for traditional loans.

Q: Why did you decide to use FICO® Origination Manager?

Kathryn: We originally licensed decisioning technology from a third party, but found it hard to work with. We then decided to build a solution in-house, but that became difficult to manage. For us, Origination Manager has been great because it helps us manage multiple concurrent models... [Read More]

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Risk & Compliance Model Management Best Practices: Part 6

Best Practice Push Pins Part 6

Welcome to the latest Model Management Monday. This is the sixth in my blog series on model management, each post highlighting a best practice that supports both compliance and improved performance.

Best Practice #6: Track Performance

Over time, many factors can impact model performance. These include shifts in population makeup or behavior, economic changes, impacts of marketing campaigns, and changes to credit and collection policies. Regulators expect you to monitor models on a continual basis, so you can recalibrate and rebuild them in a timely manner.

Tracking outcomes is vital to understanding how well your models and business strategies are performing. This requires capturing what was known at the time of a decision, what actions were taken and what the resulting outcomes were.

Automating the generation of model monitoring reports provides faster feedback about the effectiveness of your models, and makes it easier to identify and adjust for emerging trends... [Read More]

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Collections & Recovery Collections 101: How to Find Obvious Collectable Debt

Chalkboard for Collections 101 class

This just amazes me. With all the pressure on collections today, people don’t go looking for obvious collectable debt in their system.

I have walked into collections operations and said I will find you $1 million you can collect. I haven’t even looked at your system, but I can do it because you’re NOT doing it.

And it’s so simple. Here’s how to do it:

Get a list of everyone who has paid you money in the last six months, but who you have not called or contacted in the last two months. Build a queue and start calling.

These are the people most likely to pay you. But you haven’t reminded them recently.

It’s so obvious you might be thinking, why doesn’t everyone do this already? In many cases, the collector working the account doesn’t realize a payment came in.

This is Collections 101: A payment is the #1... [Read More]

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Risk & Compliance FICO CEO Discusses Alternative Data Credit Score (Video)

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Earlier this month, FICO shared details of pilot program research showing that alternative data can be used to reliably score millions of consumers who do not have enough traditional credit data to generate credit scores. On Fox Business News, FICO CEO William Lansing discusses a new FICO® Score based on alternative data and what that means for unbanked and under-banked consumers.

When asked about lenders lowering credit criteria, Lansing explains: “The goal is not to lower the standards. The goal is to identify would-be borrowers who meet our standard, but they meet it by using different data than we’ve traditionally used.”

Watch the latest video at video.foxbusiness.com

For those unable to see the video above, go here.

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