The causes of the financial crisis were many and complex, but one of the most important was a collective failure within the financial sector to accurately monitor and manage credit risks. Two years on, has the sector learned its lesson and enhanced credit risk management and associated processes, including debt management?

One sign that it may be doing so is that the market for technology used in this area is booming. The worldwide operational risk, governance, risk management and compliance (OpRisk GRC) financial services technology market will grow to $2 billion by 2013, according to a report published earlier this year by Chartis.

“The banking failures resulting from the credit crunch coupled with increased shareholder and regulatory pressures have made it mandatory for financial institutions to implement systematic and continuous processes for collecting, analysing and reporting operational risks,” write the report’s authors. They also note that the volume of new regulatory guidance means that “the overlap between OpRisk, governance, risk management and compliance (GRC) and enterprise risk management (ERM) has become more pronounced”. In other words, financial companies are being forced to take a more coordinated approach to risk management and related processes.

“The crisis has brought to the fore that people were not monitoring relationships as they should,” agrees Neil Munroe, head of regulatory affairs at Equifax, which produces much of the data used by these technologies. “They were probably still reasonably robust at the front end, but we’ve seen a huge change in the management of relationships, in being proactive, seeking information about businesses and consumers so you’re in the best position to understand exposures and to react if people stop paying. Information plays a critical role, but you have to apply it. That’s where the software growth is coming from.”

Regulatory burdens
Regulatory pressures are also playing a part, with initiatives like Basel III, SEPA and Solvency II all increasing the burden of compliance for different types of financial provider. But compliance should not be the primary driver, warns Douglas McKibben, research vice-president, banking, Gartner Industry Advisory Services. “If you’re managing risk towards compliance it doesn't mean you’re going to run your business well, because the regulatory objectives are narrow and not particularly business-focused.”

Instead, a growing number of companies now understand the potential value of integrating risk management processes, resources and systems, to provide clear visibility of risk across the business. “Our solution is focused on monitoring payments or the lack of payments, but customers configure the system to pull in information from financial data, contract information, residential information and credit check data from other companies,” says David Taylor, CEO at credit management software specialist OnGuard. “By combining all the data you can look at that customer in a holistic way and take a proactive approach to managing risk. Previously this information might only be looked at once a quarter for a business customer, probably a bit more frequently than that for a consumer, but now it’s about getting real time data.”

OnGuard end users include BMW Financial Services, which provides credit products for consumers buying expensive BMW vehicles. OnGuard’s technology has allowed BMW FS to automate invoicing and to develop a more detailed understanding of customers, helping risk managers to understand customers’ payment habits. The company has been able to reduce credit write-offs by 65 per cent over the course of four years, while a credit approval process based on improved information has actually increased credit approvals by ten per cent.

Elsewhere, financial companies are improving credit risk and debt management as part of broader strategic moves to bring all risk management processes closer together.

Barrie Neill, banking consultant at SAS UK, says at least one SAS end user is in the process of building an enterprise-wide risk platform. SAS clients include the Nottingham Building Society, which has been using SAS analytics technology in credit risk since 2006 to identify potential losses and calculate capital requirements more accurately through analysis of customer data; and to improve its ability to comply with regulatory demands and to identify criminal activity.

In future, more financial companies will find the idea of more coordinated risk management functions attractive, suggests Gartner’s McKibben, because it will help to develop a deeper understanding of the performance of the whole enterprise against risk objectives. “Rather than looking in the rear view mirror after something happens you start to have more of an interactive management of activity. You need to manage the process so you can better understand exposures and how they're going to affect you,” he says.

He believes regulatory pressure will force more banks to seek greater visibility of credit liability, examining it during the day, rather than at the end of it. But most financial companies have a long way to go to get anywhere near achieving this. “When you look at an enterprise view of risk management we're talking about a holistic view derived from [CRM], performance information – like risk-adjusted profitability – product data and compliance information. The majority of banks, when you get beyond the very largest, are still struggling to come up with a performance-based approach. The larger ones are doing a better job, but enterprise data that's reliable, good quality and consistent is a problem.”

More financial companies are also now using analytics to proactively seek out and support customers who may be about to get into trouble, before they come into the collections space, says Janice Horan, pre-sales director for EMEA at decision management and analytics specialist FICO. “Our clients talk about how they don't want to own houses and automobiles: they want customers to repay them,” she says. “The issue is that consumers don't always contact banks when they get into trouble. They assume that if they talk to the bank something bad will happen. In fact, the earlier you get in touch the more time you give yourself to find a solution.”

Technology providers like FICO are helping a growing number of financial companies to identify and proactively manage consumers in this pre-delinquency phase. Strong integration makes this possible. “It’s about the connectedness of customer service technology, the customer management, risk systems and the collection systems,” says Horan. “If you have the ability to segment your portfolio and identify high risk customers you can create a flag, so that a customer calling in can be pushed to a customer service operator skilled in drawing information out of customers to see what the real situation is. Then there can be time taken to solve that problem.”

Collections
Financial companies are also using analytics to improve collections, but there may be organisational or political problems to overcome, Horan warns. “Collections has always been the thing that wasn't integrated with risk management,” she says. “It may be considered an operational function rather than a risk or credit function. So that leads to scepticism on the part of executives as to how much analytics can do – they ask, ‘Wasn't everyone scored as a new account and then plenty of times since?’ But even if they were, that’s not stopped them ending up in collections!

“There’s a growing recognition that resources are tight and there’s got to be a better way to manage this; to ensure that people who are higher risk get more personal attention.”

Using software in-house isn’t the only solution. Outsourcing specialist TCS (Tata Consultancy Services) offers debt collection services within its business process outsourcing (BPO) division.

“One of the things we monitor is customer feedback and satisfaction during and after collections calls,” says Ashish Akshikar, head of banking operations at TCS. “Customer satisfaction ends up being quite high. When you can do that it’s pretty much a guarantee that the customer’s not going to walk away from the bank. So it’s not just
about the numbers but also about customer retention.” Mike Mathias, head of UK financial services at TCS, claims that whenever TCS has benchmarked its work against what its clients do in-house, as with Citibank, it outperforms the inhouse operation, both in actually collecting money and retaining customers.

Where analytics is used to inform credit risk, debt management and other related functions, the results can also assist marketers. Horan says FICO has helped clients to draw out the intricacies of customer relationships across multiple product lines to inform cross-selling strategies.

“That used to be a marketing function, but we’re seeing it take on a credit risk function,” she says. “Organisations are trying to identify the maximum credit balance they would be comfortable seeing a customer or household take on, then trying to optimise that across multiple products.”

Again, this depends above all upon effective systems integration and on systems being nimble. “You need software which is more interactive and fluid,” says Equifax’s Munroe. “I think those that are going to be the most effective are those that can be changed quickly. [End users will] need to react quicker, to be able to go into the user interfaces to change rules.

“But how do you integrate this software into old mainframe systems? We see a number of big banks looking more at mid-range built-on applications, rather than the open heart surgery that is required with mainframe alterations. So the mid-range [system] becomes the application and the mainframe becomes the datawarehouse.”

Even if improving the credit risk and debt management functions does entail major changes to IT architectures, the rewards are worth chasing, for the customer-facing side of the business as well as the bottom line. The only question is whether those within a company who challenge such a change can convince financial directors to invest in an improved debt management and collections infrastructure in these tricky economic times. “Investing in these systems when they’re not producing their peak performance is going to be hard,” agrees Munroe. “They’re going to be looking for the most cost-effective systems. But they have to bite the bullet. They know they have to invest.”

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