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Jun 2020 | Credit Decisions | Credit risk
By Posted by Experian

Balancing lending terms can be a complex calculation

Get the mix right and it can be rewarding for both you as an organisation, and your customer. As time changes, so does business appetite and customer circumstances; as such, a continual review of lending policies can be pivotal to the on-going success and return of your strategy. Having a holistic and rounded view of the right customers to approach for new lending, or the right customers to maintain and grow within your portfolio can often be challenging.

To start understanding the intricate details of your lending policy, it is often easier to break it down into stages. Let’s explore these:

  1. How do I identify the right people to lend to?

Making decisions on which customer or customer groups to approach can have a significant impact on your risk and operational objectives. In order to effectively approach lending, various factors should be considered. The mix may evolve over time as lending policies are re-assessed in line with new product launches, or a change in risk appetite.

Today, being able to understand who to lend to, and on what terms – is an increasingly complex equation.

For new applications, track their value and quality, as well as the risk they bring. Build a picture of your customer demographic as it changes, and of the credit types customers are seeking, or willing to accept. Tracking volume and conversion rates for new lending enables you to be proactive – offering products and terms that appeal and fit your risk appetite.

A review of your scorecard, segmentation and cut-off criteria can help to make sure you’re accepting the right customers for your risk appetite, even in a reduced pool.

Tools are available to help you understand more about customer demographics, prioritise and align your policy needs with potential customers. In addition, overlaying economic foresight can help pre-empt future changes in customer demographics – helping you understand how their circumstances or needs may change over time.

  1. Don’t just focus on new customers, closely monitor your existing base too.

With new business thin on the ground, now’s the time to look after your existing customers – for your sake as well as theirs. Harness the data you have on them and monitor it for unfolding change and warning signs. Helping them manage payments effectively will stop

them falling into arrears, keep your portfolio healthier and build loyalty that pays back further down the line.

At the same time, developing an ever-sharper understanding of their behaviours, challenges and evolving levels of affordability can help you balance the support they need with the risk you’re willing to accept.

Strong, up-to-date market insights can help you look after your existing base better. Over the coming months, it’s likely we’ll see a shift in lending types, with the demand for sub-prime credit growing (driven by need, in turn driven by economic shock) and demand for prime credit reducing (driven by choice, in turn driven by pandemic shock). If you can see these trends unfolding, you’ll be able to respond faster, with products that match your customers’ changing needs.

Once you know which customers to approach, effectively managing them over time can be critical to the on-going development and success of any relationship. In addition, having a thorough knowledge of their circumstances can help you understand whether a review of their lending terms is necessary.

  1. Optimise your lending terms

Extending lending terms to some can be beneficial in providing a low risk return for both parties. For others, you may want to consider reducing their exposure.

We know that economic and market changes make it difficult to understand whether the shifts you’re seeing in your credit portfolios are a result of external factors or past strategies.

As the business world becomes increasingly complex, so does the decision-making that supports customer interaction. The number of decisions you need to make around how to interact with each customer is on the rise: the marketing campaign they should receive, the credit limit they should be offered, the collections action that should be taken – the list goes on.

This complexity is compounded by internal business constraints, including available marketing budget, product targets, exposure or bad debt limits, and the resources of stretched teams.

As firms strive to become more consumer-centric, balancing customer needs with business objectives requires a shift towards a more mathematical approach, with decisions underpinned by advanced analysis of data.

This enables you to:

  • Better optimise relevant credit limits for individuals
  • Manage and prioritise your contact strategies
  • Intelligently price your lending
  • Quantify and manage risk across stakeholder groups
How we can help

Here at Experian, we’re uniquely placed to help you minimise risk and uncertainty by giving you access to the latest credit and economic data insights. To help you manage immediate and future needs, we’ve enhanced our suite of solutions and tailored them to the post-pandemic world. As a result, we can empower your decision-making with up-to-date insights on demand for credit, new lending, emergency payment holidays and predelinquent trends.

  • Ensure scorecards are up-to-date. Having out-dated scorecards may be giving you a misrepresentation of ‘today’s customer’. Reviewing your lending criteria, with a view of today, can ensure you are offering the right terms to the right people
  • Optimise credit limits. Balance opportunities with lending strategies – offer the right credit limits to the right customers.
  • Understand the market, its customers and its future. Having a thorough understanding of customer demographics and the market, whether new or current, can help balance opportunities and prioritise your lending strategy.
  • Access a wealth of data via our Bureau Scores. Control bad debt, business risk and exposure by gaining a true ‘customer view’ by incorporating shared data from other lenders and receive accurate predictive scores for real-time decision-making.
  • Understand customer’s affordability. There is no doubt that making prudent lending decisions is more important than ever, not only on a regulatory perspective but to enable you to assess the affordability and suitability of lending terms.
  • Authenticate your customers. To build trusted relationships with legitimate customers, it is vital that you can establish the identity of your customer with confidence.
  • Understand the future needs of your customers. Use propensity scores to understand more about who may want what, and when, to underpin future lending strategies.