I've been blogging about FICO’s most recent quarterly survey of U.S. bank risk professionals, which included questions about global issues that could put pressure on the U.S. economic recovery. In my last post, I highlighted a noteworthy finding from respondents about China's economic growth as it relates to the future influence of U.S. consumers.
Over 72% felt that the global influence of Chinese consumers has either overtaken that of U.S. consumers or will do so within 5-10 years.
Interesting, but perhaps not terribly surprising. One hears and reads daily about China’s rapidly expanding consumer credit industry, infrastructure development, and visible role in major political and economic discussions. China, the confident, fast-emerging global powerhouse.
Yet, it marches forward with prudent caution that often goes unmentioned.
I recently returned from Asia, where FICO hosted a gathering of 30+ senior risk officers from banks in China and other Asia Pacific countries. They are carefully watching where world economic events are headed. The theme of uncertainty prevails, as it does in boardrooms in more troubled regions like the U.S. and Europe.
But it’s not a hand-wringing, helpless sense of uncertainty. They’re actively working to understand two critical things: 1) growing indebtedness, particularly understanding any one consumer’s situation, and 2) consumer resilience to what might be coming, and how to estimate the impact of various economic situations on their lending policies.
The good news is that Chinese banks, and many others in Asia Pacific, are still focused on growth. However, growing concerns about the consumer make the path to growth more challenging. In the depths of the financial crisis, banks in many countries stuck by an easy credit policy – just say no. However, if you want more growth, more subtlety is required.
We heard many of the region’s banks express an ardent desire to try to understand the complete customer.
A better understanding of existing customers goes right to the heart of the indebtedness question. Full-service retail banks have a sort of advantage if they can effectively interpret the information they get from both card and deposit-based products. This is especially important in a region like Asia Pacific, where there is a lack of reliable central data or credit bureau.
In more advanced countries, we have a growing emphasis on formalizing the impact of macroeconomic variables on credit risk. This goes to the heart of the Basel capital calculations and problem of pro-cyclicality that many say was exacerbated by Basel II, but it’s also relevant for day-to-day lending. We have been working with a major Korean credit card lender to use this approach in helping them refine limit and pricing policies based on different assumptions on the Korean economy. We are also helping them understand how a given consumer will react to a particular price or limit. Modeling that action and that effect goes to the heart of the subtlety that APAC risk officers were talking about. The Korean lender expects to see an increase of $4 per customer and about $30 million more in revenue. So done right, there are still opportunities to find ways to balance prudent risk policies and growth.
So does this mean banks in Asia Pacific will be more profitable than their peers around the world?
It’s a simple question with a complicated answer. APAC banks understand the need to adapt faster and smarter. They’re generally not encumbered by legacy systems and decades-old culture and habits. China and other growing countries are in the midst of change – they get that change is now the new normal.
And more gratifyingly, they get that analytics play a critical role in helping banks determine the healthiest consumers, how their portfolios will react to new economic stresses and how to comply with regulation profitably. I plan to spend more time there this year, so expect to hear more from me on these issues.