Credit Risk

How Lenders Can Find the Hidden Risk in their Portfolio

How Lenders Can Find the Hidden Risk in their Portfolio

August 10, 2023 | Tom O’Neill

The last three years has brought a range of micro and macroeconomic storms. Shifts in spending behavior and the influx of stimulus payments early in the pandemic led to a reduction in credit balances and delinquencies – and a rise in credit scores. But more recently, rising inflation has caused dwindling savings and an uptick in delinquencies. 

Where does this leave lenders? And what is the most important thing they should be doing right now when it comes to account management? 

In episode 30 of the Market Pulse podcast, our panel of experts from the Equifax Risk Advisory group discuss how lenders can leverage account management to find hidden risk in their portfolio. My guests include Maria Urtubey, Thomas Aliff, Jesse Hardin and Dave Sojka.

Listen to our podcast episode for the full interview or keep reading for an abbreviated Q&A.

What is the most important thing a lender should be doing right now when it comes to account management?

Jesse Hardin: The most critical thing lenders can do right now is use account management strategies. The idea of booking an account and forgetting about it is not a wise strategy. So, managing a customer relationship, and I may use customer and consumer interchangeably here, but managing a customer relationship via account management is about understanding the value a consumer represents to the lender. And value takes into account things like cost. So real investment dollar or opportunity cost of that investment. And then things like the benefit the consumer brings to the organization. Only after understanding value can the lender develop strategies via account management that help promote growth and profitability. 

I'd also like to point out that account management is more than risk mitigation. The telco and energy portfolios I help cover are acquiring customers and developing those customer relationships. That's as important, if not more important, of a strategy as managing or mitigating risk. Lenders must build an account management strategy that uses all types of data to help inform how the consumer will react once they become a customer. And it's imperative, as we've seen and you mentioned with the economic shocks that we've had over the past few years, whether it's COVID, inflation, elections and loan forgiveness, lenders must be proactively managing a customer across the customer lifecycle. And they should reach out as those customer situations change. 

Dave Sojka: Great point, Jesse. I would say the account management strategy should be complimentary to your adjudication strategy. What you do at the front end should be complemented by what you do once that customer has accepted whatever product offer you have given them. If you are conservative on the initial line or loan amount or rates, account management allows you to be potentially more aggressive. 

The converse is also an option. Acquisition costs are usually much higher than the cost of retainment. To your point, Jesse, it's not only about the risk side of things. It's also about keeping the customer. And whether that's through cross-sell, line management or reissue, these things are all part of a cohesive strategy that work hand in hand.

The last point I'll make is if you're looking to adjust your strategy, know how much lead time it will take to go through your portfolio and have an impact. A strategy that starts in the beginning of the year will have significantly more impact than one that begins in November and is expected to change results for the year.

Maria Urtubey: Adding to what Dave said, tying management in with origination strategies should be a continuous process. Particularly since the scores and the data used to make the origination decision is not as valid after six months. You want to ensure that the picture that you’re considering when making decisions to differentiate treatment of your customers includes the best filters and colors and definition. And that in a way will tie into the type of reaction and frequency of that reaction. What are you currently doing and how quickly do you want to anticipate or react to rising delinquencies or retaining customers that are decreasing utilization? These are some aspects to consider.

Listen on Your Favorite Podcast App

Listen to the full episode of this podcast on your favorite app. And don’t miss our previous episode, Financial Industry: Assessing Risk as Federal Student Loan Payments Resume.

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Tom O’Neill

Tom O’Neill

Risk Consultant

Tom O'Neill brings over 20 years of experience leading analytic consulting engagements within Financial Services and other industries. As Risk Consultant at Equifax, O’Neill provides analytic thought leadership to client senior management, public forums, and various industry and advisory councils. While at Experian up[...]