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Optimizing Credit Limits Under New Regulations

July 2012.  Add a reminder to your Outlook calendar, because that’s when new Australian regulatory changes for credit card lending will take effect—specifically Phase 2 of the National Consumer Credit Protection Act 2009 (as detailed in my colleague Paul Swyny’s recent post).  What does this mean to portfolio managers throughout the country?  In addition to a few sleepless nights, it means changing your approach to both line management strategies and how you set initial credit limits at origination.

Of course, Australia is not the only market where new regulations are causing lenders to rework traditional approaches to credit line management.  In the US, for instance, the CARD Act now requires lenders to determine a consumer's “ability to pay” for all line increase decisions—a challenge that many lenders are still in the process of resolving.

In Australia, credit line management traditionally involves a delicate balance of analytics and customer management.  First, lenders must determine which accounts should be mailed an offer, and then persuade those customers to respond to that offer.  However, proposed regulatory changes will require that this pro-active, two-step line increase offer process is stopped for new credit cards, unless the card-holder explicitly agrees to receive them.

How will this affect day-to-day operations?  At the very least, it means fewer opportunities to entice customers to actively use your card.

The best way to address this challenge is to set the limit correctly, right out of the gate, at the point of origination.  This circumvents the need to course-correct customer limits through credit line increase offers, effectively minimizing the impact that the new regulations will have on your portfolio.

To tackle this problem, Australian lenders can capitalize on already established best practices for optimizing initial credit lines.  FICO has worked on this with lenders worldwide using a decision modeling and optimization methodology.  By leveraging optimal account-level decisions, you can develop an initial credit line strategy that makes an efficient use of capital to maximize profit.  Our Quick Start methodology facilitates the development and implementation of optimized strategies within relatively short timeframes.

Whatever you do, be sure not to snooze that Outlook reminder.  You’ll need to have appropriate strategies in place well before July 2012 arrives.

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