Optimization – the use of analytics to derive the best strategies for reaching particular goals – can have dramatic effects on the success of decision strategies. For an example, look no further than Česká Spořitelna, the largest bank in the Czech Republic. The bank increased portfolio profit on pre-approved loans by 26%, and new sales by 29%, by developing optimized strategies using FICO software. For this achievement, Česká is a joint winner of the 2015 FICO Decision Management Award for Customer Onboarding and Management, along with China Minsheng Bank.
Česká Spořitelna wanted to combat aggressive pricing by competitors, which was cutting into the bank’s market share. “We wanted to be more competitive without destroying our loans’ profitability,” said Zuzana Sloukova, who leads the optimization, reporting and analysis team for Retail Risk at Česká Spořitelna. “Optimizing our strategy for pre-approved cash loans would be a significant part of this campaign.”
The bank had performed analysis showing that it could increase the absolute portfolio profit (APP) of pre-approved cash loans by identifying the optimal offer price and initial credit limit for each individual borrower, based on their risk profile, loan appetite, price sensitivity and personal wealth. Using optimization tools that are part of the FICO® Decision Management Suite, the bank could crunch masses of data to arrive at the best price and credit limit.
The Česká Spořitelna team developed a new approach using an iteration algorithm that took into consideration all the possible loan limits in order to maximize profit. The team also developed a highly sophisticated amount take-up model, which predicts the loan amount that clients will take.
Based on the successful results from a similar project for non-pre-approved loans, the bank expected to see a 5% to 10% increase in APP, and a 7% to 12% increase in new volume. When the bank’s analysts tested optimized scenarios in FICO® Decision Optimizer, they showed even better results, estimating a 22% increase in APP and a 25% increase in new sales compared with the prior strategy for pre-approved limits.
“When the strategy went live, it outperformed our expectations,” Sloukova said. “APP increased 26 percent, and new sales increased 29%, without an increase in credit risk costs. Currently, the strategy runs on our entire cash loan portfolio of pre-approved loans. Projecting the results across our portfolio, we forecast an annual increase of $16 million in APP, and $41 million in new sales.”
In order to react to increasing demand for debt consolidation loans, Česká Spořitelna has now begun using even more advanced analytical procedures involving real-time optimization. For this, the bank’s analysts use FICO® Optimization Modeler, powered by the FICO® Xpress Optimization Suite, to configure the optimization models used for real-time decisions. The first generation of this optimization, which returns optimized results within one second, is being currently implemented into the bank’s loan origination platform.
“We expect a 15% increase in new sales compared to the prior strategy, which again is part of our campaign to win market share,” Sloukova said. “FICO Xpress for Debt Consolidation should help us to be even more ambitious about increasing market share and lowering attrition.”
“We are very proud to have developed new optimal strategies on our own,” said Sloukova. “Our achievement was recognized by members of our Board of Directors.”
“Analytic excellence is the core of the financial services industry,” said Michael Versace, global research director for digital strategy at the industry analyst firm IDC, and one of the judges for the FICO Decision Management Awards. “In the digital era, firms can further differentiate their products and services by using data and analytics to improve customer engagement and risk management, and support relationships with regulators. Česká Spořitelna has shown great innovation in their use of the FICO analytics technology.”
Congratulations to Česká Spořitelna for their results, and their award.