Managing Economic Uncertainty with a Customer-centric Approach
Know how to leverage data to better understand your customers, their expectations, risk and drivers.
Managing customers has changed dramatically over the years. I remember getting my first personal loan at my company’s credit union. I knew the tellers and the loan officers on a first name basis because I saw them every other week on payday. When I requested my first personal loan, it was approved quickly because of my long-standing employment at the same company and the fact that my financial relationships were all with my credit union. We had a relationship and each of us knew what our role was in the relationship.
If you fast-forward to today, financial relationships have changed dramatically. Although I still have accounts with the credit union in my story, I also have financial relationships with multiple banks, credit card issuers, and investment organizations. Each one of these organizations knows about a slice of my financial life, but none of them know the entire story. The management of multiple accounts with multiple financial institutions ranges from being viewed as a valued customer to being closed due to inactivity. How do these institutions, with limited and often disconnected information about me, take a customer level approach to the relationship? And how do they do this in a changing environment?
That is the question of the day.
None of us know when the markets will shift. Experts have varied opinions but that doesn’t change the fact that households continues to rise according to the Federal Reserve Bank of New York’s Center for Microeconomic Data (https://www.newyorkfed.org/microeconomics/hhdc.html) while the economy slows down (https://www.cnn.com/2019/10/30/economy/federal-reserve-rate-decision-october/index.html).
Financial institutions are struggling with everything from understanding the full relationship with their customers to knowing how to best communicate in a changing world. These are basic factors that must be managed to effectively compete in an uncertain economy. Simply stated, know your customer and use that information to make decisions.
Customer Relationship
Today’s customers expect that their financial institutions know who they are and understand their needs and preferences. Customers also expect that, no matter how they interact with their financial institution, the experience is consistent. I have met with financial institutions that struggle with this. The answer, although simple, is not easy – use the data available to you to understand your customer. There is no shortage of customer data available at financial institutions, the challenge is knowing how to source the data and use it to drive interactions and decisions. Financial institutions are tracking customer interactions, sometimes in multiple systems that don’t “talk” to each other. The key to being prepared for the future is knowing how to leverage the data available, both internal and external data, to better understand the customer, their expectations, risk and drivers. You will then be able to interact with the customer in their preferred manner and to tailor those interactions to meet your customers needs.
Knowing and understanding your customers is also beneficial to your organization because it can help drive revenue through appropriate cross-sell opportunities and can help you understand and mitigate risks. FICO clients leveraging this approach have achieved excellent results, as shown below.
- Reduced 90-day delinquency by >90%
- Reduced loan loss provides by 60%
- Reduced back office staffing up to 90%
- Increased response rates and amounts borrowed by 17% on key new product extensions while reducing losses
So how do you get started down the road to knowing the customer?
Here are the first steps.
- Identify each data source available for your customer base. Include internal and external sources.
- Identify any gaps in information and sources that can be tapped to get that information.
- Type each of the data elements. For example, is the data structured or unstructured, financial information or demographic information, internal or external and so on.
- Wrangle the data so it can be effectively used for analysis.
In my next blog, I will discuss how to identify the data sources you will need.
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<p>FICO’s latest research on <a href="http://www.fico.com/en/blogs/risk-compliance/us-credit-quality-rising-the-beat-goes-on/" target="_blank">national FICO® Score distribution</a> shows that US credit quality continues to trend upwards, with an increasing number of consumers scoring in the highest scores ranges. Given that, we decided it was time to refresh our study on “<a href="http://www.fico.com/en/blogs/risk-compliance/infographic-what-does-a-high-credit-scorer-look-like/" target="_blank">FICO® Score high achievers</a>,” where we examine the credit behavioural profiles of consumers with higher credit scores.</p> <p>As expected, our latest study showed that older people generally have higher scores, as has been the case in our <a href="http://www.fico.com/en/blogs/risk-compliance/age-before-beauty-credit-worthiness-before-youth/" target="_blank">past research</a>. This is largely because they have trade lines that have been open longer, which leads to higher scores (assuming the trade lines are in good standing and all other things equal). The most credit savvy among you will remember that length of credit history accounts for roughly 15% of the overall <a href="http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx" target="_blank">FICO® Score calculation</a>.</p> <p>But for younger consumers, it isn’t too helpful to say, “just wait until you are 50 years old, and that will fix things!” Thus, I decided to dive deeper with our analysis, including looking at the credit behavioural characteristics of younger consumers with high FICO® Scores.</p> <p>In this analysis, I looked at credit characteristics for the two highest score bands, 750-799 and 800-850, which have about 16% and 23% of the population, respectively. I further broke this down by looking at the characteristics of the youngest 15% in each group, which occurs at age 29 for the 750-799 group and 43 for the 800-850. We used FICO<strong>®</strong> Score 9 for our analysis, and examined typical variables of the categories that go into the make-up of the score.</p> <p><a href="http://www.fico.com/en/blogs/wp-content/uploads/2016/10/FICO-Score-High-Achiever-table.png"><img class="alignnone size-full wp-image-29367" src="http://www.fico.com/en/blogs/wp-content/uploads/2016/10/FICO-Score-High-Achiever-table.png" alt="fico-score-high-achiever-table" width="715" height="747" /></a></p> <p>Since there’s a lot to dissect in this chart, I’ll highlight a few findings that struck me: <ul> <li><strong>Credit history.</strong> Higher scores are undoubtedly associated with a longer time on file. What’s striking is the higher average time on file for the 800+ group, both overall and for revolving accounts (the most common trade line). Clearly, it helps to start credit use early in life – but that’s not the sole determining factor for high scoring. The younger cohorts in both the 800+ and 750-799 groups have time on file medians significantly less than their older counterparts.</li> <li><strong>New credit.</strong> High credit scorers do, in fact, pursue new credit. We see little variation in months since last trade line opening and last inquiry among all groups observed.</li> <li><strong>Pay on time.</strong> As you might expect, the further in the past the delinquency, the higher the score – and that’s <u>if</u> a delinquency ever happened. 95% of the 800+ people and 72% of the 750-799 group have never been delinquent, which is a striking contrast to the 57% for the total population. The percentages for the younger groups are even higher, especially so for the 750-799ers. Collection items are also scarce for these high scorers. While 23% of the national population have collection items greater than $99, the figures are only 0.5% for the 800+ group and 3% for the 750-799 group. It is clear that, in conjunction with starting a credit file early, paying on time is a key trait of the FICO® Score high achiever.</li> <li><strong>Balance and utilization.</strong> Finally, we look at how credit is being used, focusing on revolving product use. (Since most people only have one mortgage or one auto loan, variation in instalment product figures is minimal and driven by payment history, which is near perfect for high scorers, as we’ve seen.) FICO® Score high achievers tend to have more open revolving accounts. While the % active trades and utilization are generally lower, by no means do high scorers avoid the use of credit products. What drives the difference here is the amount of <u>available</u> revolving credit utilized. The 800+ group is roughly 1/4 of the national median, both in total and on their highest utilized card; they also have lower balances and more cards<em>. </em>The 750-799 group is more active and higher utilized, but still only at 2/3 of the national figures. The young 750-799 group compensate with lower revolving balances and, as a result, lower utilization, which is in line with what we see for the 800+ group.</li> <li><strong>Benchmarks.</strong> I’d like to point out that while this study provides good benchmarks of the typical credit traits of the FICO® Score high achiever, individual credit profiles will vary widely. And keep in mind that when we sort groups of consumers as a whole by different behaviours, some results may look superficially odd. For example, the 800+ band has a longer median average open account time (128 months) than average revolving months on file (140 months).</li> </ul> So, what do we conclude? A huge takeaway is that high scorers don’t have too much in the way of serious delinquencies and negative public record data.</p> <p>In most respects, the young 800+ people are like their peer group. They really only differ markedly in their shorter credit history and higher non-mortgage balance, both of which are a function of life stage. Our results show that you don’t have to be a credit product hermit; these high scorers have more credit cards. The takeaway is to start credit activity early and maintain well-managed and moderate usage.</p> <p>In many ways, the young 750-799 people are more interesting because their age profile is much younger. Their credit characteristics differ more from their peer group, particularly in terms of length of credit history. They compensate by having almost pristine credit records and lower balances.</p> <p>Ultimately, 39% of US consumers are FICO® Score high achievers, which they accomplish by following common-sense credit practices. It ain’t rocket science!</p>
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