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Comprehensive Management of Profitability and Credit Risk

The mortgage crisis demonstrated the dangers of over-reliance upon a narrow view of customers. Assumptions about asset values—and therefore the reduction in credit risk provided by those assets for secured loans—have received the most scrutiny about the lending decisions that ultimately led to large losses. However, the total picture is much broader. Impacts of acquisition channels, debt levels, promotional programs, workout programs, funding sources, and many other variables were also demonstrated to be part of a highly interconnected picture.

Post-crisis, institutions needed to renew their focus on profitability by growing top-line revenue. The lessons learned through this transition have reinforced the need to take a comprehensive view of our customers and business lines.

Growing profitability in the face of current challenges requires both analytical and operational changes, tied to two overarching themes:

  1. Utilizing a full customer view
  2. Aligning actions across the credit life cycle

Utilizing the Full Customer View

Utilizing the full customer view can be defined in two categories.

First is the use of data from all relationships for analysis. While many organizations attempt to harness customer-level data to varying degrees, few have successfully incorporated a full customer view into all decision areas and touch points.

The second category is taking coordinated actions across all relationships. Taking un-coordinated actions has significant cost and performance impacts. For example, a credit line decrease will have a limited effect if only one account is treated (e.g. credit card) while the others are left with availability (e.g. HELOC). In this example, the balances will just shift to the other account.

We have found that identifying actions to take is easier than executing actions due to technological and organizational challenges.

Aligning Actions Across the Credit Life Cycle

It is essential that business practices throughout the credit life cycle are aligned in each segment to avoid evaporation of profitability. This alignment requires a greater level of communication, analytics and coordination across business units. In this white paper, key required changes are outlined across each area of the credit life cycle, including:

  • Marketing and Prospecting;
  • Credit Acquisition;
  • Portfolio Management; and
  • Collections.

In the end, leveraging all available customer information across products to manage credit relationships can greatly increase profitability and reduce surprises. Download the full white paper to read in greater detail how you can improve financial performance through the comprehensive management of profitability and credit risk.

Category: Credit