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Zero to Hero: Aiming for Best-in-Class Originations

Emerging markets in Asia are seeing tremendous growth in credit applications at the moment, particularly in countries like the Philippines, Thailand and Indonesia. The Philippines, for instance, has witnessed credit card growth by volume between 10 – 15%, and Asia Pacific is expected to move from the third to second largest of the seven regions by 2016 in terms of card payment volume.

Many of our APAC banking clients are looking to automate their originations decisions for the first time, and enhance those decisions with application scores, and bureau data and scores where available. For example, when a bank in the Philippines decided to venture into the consumer banking market by offering auto loans, credit cards, mortgages and personal loans, they knew they would face stiff local competition. Working with FICO, they're determined to build competitive edge through the right analytics, decision management technology and risk strategies.

With originations accounting for as much as 40% of total bank costs and up to 80% of the risk, banks in these growth markets are rightly focused on getting this area of the customer lifecycle streamlined, consistent, automated and analytically driven. The originations function typically has four objectives:

  • Add more customers
  • Lower originations costs
  • Increase the value of customers
  • Reduce bad debt and fraud

My colleagues and I at FICO are often asked, “What are the best practices banks should look to adopt as part of the originations process?”  There isn’t a simple answer to this question. The response will vary depending on the bank's current situation, objectives and available resources. Instead, we often talk about a best practice continuum. Knowing where you are today will help provide focus for future initiatives:

  • Stage 0: Focus on manual and judgmental decisions
  • Stage 1: Focus on operational efficiency
  • Stage 2: Focus on operational effectiveness
  • Stage 3: Focus on profit optimization
  • Stage 4: Focus on relationship value
  • Stage 5: Innovators

Since all the banks we meet are interested moving away from Stage 0, in this post, I will expand on best practices in Stage 1 of the continuum. This stage is focused on increasing productivity and reducing costs through full time employee (FTE) cost reductions, FTE cost avoidance, and increasing labour productivity, application capacity, and decision consistency through automation and the use of predictive analytics. To achieve this, banks should look at the following:

  • Centralized or regionalized operations – to reduce infrastructure, FTE, and IT costs and complexity, and make it quicker and easier to introduce policy changes and manage teams and processes.
  • Automated decisions – to make quicker decisions, handle greater application volumes without increasing FTE, reduce FTE from manual and judgmental decisions, increase agility and consistency in the decisioning process, and make it easier to implement change.
  • Automated workflow – to manage greater volumes of applications, configure the processing steps required for each type of product, provide case management and integrate with third-party data sources.
  • Automated queuing – to categorize, prioritize and manage various manual work-streams, such as applications near the score cutoff, high debt ratio applications and cases with bankruptcy in the credit history.
  • Predictive analytics such as application scores and bureau scores – to understand the credit risk involved in a particular application, along with the ability to set cutoffs at the desired loss level depending upon the risk appetite of the organization, and alter these as policy, competition or economic factors require. When combined with automated decision strategies, these enable organization to make fast, consistent decisions, whilst at the same time understanding the risks involved.

Needless to say, the road to ‘best in class’ is not over once an organization has mastered Stage 1. In future posts, I will expand on the other stages of the best practice continuum.

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