It's Time to Rethink Credit Strategies in South Africa

Lenders in South Africa are facing heightened competition from fintechs and alternative lenders, rising operational costs, and a shortage of skilled credit professionals. These are some of the key challenges that are top of mind in South Africa and come up time and again in our work with credit professionals there.

Our work with lenders in other countries, however, is increasingly revealing the significant value that can be achieved from leveraging advanced analytics and optimization technologies at every decision-making stage of the credit lifecycle.

This is where the future lies for lenders in order to remain competitive. While traditional data-driven approaches have served lenders well in the past, the increasingly challenging environment means that it is now time for them to rethink their credit strategies.

The Key Challenges in Digital Onboarding

1.    Digital Disruptors to the Financial Landscape in South Africa

South Africa's lending market is transforming rapidly as fintech firms and digital banks leverage AI-driven credit scoring, digital onboarding, and mobile platforms to offer faster, lower-cost lending solutions, particularly to underserved segments. These innovations—including micro-loans via mobile money and peer-to-peer lending—are eroding traditional banks' market share, forcing legacy institutions, burdened by regulatory constraints like the National Credit Act and costly physical infrastructures, to innovate in order to remain competitive.

2.    The Cost Challenges in Collections

Mounting operational costs is a key challenge facing South African lenders across the customer lifecycle. Debt collection is a particular pain point. While the collections landscape has improved slightly in South Africa, expenses remain a critical concern. The costs of running large call centres, managing legal compliance, and investing in digital recovery tools weigh heavily on profitability. Additionally, banks often rely on third-party debt collection agencies that charge substantial commissions, further diminishing recovered revenue.

Legal costs also pose a significant burden. Banks must adhere to strict regulatory steps before pursuing legal action against defaulting borrowers, including issuing formal notices and following prescribed debt review processes. In many cases, the cost of legal proceedings outweighs the value of the amount outstanding, making traditional recovery methods inefficient.

Technology investments in collections, such as AI-driven predictive analytics and automated outreach, can help streamline recovery efforts. However, they can also come with high upfront costs. Despite the benefits technological investments can bring, banks must carefully balance them with operational returns.

3.   The Growing Skills Shortage in South African Lending

Another pressing concern is the shrinking pool of experienced credit professionals. Many skilled individuals are emigrating to countries with stronger economies, while younger graduates are steering away from traditional banking in favour of careers in fintech, data science and entrepreneurship. This means that many South African banks struggle to recruit enough of the right people into their credit teams. This in turn impacts how easily they can implement sophisticated risk management strategies.

Limited investment in training and development has exacerbated the problem. Without structured mentorship programs and upskilling initiatives, banks risk stagnation in their credit decisioning capabilities. Additionally, retaining talent is a growing challenge, as fintech startups and international firms lure top professionals with better salaries and flexible work environments.

4.   Data Is No Longer a Competitive Advantage

Many South African lenders continue to rely on conventional data-driven strategies, assuming that access to vast amounts of customer information will give them an edge. While banks certainly have more data than their fintech competitors, simply having data is no longer a competitive advantage. The real differentiator lies in how effectively that data is used to drive better credit decisions.

Current decisioning in many banks, however, are built on legacy platforms that lack true optimization capabilities. This approach may be effective at applying standard risk models, but they fail to provide an optimal strategy for balancing risk, profitability, and customer experience. This means that banks are making suboptimal pricing, credit limit, and portfolio management decisions.

The Power of Credit Optimization

Working with FICO, lenders in other countries who are facing similar challenges have started to move beyond traditional decisioning models by embracing advanced prescriptive analytics and optimization. FICO’s enterprise optimization not only empowers banks to proactively and dynamically model multiple credit scenarios, but it also directly tackles the specific challenges faced by South African lenders.

At its core, FICO’s optimization leverages a detailed understanding of the “action-effect” relationship – the ability to assess the likely impact of multiple alternative scenarios on key performance metrics, including profit, losses and costs.

Instead of relying on broad policies or historical trends, banks can simulate the impact of different pricing strategies, credit limits and risk thresholds across their entire customer base. This approach allows for precision in decision-making, ensuring that each customer is offered terms that maximize both their financial well-being and the bank’s profitability.

Here’s how FICO’s credit optimization addresses the key challenges:

1.    Adapting to Digital Disruption

FICO’s optimization allows banks to simulate alternative pricing strategies, adjust credit limits, and fine-tune risk thresholds instantly and as needed. This dynamic modelling helps traditional banks remain competitive, while meeting the speed and flexibility of digital disruptors.

Furthermore, while FICO’s optimization capabilities are offered on FICO’s own platform, they can also easily be integrated into existing decisioning platforms, maximizing and amplifying the value of the investments lenders have already made. Not only can lenders adjust quickly, but they can extract even greater value, ensuring that strategies are managed effectively while maintaining control over the underlying models.

2.    Reducing Collection Costs

The integration of FICO’s optimization into the entire collections lifecycle enables lenders to improve engagement, maximize recoveries, and, crucially, maintain ethical and operational efficiency.

• In early-stage collections, combining optimization with FICO Customer Communication Services (CCS) has proven critical by automating high-volume digital communications. Underpinned by data-driven segmentation to identify customer risk profiles, interactions are more personalized and interventions are more targeted and effective. Offering self-service options, for example, has empowered customers to manage their debts, as seen in Absa Bank’s success - doubling its self-service customers to 43%.
• In later-stage collections and recoveries, optimization enables the best treatment strategies for each account and efficient resource allocation. Advanced analytics and machine learning continuously refine recovery approaches, adapting to changing behaviours and circumstances. This helps lenders ensure that ethical debt management remains a priority.

3.    Overcoming the Skills Shortage

The answer to a shrinking pool of experienced credit professionals is the automation and optimization of complex decision tasks, such as pricing, credit limit decisions, and portfolio management. In fact, this is critical. FICO’s optimization seamlessly integrates with existing decisioning platforms to enhance complex data-driven strategies, amplifying the value of existing data science investments.

4.    Enhancing Data-Driven Decisioning

Many banks rely on legacy platforms that apply standard risk models, often resulting in suboptimal decisions. FICO’s solution goes further by enabling banks to simulate the impact of various credit strategies in real time.

• For credit card issuers, optimization ensures that initial credit limits are set in a way that balances risk and revenue potential. For loan providers, pricing strategies can be fine-tuned to improve acceptance rates while maintaining healthy margins. In the mortgage space, lenders can simulate different pricing structures to optimize new loan pricing and refinancing offers, reducing attrition to competitors.
• Beyond originations, optimization plays a critical role in ongoing customer management. It helps lenders refine deposit pricing, next best action, customer limits, and decisioning.
• In deposit pricing, mathematical optimization balances profitability with customer satisfaction, while price elasticity modelling predicts customer responses to rate changes. This enable swift adjustments to market conditions, as seen with Česká spořitelna’s adoption of FICO’s technology.
• For next best action and decisioning, customer interactions can be optimized. Business objectives are balanced with individual needs by leveraging advanced analytics and historical data to personalize offers and messages.

By integrating FICO’s optimization, South African lenders can significantly enhance the quality and agility of their credit strategies without the need for disruptive system overhauls. This approach not only addresses the challenges of digital competition, high operational costs, and talent shortages but also transforms these hurdles into opportunities for sustainable, profitable growth.

The Competitive Advantage of Optimization

Traditional lenders in South Africa are at a crossroad. They need to navigate current challenges more effectively and efficiently. Refining existing risk models or tweaking legacy systems, however, will not be enough to maintain that competitive edge.

In order to thrive in an increasingly digital and customer-centric market, lenders must embrace a more holistic approach that leverages advanced optimization techniques to drive better credit decisions across the entire customer lifecycle. It’s time to re-think credit strategies, and it’s time that lenders in South Africa started to view optimization as a necessity, rather than a luxury.

Learn More About the Power of Credit Optimization

• Unleash the power of enterprise optimization
• Visit our optimization community
• Read more about pricing optimization