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The Originations Imperative. Organic Growth by attracting New Customers. Daniel Melo Director Pre Sales EMEA FICO 16 November, 2010. Originations: path for growth. Many “leaks” in the Portfolio! Everybody drinks your beer. Voluntary Attrition Collections Inactive

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the originations imperative

The Originations Imperative

Organic Growth by attracting New Customers

Daniel MeloDirector Pre Sales EMEAFICO

16 November, 2010

originations path for growth
Originations: path for growth

Many “leaks” in the Portfolio!

Everybody drinks your beer...

Voluntary Attrition




Capital Requirements



With few sources of replenishment...

originations the new credit consumer
Originations: The New Credit Consumer
  • There is a new client around the block
    • With different origination needs
      • Traditional  Branch, not much credit appetite, no appetite for consumer credit, can wait decisions, prefers papers and documents;
      • Normal  Semi virtual, with credit needs but careful, likes fast decisions, accepts virtual contracts;
      • Webbie  Branch? What is this?, consumer above all, love (and sometimes do only know) plastic cards, not careful, demands real time decisions, paperless;
      • Emerging  no previous bank experience, uneducated regarding product characteristics, insecure when decisions delayed, prefers papers, documents and personal attention;
      • .....
    • Keen for price and service levels
    • Overwhelmed with many different banking and credit proposals
    • “Good”/low risk customers? Focus of everybody!

Originations: The New Credit Market

  • Regulatory issues
    • Capital requirements and sometimes “cap” over credit limits
    • Increased emphasis on alignment of provisions to risk appetite
    • Demanding more customer protection, more transparency
    • Local regulation versus Basel versus “the world” demanding more control
  • Internal Bank issues
    • Mergers / “forced marriages” involving weak banks taken over by more stable entities – legacy systems or multiple operating jurisdictions result
    • Emphasis on strong Governance in wake of banking crisis – increased scrutiny on Risk  avoid same mistakes…
    • Tensions between desire to grow and compete successfully, reality of highly cautious approach to risk and capital allocation
    • As attention refocuses on originations,operational and resource issues can arise as the market resets  the neglected element?
originations in the resetting economy
Originations in the Resetting Economy
  • Multiple decision moment / Not a silo decision:
    • Credit Risk evaluation
    • Fraud Risk evaluation for First and Third Party Fraud
    • Return on Allocated Capital
    • Price definition based on Risk (any evaluated risk)
    • Commercial Offer (Up Selling / Cross Selling)
  • Pressure for fast decisions (internal/external)
  • Multiple sales points to integrate
    • Traditional face –to-face interviews and paper applications
    • Internet and Mobile Channels increasingly popular
    • Applications without paper trail can be riskier due to lack of data proof
  • Adapt decisions to a fast market change
    • Reshape on the fly the offer, risk decision/appetite.
key concerns within the originations function
Key Concerns within the Originations Function






  • Location and geographic footprint strategy?
  • Target prospect / customer?
  • Manage marketing campaigns?
  • Tailor offer / message / incentive?
  • Tier pricing?
  • Manage promotional expense and effect?
  • Timing of campaigns?
  • Accept/reject?
  • Deter fraud?
  • Verify customer data?
  • Anti-money laundering compliance?
  • Tier pricing?
  • Initial line? Loan-to-value? Collateral value?
  • Cross-sell?
  • Upsell / downsell /offer alternative?
  • Manage payments?
  • Promote usage?
  • Manage exposure?
  • Collection & recoveries?
  • Collateral tracking?
  • Mitigate risk?
  • Deter fraud?
  • Marketing communications?
  • Adjust pricing?
  • Service level?
  • Cross-sell?
  • Stress testing?







Client Prospects

Client Customers

data entry and information capture has impact across originations process and beyond
Data Entry and Information Capture Has Impact Across Originations Process and Beyond
  • Tension: more information requested, less likely customer will complete application
    • Adapt for each customer type  offer/proposal segmentation will drive commercial offer
    • Balance between Risk x Marketing x Sales x Finance
    • “Short-cuts” where the customer is already well-known to you
  • Application data needed to perform:
    • Credit review
    • Fraud evaluation
    • Activation probability
    • Marketing / Commercial offer review
  • Yes, external data is usable and important
    • Conform with local/EU regulations in Data Protection
  • Yes, internal data is usable and perhaps most important
    • Insights from existing credit, liability relationships with the customer
minimum mandatory information how do you know
Minimum Mandatory Information — How Do You Know?
  • Information is typically considered mandatory if it:
    • Is legally required to open an account and/or satisfy “know the customer” and ID protection requirements
      • Example: Mailing address, date of birth, vehicle ID number
    • Is legally required to obtain a credit report
      • Example: Evidence of customer consent
    • Is needed to perform the multiple decisions
      • Example: Income - reviewed from fraud, credit, marketing, other perspectives
    • Is required for downstream contact
      • Example: Telephone numbers at home and business
    • Would invalidate the statistical correctness of a score calculation if too many elements were missing
what can you do to control fraud at originations
What Can You Do to Control Fraud at Originations?
  • Have reps observe application clues
    • Handwriting characteristics indicative of fraud rings
    • Abnormal inclusion or exclusion of detail (income = 10.000 vs. 10.023,15)
    • Unable to correctly spell occupation, other key words
  • Implement a Rule and Decision Platform
    • Can routinize simple checks for repeated use of phone numbers, addresses, names
    • Can create unlimited, highly sophisticated rules and flexibility – highly scalable
    • Enables the bank to manage complete detection system by themselves
    • Must take care to avoid “training” fraudsters how to cheat through frequent update
  • Fraud Consulting
    • Review policies and procedures across the life cycle
    • Help identifying most effective rules for originations fraud deterrence
    • Apply industry best practices
  • Models
    • FICO builds models to detect First Party Fraud at application stage
    • A decision platform will allow other score cards or hot list to be called to improve the intelligence and decision
blocking fraud analytics at originations
Blocking Fraud: Analytics at Originations

New Customer Application




Data Includes:

  • Application
  • Credit Bureau
  • Existing Customer Master File
  • Linked Accounts
  • Hits on Hot lists/files

APP Model



Manual Review

Application models can be stand-alone scorecards or include advanced capabilities that detect and address differences in channel and product fraud trends

fraud model results
Fraud Model Results

Fraud To Non-fraud Score Separation


Advanced Analytics increases the concentrationof fraud relative to good transactions at high score thresholds

% Goods

% Bads

Advanced Analytics decreases the concentrationof fraud relative to good transactions at lower score thresholds

While minimisingthe false-positives

While minimisingthe false-negatives

multi product and counter offer strategies make sense for many full service retail creditors
Multi-Product and Counter-Offer Strategies Make Sense for Many Full Service Retail Creditors


Current Account/ Checking

  • Counter-offer makes sense if customer could qualify for a product other than the one requested
    • Up-sell — better product or multi-product offer
    • Down-sell — lesser product or product with more restrictive terms
  • Counter-offer typically communicated in place of decline, but with same communication requirements
  • Where multi-product lending is possible, may make sense to establish customer exposure and offer additional products beyond the one for which customer immediately applied

Overdraft Protection

Debit Card

Credit Card

Vehicle Loan

Education Loan

Mortgage / HELOC

general challenge to create competitive advantage magnified in crunches
Keep your product offerings competitive

Adverse Selection: High risk applicants will respond to any product opportunity, while low risk applicants can discriminate between various credit opportunities

High response rate is not always good news

General Challenge to Create Competitive Advantage Magnified in Crunches
open originations platform
Open Originations Platform

Application Processing

Application Sources

Data Normalization


Workflow, queues, manual


3rd Party Data

Online Banking

WEB Offer



Decision Management




Retail Stores

ATM Offers


Bank DataHosts


risk based pricing business goals
Risk-based Pricing: Business Goals
  • Caveat: Risk-based Pricing may be subject to government restrictions including rate caps, fee caps, may need to meet “transparency” requirements
  • Good Credit Quality Customers will expect lower costs, more attractive offers; Higher Risk Customers more accepting of high fees, high rates, less compelling products
    • Risk-based pricing can improve profitability
    • Enhance Revenue from Riskier accounts
      • Enable approval of riskier customers based on risk-adjusted returns
      • Increase rates and fees to enhance revenue on high risk customers
      • Reduce losses (spark Positive Rejection)
    • Encourage interest revenue from lower risk accounts
    • Increase activation and retention
    • Enhance customer relationships
  • Small changes in price will yield larger changes in Profit
how does penalty pricing work
How Does Penalty Pricing Work?
  • Event driven or criteria driven Penalty Pricing most common
    • Event: History of Multiple Delinquencies
      • Example: Two times one cycle delinquent within a set period
      • Example: Once Two cycles delinquent
    • Criteria: High Risk Originations Score
  • In practice, ranges from:
    • The Simple - One defined “From” and “To” Price ( from 9 to 11%)
    • The Complex:
      • Score driven ranges of increasing rates (low risk goes to 9% and all the way to high risk at 11%)
      • Based on Score AND/OR Criteria
  • Should be empirically derived, including test for Actual vs. Expected Payment Rates
  • CAUTION: Penalty pricing under increasing regulatory scrutiny
  • CAUTION: Penalty pricing that is too onerous can become a self-fulfilling prophecy of degraded performance
how does promotional pricing work
How Does Promotional Pricing Work ?

Many Approaches

  • Lower Risk = Lower Interest Rate at originations
  • Lower Risk = Lower Fee
  • Upgrades to gold products under same Fee (not a selling act, an upgrade)
  • Upselling
  • Fee Waiver
  • Added Rewards Points
  • Time-restricted offer where rate varies after a fixed period
  • Behaviour-restricted offer where promotion award occurs when customer makes specific purchases, maintains specific balances, etc.
connected decisions setting up the booked account
Connected Decisions – Setting Up the Booked Account


  • Important to transfer information to the billing system master file that will
    • Enable customer contact
    • Permit ID verification
    • Satisfy legal requirements
    • Enable score and policy tracking
    • Permit performance capture to tie back to originations criteria






Collections & Recoveries

Customer Management

originations in the resetting economy1
Originations in the Resetting Economy
  • There is a new Originations need around the corner
    • Changes in Clients, Markets and Regulations
  • Not just a Credit Risk decision anymore
    • Remove silos
    • Be proactive internally and externally
    • Maximize opportunity with the customer
  • Control with flexibility
    • Fast adoption of changes with proper control and performance following
  • Do not wait for the call
    • Prepare now for the resetting economy
thank you


Daniel MeloDirector Pre Sales EMEAFICO

16 November, 2010