Today I’d like to offer six impactful strategies that can be used to create longer term preparedness for unplanned for events, and then offer examples of how those strategies could be used to mitigate the impending credit crunch many of your financial institutions will face.
1) Commit to data as the foundation for decision making, by adopting a “data-centric” mindset
Prioritize and reward the use of data in the day-to-day operation of your FI so that data-based decision making becomes ingrained in the culture. You own the relationship with your customers and members, and are in the best position to really know how to serve them. By analyzing your customer data, new and better models can be developed to measure risk and credit-worthiness.
Traditional credit scores and third-party data resources are going to have significant limitations in providing a full picture of the financial health of your customers. Rapid financial impacts from the pandemic, loan forbearance programs, and limitations about what can be reported to credit agencies will limit the usefulness of traditional credit scoring models. This is an opportunity to take greater ownership of the credit evaluation and decisioning process, adding additional data to drive greater insights and improve decision making.
2) Demand cleansed and categorized data to support decision making
It’s not enough to embrace that decisions should be anchored in data. Often the data we have is not in a usable form. Additionally, there are numerous internal and external data sources available to us, with no end in sight to the amount of data being generated on a daily basis. What’s missing is consistency and context.
In order to ensure that you have usable data to inform your decisions, you must demand that your data is cleansed, organized and categorized. We’ve all had the experience of seeing a merchant transaction on our credit card statement we don’t recognize, and we may have even called our bank to dispute a legitimate charge we didn’t recognize. Just as you need to cleanse and categorize those “dirty” merchant strings, you need clean, organized, and categorized data to add context to your decision making.
For example, if you only look at inflows and a consumer’s balance, you may miss significant details. Understanding the difference between a direct deposit, a payday loan, or a deposit from a pawn shop, can provide great insight into the current financial status of your customers. The implications are clear - expect more from your data than you’ve been getting
3) Recognize the limitations of “data lakes”
Too many banks and credit unions fall into the trap of thinking that a data warehouse or “data lake” is the answer. In reality, a data lake focuses almost exclusively on centralizing data, but ignores the analysis and implications that come from truly understanding data. Do not fall into the trap of thinking a repository is enough.
It is critical that you develop capabilities around analysis and modeling. Predictive analytics models should serve as the foundation for scenario planning. For example, data analysis can be used to identify truly “at-risk” populations and separate them from groups that took advantage of deferral programs simply because programs were available.
Building predictive models that consider inflows and outflows of cash, income sources, product mix and other variables will help you identify loans and customers at risk. Monitoring changes in consumer behaviors and risk levels will allow you to make on the fly adjustments to credit strategies in this rapidly changing environment.
4) Integrate delivery channels to ensure messages are consistent and available where your customers are
As the pandemic has interrupted our normal behavior patterns, reaching people the way you used to may not be possible anymore. Even before the pandemic, people were already less likely to answer a call from an unknown number. Reaching customers is now more difficult than ever.
Ensure that you can communicate with at-risk customers via email, text, phone and online channels. Find the communication channel and the communication cadence to which each at-risk customer will respond. Successful engagement is the very first step to positively impacting your customers. Make sure you can reach people before it’s too late.
5) Ensure messaging supports the principles of being relevant, personalized, timely, and human.
If you can understand the challenges a customer is facing, you can engage that customer with strategies that are specific to their unique circumstances and more likely to result in a positive outcome. Data will help you understand each customer’s story. Just because a loan is at risk, doesn’t mean you should write it off. In fact, that approach may be the most costly for you and your customer in the long run. Coaching and information about financial wellness will be well received by people who need somebody to help them.
From there, develop creative offer structures to work with people to keep them in their homes, driving their cars, and pay for life’s necessities. Communicate personally, humanely, and with genuine concern. Defaults, sending people to collections, and re-possession aren’t positive outcomes for anybody involved - view each only as a last resort.
6) Measure, Adjust, and Repeat
Don’t just “set it and forget it”. Now is not the time for autopilot, but rather for constant review, measurement, and readjustment. These strategies are part of developing a new way of having conversations with customers and building more lasting relationships.
Back-test the models you’ve built for accuracy. Measure your ability to reach consumers, the effectiveness of the message, the performance of your teams, and the relevance of the interactions. Truly engage - your customers deserve it and they will reward you for caring.
Future-proofing Your Institution
These six strategies will help you mitigate some of the impending loan risk that is surely ahead and will prepare your institution for the next unforeseen crisis. By adopting the recommendations in this article, your bank or credit union will be viewed as a consumer’s financial partner, delivering more lasting, loyal, and profitable relationships that will stand the test of time.