For most lenders, making changes to credit policy is not an easy or expedited process. It often takes financial institutions at least nine months to develop, test and deploy a credit risk policy concept and more likely this process is somewhere closer to 12 to 18 months.
This poses a great challenge because the time required to build and implement new policy is ineffective in the current economic climate. There is a desire within the financial services industry to speed up the development cycle, but many believe it is impossible to do so without impacting the quality of the final policy. With the right technology and supporting business strategy it can be done.
To make decisions faster, accurately and safely, credit risk executives can learn from an approach fighter pilots employ, the OODA loop. This loop dictates that in any decision-making process these four steps must occur: Observe, Orient, Decide and Act. Retired military strategist Colonel John Boyd of the United States Air Force (USAF) originated this concept to help fighter pilots hone their decision-making skills and improve proficiency during battle.
The key is executing the decision-making loop more quickly than competitors and improving outcomes with a faster cycle. The “Top Guns” of the USAF have mastered this strategy and trap rivals in their line of fire before the competition has time to react.
Lenders can use the same decision-making technique to develop credit risk policy. By employing this technique in a continuous development cycle, institutions don’t need to rely on policy implemented once every few years.
The OODA loop cycle for credit risk managers looks like this: 1) “Observe” what is happening in the market and in their portfolio; 2) Use performance data to “orient” their institution in the right direction; 3) “Decide” next steps by testing and validating theories based on that data; and 4) “Act” by implementing new policies quickly.
According to Bobbie Britting, research director of consumer lending at TowerGroup, “For lenders, the most important learnings from the recession are that historical lending models, collection metrics and financial planning tools are imperfect and that market conditions, consumer purchase behavior and demographics have changed.
New business models require continuous learning based on timely feedback loops to ensure the models remain effective and in sync with economic shifts and changes in consumer purchase behavior.”
In a volatile market, with conditions changing faster than ever, the best-laid plans are going to be outdated before they can be implemented. To stay ahead, lenders must cut time and cost barriers that stall productivity and be nimble enough to make changes as the market and consumer behavior fluctuates.
These are unprecedented times that require more progressive strategies. Adopting a new business strategy for credit risk policy development improves outcomes for lenders by making the cycle a more continuous process rather than a project that is undertaken every few years.
This may ease collection issues down the road by helping lenders make better credit decisions early. The same strategies can be used to support a quicker response time when identifying consumers on the verge of getting in trouble.
Eric Lindeen is director of marketing at Zoot Enterprises.