Competing in a Digital-first Environment: Is your Origination Process Ready?

“He who defends everything defends nothing”

That quote, attributed to the 18^th century King of Prussia Frederick the Great, refers to military strategy, but it could just as easily be used to describe the dilemma faced by financial services executives as they modernize their loan origination processes.

In the first post of my multi-part series on how banks are solving common challenges in acquiring and retaining new customers, I looked at the challenges and opportunities financial institutions need to address in improving marketing performance. In this write-up, I want to focus on similarly practical solutions to common challenges in the origination process as it is a convergence point for a lot of different objectives necessary to deliver growth—provide a compelling customer experience, minimize credit losses, prevent fraud, maximize revenue, and comply with regulations.

Fully addressing all of those objectives (or defending all of those fronts) is an impossible task.

Move fast, but make sure the applicant feels in control. Grow the portfolio, but minimize credit losses. Fully enable digital account opening, but stop identity fraud. Maximize profitability and offer acceptance at the same time. Continually modernize processes while staying in compliance with regulations that were written decades ago.

You can’t do everything. Market laggards try anyway. Market leaders set a clear vision for what they want to be and (just as importantly) what they don’t want to be and they exercise discipline in pursuing that vision and avoiding distractions. They leverage data and advanced analytics to understand the trade-offs and opportunity costs of their decisions and they rely on that insight to drive their strategies.

When we apply this mindset to the origination process, some key questions emerge.

What customers are you trying to acquire?

The characteristics of your origination process should reflect what your target customers value. Profitable, super-prime credit customers are highly sought after and have extremely high experience and pricing expectations. New-to-credit customers may be looking for more guidance and education, but come with risk. A customer may be looking for tangible evidence that you know who they are and will treat them differently as a result.

A focused and well-designed origination process may be mildly frustrating to customers who aren’t your target. That’s OK. The goal is to drive self-selection for the population of customers you want in your portfolio.

What are your portfolio-level performance goals?

You may know what types of customers you want to acquire, but are those customers producing, in aggregate, the right performance for your portfolio? Are specific decision points in your origination process—like pricing—negatively impacting important metrics like offer acceptance rate or revenue per customer? Are organizational constraints—like a limited underwriting staff—preventing your acquisition strategy from producing the results you expect? Market leaders don’t just design an origination process and then hope for the best. They measure performance and use analytics to continually fine tune that process.

What’s your appetite for fraud?

This is a particularly important question as a majority of credit applications migrate to digital channels and fraudsters increasingly focus their efforts on the account opening process. Strategies for mitigating application fraud sit on a continuum. The extremes on either end of the continuum are untenable—you can’t ignore digital account opening altogether nor can you design a digital account opening process so restrictive that no fraud occurs. The right answer is somewhere in the middle, but where exactly? How much friction should you introduce into the process to dissuade most fraudsters without frustrating too many legitimate customers? Which specific fraud detection tools should you utilize and in what sequence, in order to maximize your hit rate while containing costs?  Surprisingly, many institutions don’t openly describe their fraud appetite in advance of opening up digital channels for account opening.

Are your post-book operations ready?

The origination process shouldn’t exist within a silo. The decisions you make when booking a new customer have vast implications for post-book operational areas like credit exposure management, marketing, fraud mitigation, and collections. The same organizational priorities that inform the design of the origination process should inform process design for the rest of the credit lifecycle. If your strategy is to take calculated risks within targeted near-prime or sub-prime populations, your collections department should be ready to handle a higher volume of delinquencies. If your strategy is to provide the most seamless and convenient digital account opening experience in the market, your transactional and portfolio fraud detection capabilities need to be best in class. Robust post-book systems and processes can make high-risk origination strategies pay off. Conversely, poorly-designed post-book operations can make the safest origination strategy a longshot. Oddly, at many clients, we find that critical analytics used in origination (remember that app fraud score that just met the cutoff?) are not passed along to post-book operations.

Focus is Key

It is almost irresistibly tempting, when redesigning legacy systems and business processes, to try and plan for every contingency. To address every possible use case. To ensure no one is left out. To defend everything.

When it comes to redesigning the origination process—a convergence point for many different (often conflicting) objectives—the key to success is focus. In FICO’s experience, building an effective origination processes that can compete in today’s digital-first environment starts with a desire to understand and make strategic trade-offs; and then quickly adapt in this agile market.