Managing increased risk in your commercial lending portfolio

UK businesses have been hit hard by the COVID-19 pandemic. Many can no longer operate due to lockdown and we know from our own economic analysis, that more than half of small businesses hold only enough cash to survive for a few months. Some sectors have been impacted more than others, for example accommodation and food services, recreation and non-essential retail. And as a result, the regions that rely most on those sectors are particularly vulnerable.

This unprecedented volatility translates to a significant increase in risk for lenders – in terms of managing both existing portfolios, and new credit applications. The question is, how will this heightened risk manifest itself? And how can you mitigate it?

Traditional models are being challenged

Typically, risk in your portfolio is managed through a combination of risk assessment at onboarding and pricing to reflect the risk. But the models and assumptions that were being applied pre-COVID-19 may not return an accurate picture now. Businesses that would have passed onboarding risk policies with flying colours pre-pandemic are now facing extreme turbulence and stress. And as our research has shown, this is particularly the case for at-risk sectors and regions. Traditional risk scores that have been relied upon for decisioning and monitoring in trade credit are untested for circumstances like these.

Added to which, the introduction of the Coronavirus Business Interruption Loan Scheme (CBILS) to support businesses with quick access to finance, has driven a spike in applications, putting pressure on existing onboarding processes and customer journeys.

How Experian can help

We believe the answer lies in an increased frequency and depth of data. Data that can help you understand changes at a macro, full portfolio level, as well as at an account level. The right information at the right time to help you make decisions that are in the best interests of the customer.

CATO (Current Account Turnover) data continues to be the most reactive data set. Banks are already using it to monitor current account activity and this facility is also available to non-bank lenders, albeit relatively new to market. By combining CATO data with CAIS payment performance data you can get a view of monthly changes to credit/debit turnover, average balance, days in excess and rejected payments. All of which are very real indicators of a business’s ability to pay.

While combining your own customer data with key business stress metrics in our Commercial Credit Bureau means you can perform vital analysis of your client customer portfolio at a summary level to derive critical, actionable insight.

Identify stress indicators and react quickly

Despite the difference in the way sectors and regions are affected, no two lending portfolios will be impacted in the same way. Businesses will respond differently; some may have more cash reserves; others may be better able to adapt. So, a simple, sector-based segmentation is unlikely to be accurate or actionable. Instead, where possible, we recommend you monitor the attributes that indicate increased financial stress in a business. The sooner you can identify critical signs of stress in a customer at an account level, the greater your chances of taking action to minimise any potential losses.

We’ve enhanced some of our core portfolio management solutions to help you understand what’s changing at a portfolio level and identify stress indicators at an account level.

Portfolio CV19 risk summary and benchmarking

We’ve developed a dashboard to analyse the longevity of your customer base, based on various revenue impact scenarios (COVID-19 impact segment, payment performance trend, number of credit applications trend, and cash reserve depletion rate). We can then slice the data by company sector, size, region and age. And we can also run bespoke analysis on specific portfolios. This lets you see the position of your portfolio relative to the overall UK population as a benchmark and can be run as a one-off or on a regular basis.

Commercial DCM (Delphi for Customer Management)

Commercial DCM is a batch data append service, which updates the full set of risk attributes and scores available to you as a lender and allows you to see risk across your whole portfolio.
You can automatically append the attributes below to your portfolio at account level. And we’ll be adding new ‘stress indicator’ attributes as they come online:

These let you view both current and historic trend summary data so you can see risk levels prior to COVID-19 and at the current moment as well as likelihood of survival post-crisis.

Notifications and alerts

You can set up a series of alerts, set on key stress indicators. Portfolio accounts are monitored on a daily basis; when an account crosses a threshold, it is added to an email with details of the trigger event and sent to key parties.

Alert triggers are highly configurable, and we can help you tune the service to achieve a balance between sensitivity and noise. Examples of triggers are absolute drop in Delphi score, % increase in DBT, CCJ filed, or director change.

Smooth out onboarding to manage increased application volumes

Lenders have been realising the benefits of digitising their onboarding processes for a while, and the current crisis has shown just how important it is in processing applications at the speed and scale required. But if you can’t change your customer journeys in the short term, there are other ways we can help you smooth the onboarding process and access the data you need to better manage the increase in applications and weed out those that are unlikely to be successful.

Experian Commercial Acumen Data Portal

Lets applicants provide access to their management accounts digitally (without the need for integration) so you can assess them online rather than on paper. It also lets you access open banking data where the applicant is banked elsewhere.

Trusso

Our transaction categorisation engine automates the interpretation of accounts data to inform affordability calculations.

BusinessIQ

Lets back office staff access CATO data and assess applications manually.

PowerCurve Customer Acquisition

Automated decisioning to improve the speed of applications and reduce applicant drop-out. It also gives you the option to move decisioning to the front of the application process, weeding out the applications unlikely to be successful and making the volume of remaining applications more manageable for manual processing.

Managing the increased risk in your portfolio is just one of the ways we’re committed to helping you during these unprecedented times. And we’ll continue to share insights and trends as we identify them.

To understand more about the trends and insight, in a turbulently changing market – please join our webinar on 30 April 2020. Alternatively, please contact us or visit our dedicated web pages to help you navigate the challenges, and solutions available to help you mitigate risk – while supporting your customers at scale and speed.

To understand more about the trends and insight, in a turbulently changing market we’re running a series of webinars designed to help you navigate new and complex challenges. To receive our invites along with our latest research, insight and news, please sign up to our marketing communications here.