If there’s anything we’ve learned from the 2008 credit crisis, is that credit lines should be extended with the utmost care. It seems like a no-brainer: lenders are using credit modeling to do just that, right? But even the most well-intentioned, backed-by-advanced-technology models out there can lead to dire outcomes. Especially if they aren’t built on an agile-enough platform that matches an ever changing reality.
Below are some ways the right modeling platform can impact your results. For the sake of both your customers and your bottom line:
Take care of your customers
When a customer is given credit, it’s always at the expense of someone whose request was denied. When your model predicts their default risk, you want it to be based on the latest financial and market data. If, like most lenders, your modeling platform’s update cycles are a few months long at best, you’re doing your customers a disservice. Why? Because when the market conditions change but your model is being fed 6-months old data, some previously “credit worthy” customers will default. Meanwhile, others who might have been denied before would actually be able to fully repay the loan.
Take care of your customers:
- Use the right data sources: Don’t rely only on internal financial data. Taking market data into account, as well as financial data from external sources will let you see the full picture. Ensure your platform allows for easy, rapid integration with external sources and use it to determine which features improve your model’s accuracy most.
- Base your model on current data, always: Pick a modeling platform that has the shortest update cycle (usually based on advanced automation) to ensure you are working with the latest data.
- Ensure accuracy by quickly testing new models: Pick a no-code (or almost no-code) modeling platform that handles all modeling steps (from research to production). This will allow you to easily test new models and features in production.
Take care of your stakeholders
- Keep your risk goals in mind: You don’t want any surprises, and you’ll need to understand what is the right balance between default risks and net accepted.
- Ensure compliance: When you’re in the credit industry, you’re always dealing with regulations. In times of economic crisis, the public – and government – scrutiny are likely to increase. A credit risk modeling platform that is industry- specific will matches your internal processes and regulatory demands. This will allow you to adhere to all regulations and ensure compliance.
- Work efficiently, and leverage your team’s collective brain power. Use a modeling platform that allows for collaboration across users. This will unleash your modeling team’s collective wisdom and help you find the best models for your organization.
When your organization faces the inevitable flood of credit-seekers, you want to ensure you are handing out the credit responsibly. For the sake of both your stakeholders and your customers, your estimates of default risk should be as accurate as possible. Because in this day and age, it’s in everyone’s best interest, and the margins of error are narrowing every day.