Lending Portfolio Optimization
The onset of a recession presents challenges for lenders but applying advanced data analytics can help insulate a portfolio in any economic climate.
In good times or bad times. For richer or poorer. It was the best of times, it was the worst of times. While these sayings don’t necessarily evoke images of the national or world economy, they very well could—in recent months especially. Fueled by a global COVID-19 pandemic, a collapse in oil prices, and more, the economy has transformed in a matter of mere months. From a raging bull market to a hasty bear retreat with near-record unemployment, 10 years of prosperous growth has pivoted to one of the worst economic slides since the Great Depression. At least temporarily anyway.
While it isn’t possible to predict the length of any downturn with accuracy, recessions and their ripple effects rarely bode well for any type of business. That can be especially true for lenders, as delinquencies and defaults in a loan portfolio tend to blossom in a recession. Not surprisingly, given how sudden widespread unemployment affects the ability of millions of borrowers to make their payments on time—if at all.
That means finding ways to insulate your portfolio against these effects should be a priority if it wasn’t already. While the ideal time to perform these steps would be before a recession hits, it’s never too late to start optimizing your portfolio.
Of course, risk management is fundamental to an optimal portfolio, so you should start with a thorough risk assessment and a validation of your current portfolio. Then you should build a new decisioning model to reflect the results and your goals, monitor its performance, and continually refine it. But to continually optimize your portfolio, you should also leverage advanced analytics in both your decisioning and loan servicing strategies, and that requires utilizing far more data than just FICO scores or your own in-house data.
Better lending analytics / better data = better decisions
Perhaps one of the most important (yet underutilized) data sources available to lenders’ analytics is bank transaction data. Bank transaction data provides a treasure trove of behavioral information about your customers and potential borrowers that a credit score alone cannot
begin to convey. Analytics of bank transaction data can reveal a borrower’s purchasing patterns, the frequency of paycheck deposits, the regularity of payments, and so on. It can even give an indication of the creditworthiness of the vast number of persons who—for a variety of reasons—have yet to establish a credit score.
Analytics with the right kind of data can also help you make better decisions in unprecedented times like these. For example, regulators are encouraging banks and credit unions to consider more short-term, small-dollar unsecured loans to consumers hit hard by the 2020 recession. However, such unsecured loans have historically been outside the traditional offerings of risk-averse lenders.
When your analytics take sources like bank transaction data into account, you can identify those consumers that, despite their temporary unemployment, have a high propensity to pay. Having that information means you needn’t unilaterally pull back lending during tough times, but rather you can still grow your loan portfolio with confidence.
Analytics can optimize treatment of slow payers
If borrowers do become delinquent due to the recession, analytics can identify those that, given a chance and a little leeway, are most likely to return to a current status. For these borrowers, it can also suggest actions such as:
· Adjusting payment dates and limits
· Encouraging refinancing
· Reviewing late and service fees
All these can encourage on-time payments without discouraging those borrowers hardest hit—while also identifying those who are likely to default regardless of your efforts. That helps you adjust and optimize your collection strategy during a time of recession.
The right analytics partner
By leveraging analytics with the right data, we believe lenders can start recession-proofing their portfolios now and optimize the way they handle their existing portfolios. To help lenders like you do that, GDS Link has developed its own credit bureau and bank transaction data suite of premium attributes, as well as more than 100 data source integrations.
In upcoming posts, we’ll go into more detail about how you can leverage bank transactions to optimize your portfolio, as well as how you can optimize your collections strategy during a severe recession—surely the worst of financial times.
Meanwhile, you can get more tips on how lenders can recession-proof their portfolios by downloading the latest GDS Link whitepaper, Why You Should Always Manage Your Lending Portfolio as Though in an Economic Recession.