Magazine article American Banker

VIEWPOINT: Models Can Boost Card Profit

Magazine article American Banker

VIEWPOINT: Models Can Boost Card Profit

Article excerpt

Byline: Andrew Jennings

The Credit Card Accountability, Responsability and Disclosure (CARD) Act has given banks less room to maneuver as they search for profits in their card portfolios. Not only are they being pinched by new regulations, their card profits are facing pressure from changing consumer behavior. Cardholders in good standing are paying down balances while delinquency rates among riskier customers rise.

But there are immense opportunities for lenders to build new advantages by taking a bold approach to risk management and analytics. The task at hand - re-engineering card profitability - demands a whole new look at the possibilities opened up by advances in analytic technology.

Essential analytical capabilities that should be in every lender's toolbox include:

* Macroeconomic analysis. Gross domestic product, housing prices, unemployment and other factors have strong correlations to individual creditworthiness. Banks should apply analytics to explore "what if" scenarios about future economic conditions and understand the risk/revenue sensitivity of different segments under different conditions. Current decisions would then be adjusted to account for future potential.

* Credit-capacity insight. New CARD Act regulations require an explicit evaluation of affordability before any credit is assigned or increased. Income estimators help lenders comply with these requirements but fail to answer the most important question: Can a consumer handle more debt responsibly? This question requires a sophisticated evaluation of spending behavior, credit usage and other variables. Understanding a consumer's capacity refines consumer differentiation within risk score bands.

By using credit scores with a credit-capacity index, lenders can offer more credit to high-capacity, low-risk consumers, and reduce lending when capacity is low.

* Transaction-based risk analysis. A recent TowerGroup report said that "Transactions will become more important as demand for reduced latency in business intelligence and monitoring require more granular knowledge and timely tracking at the transaction level. …

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