As my colleague Daniel Melo reflected in his recent post, FICO and Efma’s latest survey of European credit risk professionals has revealed that levels of delinquency are expected to increase. In many cases, traditional collections techniques are now proving less effective. As Daniel notes, part of the reason for this is that many consumers are jobless, or otherwise unable (not just unwilling) to meet their obligations.
I believe there are also sinister factors at work. Indeed, for some time now I have been blogging about the intersection that exists between traditional bad debt and malicious credit abuse, or first-party fraud. First-party fraud is typically differentiated from third-party fraud by the fact that there is no consumer victim — the bank is the victim. And it is typically differentiated from bad debt by the fact that the borrower demonstrates an intent to maximise access to credit funds and to abscond without repaying.
Many risk managers are now realizing that first-party fraud constitutes a sizeable piece of their bad debt. Fraudsters, of course, need specialist identification techniques and different treatments right across the credit lifecycle. These include limiting access to extended funds or automated increases, cross-sales and upgrades; taking pre-emptive action to remove vulnerable lines of credit before they are exposed; and even closing accounts that demonstrate a high propensity for first-party fraud abuse.
FICO is working with financial institutions across the globe, applying robust analytical techniques to identify this insidious fraud population without compromising people who are bona fide customers with genuine intent, nor those debtors who are in true financial distress. It can be difficult to draw this fine line but, with first-party losses accounting for as much as 30% of the bad debt book value, it is a line of demarcation that progressive banks are willing to draw.