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.
New targeting strategies have grown more important as the industry has matured. Many issuers now use data from just one credit bureau and are redoubling their efforts to exploit internal data. These firms find they can generate deeper insights into customer behavior by using their own knowledge - for instance, which customers own boats or spend money in fine restaurants.
While making more sophisticated use of data, some issuers have reintroduced the human touch to the underwriting process. They are starting to rely a bit on manual and judgmental application reviews to approve marginally profitable accounts rather than just confirming turndowns.
Most importantly, financial institutions recognize that they are acquiring relationships, not just accounts, and that each new customer contact can deepen that relationship. This approach can transform an acquisition strategy by helping an issuer focus on maximizing value as well as accounts in force, balances, or profits.
Issuers across the industry are focusing on the fourth risk management imperative, strengthening their risk organizations. Many institutions are expanding the size of their risk groups, giving them more independence, and having them answer directly to senior management rather than business unit heads.
While many issuers place improving risk management high on their to-do lists, they are at a wide variety of stages in their efforts. What is clear, however, is that in the current environment, risk initiatives must cut across the organization and enjoy the support and direction of the C-suite.
