For most lenders, making changes to credit policy is not an easy or quick process.

In a recent survey by TowerGroup, 93% of financial industry executives said it takes at least nine months to develop, test and deploy a credit risk policy concept.

The majority of the executives polled (64%) said that this process takes their institution 12 to 18 months. This time lag presents a significant challenge, because taking so long to develop and implement new policy is ineffective in today's economic climate.

There is a desire within the financial services industry to speed up this development cycle. However, many believe it is impossible to do so without affecting the quality of the final policy.

With the right technology and supporting business strategy it can be done. To make decisions more quickly, accurately and safely, credit risk executives can learn from an approach that fighter pilots employ — the "OODA loop."

Retired military strategist Col. John Boyd of the U.S. Air Force originated the concept to help fighter pilots hone decision-making skills and improve proficiency during battle.

The OODA loop dictates that in any decision-making process these four steps must occur: observe, orient, decide and act.

The key is executing your decision-making loop more quickly than your competitors and improving your outcomes with a faster cycle.

The "Top Guns" of the Air Force have mastered this strategy; they trap their rivals in their line of fire before the competition even 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 something like this:

  • Observe what is happening in the market and in the portfolio.
  • Use performance data to orient their institution in the right direction.
  • Decide on the next steps by testing and validating theories based on that data.
  • Act by implementing new policies quickly.

"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," Bobbie Britting, research director of consumer lending at TowerGroup, said. "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 today's volatile market things are changing more rapidly than ever before, which means the best-laid plans will be outdated before they can be implemented. To stay ahead of the game, and out of the line of fire, lenders must cut time and cost barriers that stall productivity, and be nimble enough to make changes as the market and consumer behavior fluctuates. We are living in 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 undertaken every few years. This may ease collection issues down the road by helping lenders make better credit decisions up front. In addition, the same strategies can be used to support a quicker response time when identifying consumers on the verge of getting in trouble.

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