Transcript Title of Presentation
Optimize Originations for Profit and Success
Case Study: Ceska spořitelna Decision Modeling and Optimization Project
Petr Kapoun
Retail Risk Head Česká spořitelna
Zuzana Slouková
Head of Risk MIS Česká spořitelna © 2014 Fair Isaac Corporation. Confidential. This presentation is provided for the recipient only and cannot be reproduced or shared without Fair Isaac Corporation’s express consent.
Neel Williams
Analytic Consulting FICO
Presenters
Petr Kapoun
Head of Retail Risk Česká spořitelna
Neel Williams
Analytic Consulting FICO
Zuzana Slouková
Head of Risk MIS Česká spořitelna © 2014 Fair Isaac Corporation. Confidential. This presentation is provided for the recipient only and cannot be reproduced or shared without Fair Isaac Corporation’s express consent.
Results and learnings gained from a Decision Modeling and Optimization project on origination decisions for a Consumer Loan portfolio
3 © 2014 Fair Isaac Corporation. Confidential.
Agenda
► Project Goals ► Erste Group: Who We Are ► Consumer Loan Optimization ► What Is Decision Modeling and Optimization?
► Ceska Optimization Solution Roadmap ► Initial Project ► Lessons Learned ► Development of Internal Optimization Team ► Further Projects ► Pre-Approved Consumer Loans ► Credit Cards Initial Limit ► Debt Consolidation ► Future Developments 4 © 2014 Fair Isaac Corporation. Confidential.
Project Goals
► Improve portfolio level profitability by developing two optimized origination strategies for Consumer Loans portfolio ► ► New to Bank customer applications Existing customer applications ► To maximize portfolio level profitability considering the optimization action space ► Loan amount offered (10 loan amount offers and no offer) ► ► Loan price (13 loan price offers) Total of 131 action combinations ► ► Operate within portfolio level constraints Project delivered by FICO to Česká spořitelna ► Collaborative approach with model development knowledge transfer 5 © 2014 Fair Isaac Corporation. Confidential.
Erste Group —Who Are We?
► ERSTE Group is largest bank group in CEE region ► Česká spořitelna is largest bank in Czech Republic mainly focused on retail banking 6 © 2014 Fair Isaac Corporation. Confidential.
Consumer Loans in Česká spořitelna
► Consumer Loans is second most profitable product ► More sophisticated tuning of credit policy and pricing is required due to more competitive market, higher price sensitivity and saturation of Consumer loans ► To improve portfolio level profitability by optimizing the price and limit for applications 4.5
4.0
3.5
3.0
2.5
27%
3.9
2.0
1.5
1.0
0.5
0.0
Prime current account deposits
22%
3.3
Consumer Loans
Operating income (in bio USD)
Previous Year Current Year % Share on Total Operating Income
14%
2.1
9%
1.4
5%
0.8
5%
0.8
4%
0.6
Corporate Loans Prime current account deposits Non-priv. curr. Account dep. (D5) Card Fees Non-priv. term loans 7 © 2014 Fair Isaac Corporation. Confidential.
Consumer Loans Portfolio
Application Volumes by Product ► We have main 3 product types eligible for Optimization: ► Standard Consumer Loans ► Pre-approved loans ► Debt Consolidation loans ► All product are offered with different pricing under different brand (majority is ČS) ► Standard Consumer Loans first optimization project 3,000 2,500 2,000 1,500 1,000 500 0
Unsecured Loans: New volume by product (mio CZK)
Consumer Loans 2 nd option Evidence MA Pre-approved MM Pre-approved Consolidation Staff MA Standard MM Standard Other Students MA Pre-qualified MM Pre-qualified 8 © 2014 Fair Isaac Corporation. Confidential.
Results
Consumer Loans ► 19% “profit per application” improvement driven by: ► Better price assignment to account for customers’ price sensitivity ► Better limit assignment improved Approval rate without Risk impact ► Better pricing and limit strategy to increase loan amount
Impact of OPTIMIZATION Principle:
Risk adjusted Net revenues per application 1 000 USD
+19,1%
877 USD 800 USD 736 USD 600 USD 400 USD 200 USD 0 USD Standard (1st Strategy - Q1 2013) OPTIMALIZACE (4th Strategy - Q2 2014) Existing Customers Risk adjusted net revenues per application Average Loan Amount Average Interest Rate (taken): volume weighted Approval rate (without impact on Risk costs) Champion 1 st Strategy (Q1 2013) $736 USD $4,818 USD 15.26% 46.40% Challenger 4 th Strategy (Q2 2014) $877 USD $5,192 USD 15.91% 52.20% 9 © 2014 Fair Isaac Corporation. Confidential.
Impact 19.13% 7.75% 4.26% 12.50%
What Is Optimization?
►
Example:
Set aggressive prices to grow while maintaining profitability and control over losses
►
Example:
Determine the collections treatment that maximizes customer repayment while minimizing attrition or costs
Optimization
is the mathematical process of finding the best decision for a given business problem Optimization should account for uncertainty and balances competing business objectives 10 © 2014 Fair Isaac Corporation. Confidential.
Development Methodology
Provides Decision Making and Learning Environment
Inputs
► Customer & Bureau Data ► Segmentations & Scores ► Product Metrics
Design Framework Accelerated Learning Deployment
► Engineer final strategy and deploy challengers as Decision Trees or Rule Sets
Decision Modeling
► Establish mathematical relationships between Actions, Reactions and Profitability
Optimization Software (Decision Optimizer) Simulation and Optimization
► Identify best strategy scenarios subject to multiple business goals, constraints & forecasts
Reporting & Analysis
11 © 2014 Fair Isaac Corporation. Confidential.
Decision Model Design
Credit Card Originations Example
Inputs:
Known Information Used To Make Decision
Decisions:
Possible Actions Taken
Predictions:
Unknown Customer Reactions Which Drive Objective Credit Bureau scores Credit Bureau data Predictive scores Demographic data Customer segments Price Action Effect Models Response Initial Credit Line Activation Revolving Balances Sales Charge-Off Capital Metrics 12 © 2014 Fair Isaac Corporation. Confidential.
Outcomes:
Key Metrics Revenue Loss Costs Capital
Objectives and Constraints:
Primary and Secondary Goals Profit Constraints
Decision Modeling Evaluates Customers’Reactions to Your Actions Customer Action Reaction
Offer 1 Line: $10,000 E(Bal) = $1,500 E(loss) = $68 E(profit) = $105 Risk score = 680 Revenue score = 720 Rev Balance = $12,250 Rev Util = 61% Time in File = 132 Segment = A Offer 2 Line: $12,500 Offer 3 Line: $15,000 As Action Effects built into Decision Model it also allows you to run thousands of scenarios very quickly E(Bal) = $1,600 E(loss) = $72 E(profit) = $114 E(Bal) = $1,650 E(loss) = $79 E(profit) = $113 13 © 2014 Fair Isaac Corporation. Confidential.
How Better Decisions Yield More Profit
Efficient Frontier —Increasing Credit Line Trade-off of Profitability Vs. Multiple Business Objectives
120 115
Scenario G
Increase profitability by $10 per account, without incurring additional losses
F G H I Efficient Frontier J E D
110
C
105
B Current Operating Point
Where you are today 100 95 -10%
A Scenario B
Maintain profitability per account and decrease losses by 6% -5% 0% 5%
Projected CHANGE IN LOSS over "Baseline"
10% 14 © 2014 Fair Isaac Corporation. Confidential.
Core Benefits of Decision Modeling and Optimization
►
Power
► ► Designed to manage complex decision model frameworks Scalability to quickly solve very large decision problems ►
Efficiency
► ► Can easily use clients own models, parameters and data elements as inputs Can be used across many different decision types — from pre to late collections and recoveries ►
Business Insight
► ► ► Easily create many different scenarios to compare alternative constraint settings Compare new strategies with any existing strategy — swap sets with drill down Stress test decisions to understand the impact of an uncertain future ►
Support
► Software used by FICO consultants —so provide ongoing best practice support ► Proven and robust development methodology and support ►
Proven Results
► ► ► Powerful reports for validating decision model and exploring optimization space Helps identify weaknesses in existing policy and decisions Proven track record of delivering significant business benefits 15 © 2014 Fair Isaac Corporation. Confidential.
Initial Project Resourcing
► Standard Consumer Loans identified as first optimization project ► Planned as a joint project between Risk and Pricing ► Initial staffing ► 2 FTE for risk analytics ► 1 FTE for pricing, ► 1 FTE as support for data/data checks ► FICO ® Decision Optimizer and FICO ® installed on desktop Model Builder ► FICO analytical team completed the optimization strategy development 16 © 2014 Fair Isaac Corporation. Confidential.
Lessons Learned
Standard Consumer Loan Optimization 1.
Recommend to have FTEs dedicated to Optimization project 2.
Data quality is critical, not only for preparation but also to evaluate and improve the strategy 3.
Ability to interpret data is critical, because correlations are usually influenced by existing policy 4.
Close co-operation with Business is required ► Sharing of business/marketing strategies, ► Development of new strategy takes approximately 8 –10 weeks; basic recalibration takes approximately 2 –4weeks 5.
‘Champion-Challenger’ testing of new strategies before full rollout on whole portfolio and new approval process for all stakeholders 17 © 2014 Fair Isaac Corporation. Confidential.
Changes Along the Way
Internal Optimization Team ► During the development resourcing was changed to: ► Staffing ► 3 FTEs for risk analytics – statistical/economical background with data mining skills ► 1 FTE for pricing did not join the project because of other responsibilities/commitments ► ► Developed own database for optimization to better understand data quality and to shorten preparation phase for new developments Changed installation of FICO ® Decision Optimizer and FICO ® Model Builder from desktop to server, and upgraded server to reduce processing time ► ► ► Project delays mainly caused by data quality Česká spořitelna analytical team took ownership of the optimization strategy developed by FICO Česká spořitelna analytical team begun their own optimized strategy developments, with support from FICO
“Risk only” team fully dedicated to Optimization with own server/database and reporting
18 © 2014 Fair Isaac Corporation. Confidential.
Extending to Pre-Approved Consumer loans
Second Project ► Overall principle of initial limit and price optimization same as for Standard Consumer loans ► Same goal: maximal portfolio profit without an increase of risk costs ► Strategy developed by Česká spořitelna Optimization Team, with support from FICO ► Currently there is technical test running (Challenger: Optimized strategy is running on 5% of new production) ► Full roll-out is expected in Q1 2015 19 © 2014 Fair Isaac Corporation. Confidential.
Credit Cards Initial Limit Optimization
Third Project ► Strategy developed by Česká spořitelna Optimization Team, with support from FICO ► 7,5% “profit per application” improvement without increase of Risk costs mainly driven by: ► Better identification of potential active card user ► Increase in average limits due to more relevant limit offer for individual client 1 400 USD 1 200 USD 1 000 USD 800 USD 600 USD 400 USD 200 USD 0 USD
Impact of OPTIMIZATION Principle:
Average Taken limit by risk rating Challenger Champion 1 2 3 4 5 6 Existing Clients Average Revenues per card (sum of interest and fees) Average Max Utilization of Limit Average Daily balance Average Sum of Monthly Outgoing Transactions (POS, Cash) Champion 9.4 USD 38.3% 259 USD Challenger 10.1 USD 43.3% 307 USD Impact 7.50% 12.89% 18.60% 246 USD 248 USD 0.62% 20 © 2014 Fair Isaac Corporation. Confidential.
Debt Consolidation
FICO ® Xpress Optimization Suite ► Debt Consolidation has recently become a major product on the unsecured loans market —approximately 51% of new applications ► Goal of Optimization: maximization of portfolio profit of the client without increase of risk costs ► To provide best price and limit offer for all possible combinations of consolidated products for each individual client, according to his risk profile, price sensitivity, loan appetite, attrition rate, future clients value, etc ► Development of such complex Optimization requires more sophisticated solution ► FICO ® Xpress Optimization Suite has been purchased, to provide best possible offer online taking account of exact consolidated products 21 © 2014 Fair Isaac Corporation. Confidential.
Future Plans
► Current Optimization still has one limitation: giving best possible decision on given request, but not pro-actively searching for all possible options which were not requested ► Adding to standard Consolidation online Optimization can provide answer not only for single request but also calculate possible options to fit customers needs or preference ► Bank still keeps same profit per application in all options. There are more solutions how to resolve customers’ situation, including debt consolidation (if possible)
Option 1 Standard Response
Max. Limit 3ths Price 14% Monthly payment 70
Today DO New Xpress I need 5ths Option 3 Best Price
EXTERNAL Consolidation of: Credit Card 1 000 Overdraft 500 Loan 2 000
New Xpress Option 2 Lowest Monthly Installment
EXTERNAL Consolidation of: Credit Card 1 000 Overdraft 500 Loan 2 000 INTERNAL Consolidation of: Loan 2 000 NEW LIMIT: 10 500 Monthly payment 150 Price 13,5% NEW LIMIT: 10 000 Monthly payment 140
Price 11,5% Making more credit decisions in one call
22 © 2014 Fair Isaac Corporation. Confidential.
Questions?
Petr Kapoun
Retail Risk Head Česká spořitelna
Zuzana Slouková
Head of Risk MIS Česká spořitelna 23 © 2014 Fair Isaac Corporation. Confidential. This presentation is provided for the recipient only and cannot be reproduced or shared without Fair Isaac Corporation’s express consent.
Neel Williams
Analytic Consulting FICO
Thank You!
Petr Kapoun
Retail Risk Head Česká spořitelna
Zuzana Slouková
Head of Risk MIS Česká spořitelna 24 © 2014 Fair Isaac Corporation. Confidential. This presentation is provided for the recipient only and cannot be reproduced or shared without Fair Isaac Corporation’s express consent.
Neel Williams
Analytic Consulting FICO
Please rate this session online!
Petr Kapoun
Retail Risk Head Česká spořitelna 25 © 2014 Fair Isaac Corporation. Confidential.
Zuzana Slouková
Head of Risk MIS Česká spořitelna
Neel Williams
Analytic Consulting FICO