Origination Scores: Say “Yes” to More Credit Applicants

Most US financial institutions rely on FICO Scores to guide a multitude of decisions made across the lifetime of each customer relationship. And rightfully so, since the FICO^® Score is proven to be an accurate indicator of any given customer’s overall risk. That said, banks sometimes neglect other important, adjacent scores that can further improve credit-granting decisions. As a result, financial institutions may be saying ‘no’ to good customers.

Origination Scores Offer Targeted Insight

Origination scores add significant value above and beyond the FICO^® Score, which is based solely on the data found in a consumer’s credit bureau file. In comparison, origination scores typically incorporate additional data, such as the information supplied by the consumer at the time of application. Furthermore, origination scores target the population of only those consumers seeking new credit, and the individual risk associated with the new financial obligation, rather than calculating aggregate risk across all of the consumer’s financial obligations.

In short, the origination score is built by honing in on the population looking to obtain new credit, and then looking at the performance of the new debt. There can be nuanced differences in the risk patterns and trends for this population relative to those of the holistic customer (i.e., customers assessed only by their FICO^® Score).

Machine Learning Enhances Origination Decisions

Origination scores have always added value to bureau-based score decisions, and FICO continues to innovate in this area. Recently we have realized significant improvements by applying machine learning (ML) to origination scores, primarily utilizing scorecard approximations of stochastic gradient boosted trees. More recently we have been exploring adaptive and self-learning ML technologies. You can read about the scorecard approximations of the stochastic gradient boosted trees methodology and results in my blog on building credit risk models using AI and ML. These improvements have continued to work well in conjunction with the FICO^® Score.

Saying no to good customers due to insufficient information translates to a weaker customer relationship, or even the loss of it. Either consequence has a major downstream impact on the profitability and health of your portfolio.  Saying ‘yes’ can improve profits and reduce losses, but must be done in a way to limit risk.

The origination score is not a replacement of the FICO^® Score; its value is realized by using it together with the FICO^® Score. The lift and benefits can be summarized as follows: Prime lenders focus on populations with fair to excellent credit, since applicants with poor to bad credit generally have a high rate of default. Using origination scores, good accounts can be mined from the poor-to-bad credit population, and underwriting strategies refined to approve customers that previously would have been rejected. We can say ‘yes’ to more customers with struggling FICO^® Scores.

Saying ‘Yes’ to More Applicants

To illustrate, let’s look at a random sample of one million US installment loan credit seekers from 2011 with a performance evaluation in 2013, a timeframe in which neither the origination score nor the FICO^® Score were redeveloped (so as to not overstate the value of either score).

We will assume a simple binary strategy is in use; applicants with FICO^® Scores of 650 or above are approved (green) and the rest are rejected (pink). Figure 1 shows what this split looks like in terms of bad rate and population approved vs. declined.

By enhancing the strategy to additionally include the origination score, banks can realize the dual objective of building portfolios numbers while either maintaining or reducing risk. In our sample, applying the use of Application Risk Manager scores led to approving an extra 4% of total applicants, while maintaining the default rate at 1.2%, as illustrated in Figure 2. Assuming an applicant volume of 100,000 applicants, the population accepted would have grown by 3,000 new customers.

Growing your business while managing risk – that’s the laser-like value proposition FICO origination scores offer. To learn more, check our origination blogs. And follow my Twitter feed, which is always rolling with my latest thoughts on analytics and AI.