Sound Decisioning Practices in a Volatile Environment

By Dennis Dixon, President of Zoot Enterprises

Introduction

Today’s volatile market and credit crunch have thrown a wrench into the strategic plans of many financial services institutions (FSIs). Budgets are shrinking, compliance deadlines are looming, projects are undergoing increased scrutiny for proof of ROI, and meanwhile, customers’ expectations are increasing.

However, a down market does not necessarily mean disaster for FSIs. In fact, this is an ideal time to re-evaluate business strategies and ensure your institution is primed to grab the bull by the horns when the market turns around. In today’s economic environment, financial institutions need to be in tune with the market to adapt to changes, offer the right credit products to their consumers at the right time, and have the flexibility to tap into non-traditional markets – all while effectively mitigating risk. Most importantly, they must establish and employ sound decisioning practices at all times. Solid policy is key in any market – bull or bear.

A long-term business strategy that leverages an enterprise-wide decisioning approach and utilizes automation and real-time tools to achieve operational efficiency will provide the agility necessary for financial institutions to adapt and thrive in an ever-changing market. Let’s examine some innovative best practice approaches FSIs can incorporate into their business strategy now while managing risk and increasing ROI.

A strategic approach to enterprise decisioning

With the challenges facing financial institutions today, it is imperative that lenders investigate ways to operate more efficiently. One consideration is an enterprise decisioning approach. An enterprise decisioning approach simplifies channel management (as well as simplifying the opening of new channels), increases cross-sell opportunities, reduces costs, provides consistent risk management and unifies credit policy while allowing individual lines of business control over decisioning criteria. To be effective, an institution’s enterprise decisioning solution must have a common infrastructure of attributes, rules, and reporting to streamline business processes while allowing all lines of business to directly control their business logic and make real-time production changes.

This does not have to be viewed as an overwhelming objective or an “all or nothing” scenario. Begin by selecting your institution’s top pain points. Whether that need is compliance, customer satisfaction, risk management, cost maintenance, or a combination, you can implement the pieces needed today while building a long-term strategy. By starting incrementally – with credit risk to develop attributes and policy, or with just two lines of business – an institution can establish stakeholders for future development. This provides an opportunity to garner additional support and mitigate the pain of undertaking the entire enterprise process at once.

For example, enterprise cross-sell is an excellent opportunity to increase accounts by identifying customers in other areas of the institution whose credit histories and payment behaviors are already established and make credit offers that appeal to individual consumer need. If a customer is declined as too high a risk for one product, he or she can be evaluated for others. Once a positive payment behavior is proven, the customer can be offered other products, thereby increasing wallet share with that consumer. An offers repository can house all the previous credit offers made to a particular customer, and they can be presented again at a time when that customer is most likely to accept.

An enterprise approach supports effective cross-sell by enabling collaboration among institutions’ various lines of business. Enterprise cross-sell allows institutions to not only add accounts, but also increase profits cost effectively by maximizing wallet share from existing customers. Lenders who champion this can position themselves as leaders within the market and generate new business through a pre-screened and tested pool of prospects. This approach works well with both prime and subprime customers.

Once a financial institution has re-evaluated its business strategy and determined how an enterprise approach to decisioning and cross-sell can support that strategy, they must take a step back and consider how to gain efficiencies across the organization.

Operational efficiency through automation

Optimizing your business strategy through an enterprise approach requires having the appropriate technology in place to achieve the highest level of operational efficiency. When using the right tools and services, automation allows your financial institution to react quickly to market changes, manage risk effectively, rapidly introduce new products to market, and provide seamless customer service at a lower cost and with improved quality.

A side effect of the turmoil within today’s credit market is the need for lenders to do more with less. Automation can achieve this goal by enabling financial institutions to increase the number of credit products they sell without adding staff or resources ­– all while lowering the cost to do business.

Lenders can have the best of both worlds when it comes to automating their lending practices – the speed and efficiency of automation and the ability to manually review applications that don’t meet their criteria for automation. Strategic automation involves automating as much of your origination system as possible without sacrificing your risk or compliance standards or human touch when appropriate. You can automate your entire origination system and then go back and place points of manual review anywhere in the process as required by internal credit risk policy or federal regulation and compliance standards. Business users then have the ability to add, modify, or eliminate any of these points of manual interaction at any time via process management interfaces.

This is extremely beneficial in times of dramatic market change. It saves time and money and decreases risk compared to systems that must restart the application or complete the entire process manually.

Additionally, automation helps institutions manage their compliance programs and respond to regulatory change. If we learned anything from the subprime crisis, it’s that good credit policy fosters good credit decisions. Automation reduces the cost of the decision while improving consistency and compliance. Industry estimates from top banking institutions have shown the cost to manually review a credit application is up to $10, while automating the same process costs pennies.

In many cases, lenders fail to adopt more flexible technology because the cost to “rip and replace” an existing system is hard to justify, especially in a down market. For those institutions looking for a less severe solution, there are tools and services available that upgrade components rather than the whole system. This modular approach provides a low-cost, low-risk alternative to an entire system overhaul and allows current operations to be maintained and enhanced. A modular approach to system upgrades may also provide the ability to adapt to market changes in real time. Flexible technology allows for greater user control that does not rely on programmers for system changes and focuses on business needs rather than technology.

Now that a foundation is built that includes a strategy for decisioning, supported by efficiency gained through automation, the final best practice to consider is incorporating market responsiveness and agility that allows the flexibility to excel not only in today’s environment, but in the future.

Speed and agility using real-time tools

Today’s volatile financial market and the resulting impact of the subprime fallout put tremendous pressure on financial institutions to adapt quickly to market changes in order to survive. Financial services companies must employ tools that allow them to be flexible in their business logic, implementing changes quickly while also reducing overall operating costs. Real-time tools provide a unique adaptive advantage by allowing business users to quickly and securely create, modify, and implement business logic.

The financial industry will always be marked by degrees of instability. Those companies that want to prevail over the long term must focus their efforts on two adaptive tactics: 1) increasing their agility in the market and 2) lowering operating costs while simultaneously increasing operational efficiency.

The first tactic is the result of multiple contributing factors. In an increasingly volatile market, companies must be able to respond to market shifts quickly, modifying their credit risk policy to meet new demands and regulations. Not only are interest rates changing with a higher frequency in response to the subprime fallout, but it is also likely that consumer behavior will continue to evolve, and the 2008 election cycle will bring more market regulations to temper changes in the economy.

Another factor driving the need for flexibility is the customer’s increasing sensitivity to timeliness. Since online and mobile banking provide access to financial information 24 hours a day, consumers are no longer willing to wait one to two weeks for loan or credit approval, especially when coupled with concerns over a slowing economy. If your customers are left waiting, this means you miss not only the sale, but also opportunities to sell more credit products to them in the future. Customers and the market demand flexibility. This means FSIs must implement technology that allows real-time business logic changes.

To stay ahead of the competition, lenders also need to take advantage of micro-opportunities and tap into non-traditional markets, such as thin file or underbanked consumers. Although this may seem risky for some FSIs, the good news is flexible technology is available to quickly and easily customize the logic lenders employ to evaluate risk. Advances in decisioning and loan origination systems provide the capability for lenders to use alternative data sources and priority routing to analyze risk and allow them to adapt quickly to market changes.

Priority routing allows institutions to define which data sources are needed based on unique requirements. You may want to simply define backup vendors for your primary sources, or you may be interested in geographic (or ZIP code) preference. In cases where credit bureau data is insufficient, you can include other information to evaluate credit behavior, such as scores based on utility payments. Access to both traditional and new data sources allows lenders to better evaluate risk, thereby minimizing its impact.

Financial institutions seeking resiliency can find a solution in real-time tools, which allow business users to do everything from overall strategic business process management to adjusting and administering credit policy and creating attributes. Through these real-time tools, institutions save time by decreasing the lengthy coding previously necessary for business rule and policy changes. In addition, utilizing current business staff to quickly implement best practice business logic also cuts costs.

Many tools exist that can fulfill different parts of an institution’s process and rule management needs and, when employed, can provide an adaptive advantage in today’s market. However, when selecting a tool suite, it is essential to look for business user control and business user independence. Otherwise, projects will be trapped in the long queue of IT initiatives.

Perhaps the most important benefit of a real-time tool suite is speed: speed of response, speed of implementation and speed of delivery to the customer. The typical process for implementing a change to decisioning encompasses hours of hand-coding by IT staff, as well as review and testing by quality assurance before reaching an install. This time-consuming process can last an average of three to four months. It takes months to evaluate changes in customer behavior and how those changes impact your business process. Therefore, you do not want to spend any more time than necessary implementing updates to your system based on what you have learned about your consumers.

Speed enhances your business process. For example, some FSIs use a real-time tools suite to implement the most up-to-date fraud protection and compliance standards. One example is an alternate payments lender who is able to install more than 400 attribute changes per year, with a monthly average of 34.6 installs. Importantly, these installs average just 1.5 minutes in total time, including scheduling and validation. By using a real-time tools suite, this lender has been able to respond quickly to both changes in the market and customer preferences, all without engaging IT staff.

As mentioned earlier, today’s consumers value timeliness. Having an agile and responsive solution gives your company opportunities to provide excellent service to a wide variety of customers applying for different types of products and expecting immediate responses. Those companies unable to fulfill this need are likely to lose an increasing number of customers to more agile competitors.

This is not a time to take a wait and see approach. Lenders can make small changes today that fit into their overall business strategy. Lenders already using an enterprise decisioning approach with real-time tools can easily make these adjustments. For other lenders, this is the opportunity to choose components that will fit into their environment and provide the agility they need now.

Where do we go from here?

In the coming years, it is unlikely that market volatility will diminish. Indeed, the global economy will continue to impact the financial services industry, ultimately increasing competition for customers. With so many institutions vying for their business, consumers can easily move to another company when one fails to meet their needs, further increasing competition and market instability.

Your business can stay ahead of the competition, and the time to act is now. Continue to examine and refine your business strategies, whether you adopt a complete enterprise-wide approach or implement it incrementally, you must have a well thought out plan. Think innovatively about how your financial institution can continue to acquire and retain customers, regardless of market conditions. Employ technologies that allow you to do more with less by automating your processes and provide the agility to bring new products to market quickly. In short, enhance your business strategy, identify innovative approaches to implement it, and select tools that can be rapidly deployed. These best practices will help you succeed in any market.