Today the accuracy of origination decisions is more important than ever. As banks require more capital in the wake of the financial crisis and in preparation for Basel III, new account risk must be assessed with greater precision. In markets where good customers continue to deleverage en masse, lenders must do everything they can to realize revenue from those still seeking credit. Where regulations restrict risk-based pricing or modifying terms on booked accounts, origination decisions must balance a wide range of risk and revenue factors at the account (and ultimately, customer) level.
Another challenge for origination decisioning is that economic conditions and regulations have caused changes in consumer credit behavior, which in some markets may not return to pre-crisis norms. In the US and UK, for example, lenders are adjusting their decision logic to account for good customers who are now less likely to carry card balances and more likely to accelerate loan payments. Some lenders have seen default rates climb even among the high-income and high-credit-scoring—categories of customers they used to regard as "a sure thing."
In some markets, including those where consumer loans and overdraft protections on current accounts are preferred to credit cards, first-party fraud/credit abuse is rampant. Origination is the place to address the problem in order to prevent fraud and abuse from artificially inflating bad debt levels and wasting collection resources.
In markets where consumers are using online channels to apply for credit products, lenders have to make today's more complex, accurate origination decisions under extremely challenging conditions. Applicants using these inbound, ad-hoc channels are generally not preapproved. Yet to reduce the chances credit application processes will be abandoned part-way through, lenders need to streamline the experience, including minimizing the amount of information they request from prospective customers. With online comparison shopping adding pricing pressure, they must also keep processing costs low to protect margins.
In all markets, the credit crisis—whether endured or observed—has provided a core lesson for origination decisioning: things can change. Wise lenders are making origination decisions that not only "get it right from the start," but also "get it right for the future." They're looking farther ahead to encompass account/customer performance under forecasted scenarios (economic downturns, increased individual customer debt levels, etc.) in their profitability equations.
With this in mind, FICO has published an Insights white paper discussing smarter uses of analytics in originations decisions (note: you'll need to register to download). I encourage you to check it out and post your comments/questions here on the blog.
