IBS Journal June 2016


39


by developing optimised strategies using FICO software. For this achievement, Česká won the 2015 FICO Decision Management Award for Customer Onboarding and Management.


Česká Spořitelna, part of the Erste Bank group, wanted to combat aggressive pricing by competitors, which was cutting into the bank’s market share. The bank had performed analysis showing that it could increase the absolute portfolio profit (APP) of pre-approved cash loans by identifying the optimal offer price and initial credit limit for each individual borrower, based on their risk profile, loan appetite, price sensitivity and personal wealth. Using optimisation tools that are part of the FICO Decision Management Suite, the bank could crunch masses of data to arrive at the best price and credit limit.


The Česká Spořitelna team developed a new approach using an iteration algorithm that took into consideration all the possible loan limits in order to maximise profit. The team also developed a highly sophisticated amount take- up model, which predicts the loan amount that clients will take.


Based on the successful results from a similar project for non-pre-approved loans, the bank expected to see a 5 to 10% increase in APP, and a 7 to 12% increase in new volume. When the bank’s analysts tested optimised scenarios in FICO Decision Optimizer, they showed even better results, estimating a 22% increase in APP and a 25% increase in new sales compared with the prior strategy for pre-approved limits.


IBS Journal: It was commented that FinTech startups could run into difficulty in the coming years. Could you expand upon this?


FICO: FinTech startups face two major challenges in an economic constriction. First, they don’t have the deposit base that banks do, so they depend on other sources for capital – hedge funds, peer lending or in some cases traditional banks – meaning that the alternative lenders taking this approach are an originations front-end for someone else’s balance sheet. Second, their business models and the analytic models they use to measure credit risk have both been developed since the last recession,


in a period of economic growth. There is a lot of concern that these models will not function well in an economic downturn, and that a rash of delinquencies could inflict disproportionate damage to FinTech lenders, relative to established financial institutions that are built to perform through economic booms and busts.


We have already started to see warning signs in the FinTech sector. Since we held FICO World at the end of April, Lending Club, OnDeck and Prosper have all had significant problems. In related news, the US Treasury Department has announced it is forming a working group to address marketplace lending, in part due to concerns about disparate impact. Last month the President of the San Francisco Federal Reserve Bank addressed the LendIt USA conference in San Francisco and talked about “unintended consequences” from new lending models, and the role regulators play in protecting wider economic interests. These new models could inadvertently reduce credit access for certain populations, or overextend credit based on faulty risk assessment.


FinTech innovations have provided the lending market with new ideas, and have stoked competition in the sector. It remains to be seen how sturdy these businesses will be in the next economic cycle. FICO has worked with many new entrants to help them put in place the right risk processes.


IBS Journal: FICO believes that the biggest rewards in this sector will go ‘to businesses focused on improving risk management and making credit more accessible to everyone’. What is driving this belief?


FICO: We have been working with lenders for 60 years, and we have always found that the banks with the strongest risk management discipline have performed the best in the long haul. A strong risk management discipline gives a bank the ability to increase lending safely and responsibly — it is not there to curtail lending. Banks need to maintain a balance between managing risk and expanding credit. This balance benefits not only the institution but society at large.


Banks that are too focused on curtailing risk will miss market opportunities, and alienate consumers and business owners who are looking for credit to improve their


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