One of the most important lessons financial institutions (FIs) have learned as the industry recovers from the recession is that historical credit risk policy models are imperfect. Because market conditions and consumer behavior are still in a state of flux, new models will require continuous learning based on timely feedback loops to ensure they remain effective and in sync with economic shifts and changes in consumer purchase behavior.
Making Better Decisions in a Dynamic Market
FIs understand that making changes to credit policy is not an easy or expedited process. For many, to develop, test and deploy a credit risk policy concept can take anywhere from 6 to 18 months. This means that in a rapidly changing economic environment, policy is likely to be outdated before it can be implemented. There is a desire within the financial services industry to speed up this development cycle. However, many believe that 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.
Our company uses an analogy based on an Air Force strategy, the OODA loop, to demonstrate a proven method for making decisions more quickly, accurately and safely. The OODA 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 originated this concept to help fighter pilots hone their decision-making skills and improve proficiency during battle. However, it is truly applicable to any discipline that requires a comprehensive—yet time sensitive— evaluation to make the best possible decision, including credit risk management.
The Credit Risk Policy OODA Loop
It is essential to cut time and cost barriers that stall productivity in the credit policy development process and be nimble enough to make changes as the market and consumer behavior fluctuates. Here’s how the OODA loop works for credit risk managers: 1) Observe what is happening in the market and in your portfolio, 2) Use your own performance data to Orient your FI in the right direction, 3) Decide next steps by testing and validating theories based on your data, and 4) Act by implementing the new policies quickly (within days instead of months via a traditional process). The key is executing your decision-making loop more quickly than your competitors. By developing policy with a faster cycle, you will be able to complete multiple loops in the time your competitors complete just one. This improves your outcomes and competitiveness.
The technology supporting this cycle must allow credit risk managers to complete the OODA loop quickly every time by giving them complete control over coding, testing, validating, building the attributes into scorecards and promoting credit policy out to production. The same day an FI comes up with an idea they need to be able to evaluate it using their own performance data to determine whether or not the proposed policy will be effective. Imagine accomplishing in a few days what takes your competitors weeks or months to do. A shortened development loop provides tremendous value to FIs because they can produce a better quality product quickly while reducing fraud and other losses and their associated costs.
What Lies Ahead
Based on conversations with our clients about the challenges they face decreasing their cycle time, we developed a solution specifically designed to eliminate more than 90% of the time required to complete a cycle (or loop). This allows our clients to make their credit risk policy development cycle a continuous process rather than a project that is undertaken every few years.
Credit risk executives are faced with the difficult task of delivering the most accurate, predictive scorecards to the marketplace quickly and efficiently and traditional processes make justifying the cost and time of credit risk policy experimentation prohibitive. Removing these barriers gives FIs more freedom to test a broader range of attributes and develop credit policy designed to meet the specific goals of their institution. Your competitors are already benefiting from the opportunities available to make better credit decisions, faster. Are you?
Karen Gordon has worked in the marketing group at Zoot Enterprises for the past 5 years and has more than 17 years of experience in management and public relations. While earning her master’s degree she learned the importance of promoting an organization’s image and creating a positive buzz about its offerings. In her role at Zoot, Karen leads the company’s public relations program.