There's no question that, between new regulations and a lingering recession, banks are seeing profits squeezed. As many look for strategic ways to manage existing customers for improved share of wallet and loyalty, deposits have reemerged a key driver of bank funding.
Leading deposit managers, taking a cue from the credit side of the business, are turning to deposit behavior scores to measure risk when extending credit instruments tied to deposit accounts. What few realize is that also adding a credit score, such as the FICO® 8 Score, can deliver an even further predictive boost. One recent study on client data showed that adding a FICO® Score to a deposit behavior score in a deposit strategy would result in over 21% profit improvement.
Why use both scores? Because each captures a different view of consumer risk. This is because the two scores use different data and measure risk in different ways.
Credit scores utilize credit bureau data and measure the risk of consumers across all their relationships with various financial institutions. By contrast, deposit behavior scores evaluate consumer performance with your bank. Having both views of consumer risk can be very useful, particularly in instances where data on a client is limited—say, with new deposit customers where there is no account usage history to rely upon for determining riskiness.
In addition, credit scores examine payment patterns to understand credit risk over a 24-month timeframe. Deposit behavior scores examine the source and use of funds to understand risk for determining insufficient funds (NSF), overdrafts (ODs) or aging of overdrafts over a shorter time period (up to 45 days). Using both scores together helps you capture risk in both the short term and over a longer timeframe. For example, you can benefit from a short-term view when using risk to determine the action needed when a customer bounces a check, and a long-term view when determining if this customer is a candidate for cross-selling a line of credit or some other credit product.
The chart below provides more detail on the differences between credit scores and behavior scores. Bottom line—combining these different views equates to better risk assessment when managing DDA.
Are there any DDA topics that you'd like me to cover in a future post? Post a comment—I welcome your ideas.
