With non-traditional lenders offering more relaxed lending policies, consumers now have many avenues to credit. In this competitive environment, in-depth knowledge of your own portfolio will take you only so far.
Abeer Waseem, Product Manager at TransUnion Canada, explains why it’s important to see how your portfolio performance compares with the market and outlines how this can help you focus your risk management efforts.
The need-to-know imperative
Successful risk management depends on having intimate knowledge of your own portfolio and how it’s performing against industry benchmarks. By recognizing changes in portfolios, market conditions and competitor performance, you could capture new opportunities, and evaluate your underwriting criteria and delinquency rates to better manage risk.
Having an aggregated view of competitor performance in relation to balances, originations and other industry benchmarks helps you evaluate your own position and provides insight into key trends for your lines of business and customer segments.
Financial institutions that can identify market trends and analyze customer segments relevant to their business will have a clearer view of the risk tiers and geographies they may be under-represented in — and a useful vantage point from which to make strategic and tactical decisions that will better position them for growth.
The real-world example
Let’s look at a practical example.
MyCo is a card issuer looking to compete head-to-head with the major banks. The graph below (Figure 1) shows the delinquency rates of MyCo’s near-prime to prime consumers with cards that were issued in Q1 of 2017.
We can see that card delinquency manifests early: just after three months on-book. In addition, MyCo has a significant increase in delinquencies between months four and five, indicating a need to concentrate strategic efforts on that group of customers.
Figure 1: MyCo credit card delinquencies, for cards originated in Q1 2017, shown over 18 months (near-prime and prime consumers only). Data image sourced from TransUnion’s PRAMA Vintage Analysis Module.
While this is certainly useful information, we can’t say with any certainty whether this performance is average, good or a potential problem for the business. To draw any conclusions here, we need to see how MyCo is measuring up against its competitors.
The second graph (Figure 2) compares MyCo’s delinquency rates for these customers to those of major banks, secondary banks and monolines. (All customers are in the same risk tiers as MyCo’s and their cards were issued at the same time.)
Figure 2: MyCo credit card delinquencies, for cards originated in Q1 2017, shown over 18 months (near-prime and prime consumers) compared with industry peer groups. Data image sourced from TransUnion’s PRAMA Vintage Analysis Model.
We now see that while MyCo delinquencies are in line with secondary banks and monolines, they are different from major banks from the onset. Also, the major banks group has a more linear growth in delinquency and its portfolio matures more slowly than other industry peer groups. MyCo has a much more immediate increase in delinquencies than major banks, which could indicate a need for more frequent account monitoring.
With this insight, MyCo may decide to move from quarterly to monthly portfolio reviews, or request a portfolio review for certain customers when they observe the initial spike in delinquency.
Lastly, comparing this group of customers to other MyCo customer segments as well as to the customer profile of major banks could also give some clues as to the type of consumers being attracted by MyCo’s card proposition. Armed with this information, risk managers may want to rethink their acquisition, adjudication and early-month-on-book strategies.
The where-to-go challenge
Unearthing these market insights can be difficult, especially if you have limited access to industry and competitive benchmarks, and limited resources to analyze them. Significant human and IT resources are needed to manage platforms that extract, organize and analyze massive volumes of benchmarking data, from different sources and in different formats. It can take days or even weeks to gather and formulate information into something you can actually use.
The graphs we’ve shown here are extracted from TransUnion’s PRAMA tool, an on-demand analytics platform that provides market intelligence on portfolio performance, account origination activity and share of wallet, using credit information for the entire population of Canada. In just a few minutes, you can select the parameters you want to look at (geography, loan band, consumer risk profile, to name just a few) and create a visual that shows how your business is performing in comparison to the market.
PRAMA was designed to help businesses solve this ‘where-to-go’ issue by providing useful industry data and a range of data visualization tools that deliver those all-important benchmarking insights. This enables financial institutions to understand both the performance of their own accounts and how this compares with industry competitors.