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Experian Limited 2007. All rights reserved. Experian and the marks used herein are service marks or registered trademarks of Experian Limited. Other product and company names mentioned herein may be the trademarks of their respective owners. No part of this copyrighted work may be reproduced, modified, or distributed in any form or manner without the prior written permission of Experian Limited. Confidential and proprietary.
Agenda
Some themes Analytics and the customer life cycle The role of scoring Building a scorecard Using scoring systems Risk management infrastructure
Themes
Description 1. Identifying potential customers; 2. Selling credit products to new customers; 3. Identifying the credit risk of the customer and the proposed transaction; 4. Identifying the risk of fraudulent application 5. Deciding whether to accept or decline the transaction; 6. Deciding, for accepted transactions, on the terms, e.g., credit amount, pricing. 7. Reviewing the customers facilities (e.g., credit limits, price, etc.); 8. Cross-selling new products to the customers; 9. Ensuring good customers are retained; 10. Identify fraudulent transactions. 11. Identifying self-cure customers; 12. Rehabilitation of potentially good customers; 13. Work-out customers where relationship is broken.
Experian Limited 2007. All rights reserved. Confidential and proprietary.
New customers
Customer management
Collections
2,196
1,374
Profits 836
Impairment charges
1998
1999
2000
2001
2002
2003
2004
2005
2006
5 core components
Component Data Description Application data (for new customers) Account behaviour data (for existing customers) External data (e.g., credit bureaux) Risk models (PD, LGD), fraud models (application and transaction fraud) and revenue models Business rules that translate the outcome of statistical models in credit decisions (accept/decline, price, credit limits, etc.) that maximise profit Software tools to automate the calculation of the above scores and credit strategies on-line on high volumes, with a high degree of flexibility to change credit strategies on the fly Software tools to evaluate the performance of statistical models and credit strategies, and accuracy of implementation
Experian Limited 2007. All rights reserved. Confidential and proprietary.
Statistical Models
Credit strategies
Implementation tools
Evaluation tools
Agenda
Some basic themes Analytics and the customer life cycle The role of scoring Building a scorecard Using scoring systems Risk management infrastructure
Solicitation
Application
Customer management
Collections
Debt recovery
Population Information
Analytics touches every part of the customer lifecycle
Analytics touches every part of the customer life cycle Amount of information about the customer grows as the relationship advances through the customer life cycle
Experian Limited 2007. All rights reserved. Confidential and proprietary.
Solicitation
Channel preference Contact history Demographics Location Bureau data Action outcomes Costs
Application
Channel Product holdings Demographics Bureau data Previous relationships Account performance Costs
Customer management
Product holdings Usage Delinquency Customer contacts Preferences Bureau data Actions taken Action outcomes Costs
Collections
Action history Promises to pay Promises fulfilled Action outcomes Bureau data Costs
Debt recovery
Action history Promises to pay Bureau data Agents used Promises fulfilled Litigation outcomes Costs
Define Goals Agree objectives Understand results Assess Strategy Review Monitor Track progress against expectations Implement Design Build new strategy
Plan Review
10
Agenda
Some basic themes Analytics and the customer life cycle The role of scoring Building a scorecard Using scoring systems Risk management infrastructure
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Example Scorecard
Baseline Constant 800
Scorecards add and subtract points to a baseline constant according to individuals or accounts data Scorecards are easy to apply and simple to understand The resulting score gives a prediction of future behaviour Scores are used to rank individuals to assign the best actions
Etc.
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Consider a scorecard built to predict whether a new applicant for a credit product will default in the next 12 months This scorecard is used when a new customer applies
Scorecard
Score
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Proportion of Applicants
A pplication Score
High Risk Extremely High Risk Reject Reject or price to cover the high expected loss
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Agenda
Some basic themes Analytics and the customer life cycle The role of scoring Building a scorecard Using scoring systems Risk management infrastructure
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THEN
Outcome
Scorecard
NOW
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x x x
Robust
x
Development Sample
Volumes
THEN
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Representative
This data can come from a number of sources All relevant data should go into the development sample
Development Sample
Application Form Credit Bureau Data Information on the individuals other credit commitments Historical Account Behaviour Information on the historical behaviour on the account Other Account Information Information on the historical behaviour on other accounts with the same lender
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THEN
Can be a continuous variable (profit, revenue, loss given default, etc.) More commonly it is dichotomous - yes/no
x x x x
Will this applicant default? Is this transaction fraudulent? Will this company fail? Etc.
Outcome
Good
THE FUTURE
Bad
Observation - Now
Experian Limited 2007. All rights reserved. Confidential and proprietary.
Outcome - Prediction
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NOW
Bad
Good
Outcome
NOW
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Statistical Model
Observation Data
Outcome
Statistical Model
Scorecard
Statistical tool needs to be: Powerful to get the best prediction from the data Flexible can handle varying data types and outcomes Interpretable easy to understand and to overlay business intelligence Transparent should be non-black box for regulatory reasons and to ensure understanding
Experian Limited 2007. All rights reserved. Confidential and proprietary.
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Linear regression
Reality
Statistical Model
Logistic regression Artificial neural networks Etc Other things being equal the choice of algorithm has relatively little impact on the ultimate power of the model
x x x x x x x x x x x x x x x x x x x x x
Prediction
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Statistical Model
Discrimination the power to polarise individuals between good and bad - Gini statistic & Kolmogorov-Smirnov statistic Accuracy how much of the variability of the outcome is explained by the model Validation ensures that over-modelling has not occurred or that an anomalous sample has not been used Improvement the new model should outperforms the existing model
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Agenda
Some basic themes Analytics and the customer life cycle The role of scoring Building a scorecard Using scoring systems Risk management infrastructure
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DATA
SCORE CARD
DECISIONS
STRATEGY
The data feeds the scoring system, which is used to aid the decisioning The decisions a company makes determine its strategy It is the aims and strategy of the business that must be considered when deciding how to use a scoring system, e.g.
Growing the market share Reducing bad debt Increasing automation Maximising response for given marketing cost Combating fraud
Experian Limited 2007. All rights reserved. Confidential and proprietary.
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Proportion of Applicants
A pplication Score
High Risk Extremely High Risk Reject Reject or price to cover the high expected loss
Score Band 400 401 550 551 650 651 700 701 750 751 - 800 801 850 851 900 901 950 951 TOTAL
# Goods 500 700 815 1008 976 950 1000 1050 960 1000 8959
% Applicants 9.8 10.3 9.6 10.7 10.1 9.7 10.0 10.5 9.5 9.9 100
Score distribution is obtained by applying the score to the development sample Gives us a prediction for new applicants falling into a given score range
Experian Limited 2007. All rights reserved. Confidential and proprietary.
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Score Band 400 401 550 551 650 651 700 701 750 751 - 800 801 850 851 900 901 950 951 TOTAL
# Goods 500 700 815 1008 976 950 1000 1050 960 1000 8959
% Applicants 9.8 10.3 9.6 10.7 10.1 9.7 10.0 10.5 9.5 9.9 100 ACCEPT WITH XSELL ACCEPT REFER REJECT
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Agenda
Some basic themes Analytics and the customer life cycle The role of scoring Building a scorecard Using scoring systems Risk management infrastructure
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Rules execution
(Decision Agent)
Rules Definition
(Strategy Design Studio)
Results
Experian Limited 2007. All rights reserved. Confidential and proprietary.
Deployed in: Origination Application processing Portfolio Management Customer level decisioning Collections Authorisations Intelligent Messaging Event Management Basel II Stress testing ..
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Business-driven scoring & decisionmaking Comprehensive workflow capabilities and provision of relevant data for users
Automated account set-up. Provision of hand-off files. Letter and e-mail production
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Implements
Defines
Business logic, Segmentation, Scorecards, Strategies and Champion Challenger Analytical ResultsData Mart
HOS T
Management System, Authorisation System etc
Active History
Extract
Strategy Implementation
Rule Definition
Data Manager
Experian Limited 2007. All rights reserved. Confidential and proprietary.
Operational environment
Challeng er n
The challenger strategy proven in one time period, may no longer be appropriate for another time period things change
Champ ion
Using performance data enables better decisions, but is also more complex to combine all the decision influences to maximise value
Challeng er 3 Challeng er 4
Challeng er 2
Time
Experian Limited 2007. All rights reserved. Confidential and proprietary.
#35
Optimised Strategies
Elaborate Strategies
Scoring
Manual
X X X X X X X XX X X XX X X X X X X XX X XXX XX X XXX X XXX X X XXX X X X X
Allocates optimal action for each customer within constraints Objective, mathematical goal maximisation
single predictive model e.g. credit risk score Heuristic cut-offs assigned using good:bad odds
Segmentation based on predictive model dimensions: e.g. risk and revenue Subjective judgment used to manage trade-offs
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#36
Centralisation of credit decisioning Set-up of IT tools required to automate credit risk and market management processes and the interaction between front line and back office Development of decision support tools Development of credit / marketing databases
Automate the processes
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Infrastructure enables total proactive control of the business decision analytics becomes a way of life Risk and marketing strategies are centrally designed based on advanced statistical techniques and drive customer profitability Decision analytics is well structured and integrated across business functions including risk, marketing, sales, operations, finance Optimize the decisions
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How are credit policies and strategies defined, reviewed and improved? Processes well defined and automated
Processes
How well defined and the processes, and what is the degree of automation?
Include all available data into the process. Focus underwriter on key review, not second scorecard
How well do staff understand all profit drivers? What is the degree of expertise in credit scoring and decision science?
Knowledge
Tools
Scorecards in place for all critical segments, decision engine used to Ensure clear assignment of control terms of responsibilities for risk business. Generate management functions key KPIs What credit management tools are used? How How are credit risk, flexible are they? How marketing and finance easy is it for business user working together? How to change processes and Organisation are operational and strategies? strategic decisions taken?
Experian Limited 2007. All rights reserved. Confidential and proprietary.
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Conclusions
It all starts with data Scorecards are important Strategy is more important Implementing the strategy properly is vital If you dont monitor youre wasting you time Risk management is a never-ending journey
Experian Limited 2007. All rights reserved. Confidential and proprietary.
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Experian Limited 2007. All rights reserved. Experian and the marks used herein are service marks or registered trademarks of Experian Limited. Other product and company names mentioned herein may be the trademarks of their respective owners. No part of this copyrighted work may be reproduced, modified, or distributed in any form or manner without the prior written permission of Experian Limited. Confidential and proprietary.