Magazine article American Banker

Finding the Profit Opportunities in Risk Management

Magazine article American Banker

Finding the Profit Opportunities in Risk Management

Article excerpt

Amid heightened competition and continued economic uncertainty, North American credit card issuers are finding that acquiring and keeping profitable customers has become a real gamble.

Consequently, many are seeking to improve risk management, either to gain advantages or to stanch rising losses.

We see three factors driving the focus on risk management. One is a climate of limited market growth, intense price competition, rising interest rates, higher delinquencies, and stubborn unemployment. Another is the expectation that the industry will continue to consolidate, making risk management a key source of value in merged companies. The third is heightened regulatory demands.

Many companies are focusing on risk, but we have found a wide diversity in their practices, with no firm displaying excellence across the board.

An issuer that improves its risk management could substantially raise pretax profits. We have identified four key ways to do that, each of which requires clear direction from senior management -- focusing the account decision-making process on optimizing value; finding the next generation of customer-targeting strategies; adopting a system that reacts quickly to changes in customer behavior; and strengthening the structure and talent of the risk management organization.

There are significant opportunities to make account decisions based on value rather than risk. But few issuers actually do so, in part because investors place such a large emphasis on such metrics as chargeoffs and delinquencies. We believe issuers leave a lot of money on the table by being either too stringent with customers who are profitable but risky or too cavalier with low-risk customers.

Issuers have found they can drive up profitability by using value-based models for assigning and managing price and credit lines, giving accounts and lines to the people most likely to use them. …

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