Post Covid-19: Reliance on Models – Will They Fail You?

Unquestionably we are in uncertain times and staring a large recession due to the global health crisis.  Over the last 14 years, GDS Link has provided advanced solutions to deliver your data and analytic needs, supporting clients through a couple of tough economic times and providing certainty during uncertain times.  GDS Link is always innovating, listening, and seeking solutions to provide value to clients.  The purpose of this blog is to offer insights and provide analytic clarity centering on our clients’ growth and profitability. More importantly, the empirical models used to immediately present statistical odds of a potential applicant’s fraud, default, account management and/or collections risk.

For much of 2020, most of the world has reacted to the COVID-19 pandemic using quarantine measures in order to “flatten the curve” of infected individuals.  The purpose is to buy time for hospitals to prep, reduce infection numbers, and save lives.  One of the many consequences is that the worlds’ economy is on hold and forced into stagnation, in the very best cases, but mostly receding. According to the USB[1], the unemployment rate in the US increased from 3.7% in 2019, to 14.7%  in April 2020, an increase of 10.3 percentage points; the highest rate and the largest over-the-month increase in the history of their series (starting in 1948).

In the US, there are now approximately 30 million unemployed, additional millions with salary and hours reduced creating a devastating economic impact on confidence and affordability.

The IMF estimated a 3% decreased in the world´s  GDP but recently their managing director stated that figure to be too optimistic, according to the World Economic Forum[2].

All sectors of the economy are being affected and thus the financial systems, which despite the fiscal and monetary responses, need to be hypervigilant of the situation. The IMF has declared that “The resilience of banks may be tested in the face of a sharp slowdown in economic activity that may turn out to be more severe and lengthy than currently anticipated[3].  Furthermore, Francesco Battazzi, head of diversified debt funds at the European Investment Fund considers that the private credit market, which provides alternatives to bank financing for thousands of business across Europe, is being tested for the first time against an economic downturn[4], it was developed after the 2008 financial crisis.

The immediate response by financial institutions is to protect assets and help consumers.  This has been accomplished by offering forbearance programs for impacted borrowers.  The consequence is credit reporting data quality will deteriorate.  Trust in the quality of credit data will be skewed because of accommodating forbearance programs.  Secondly the metro 2 credit bureau ‘macro’ indicators used to cover pandemic events have shown limited usage to date.

Tens of thousands of models are in place leveraged across banks, financial services, and insurance companies to deploy billions of dollars in capital.  These models went through rigorous analytical modeling techniques and great thought placed on the time periods used to build them.  The issue is, they were built on the performance observed over the past 5-10 years.  Arguably the best economic period, particularly in the US.

These models are used to build certainty into lending decisions in which uncertainty is definitively the risk all businesses seek to erase.  Lending models are based on historical data in which hundreds and thousands of data points collected using historical archives, in which quantitative technique teases out the good and bad behaviors, ensuring lenders identify the best potential profitable customers.  All of this is based on known historical data collected at times of “normality” which, considering the world´s economic growth over the past 50 years, could also be named as prosperous times.

Lenders must ask themselves if the tools they are using are solid enough to address fraud, prevent losses, retain clients, identify new customers, and find new worlds full of resources. In speaking with clients’, they recognise that pausing lending until models can be re-built is not realistic and requires a strategic pivot for the short term.

GDS Link can support banks, credit societies, insurance, and FinTechs lenders by adjusting their models during this period of uncertainty.  Once we understand the strategic outcome the lender is seeking, we can provide numerous solutions.

What are these short term solutions?

  1. Stress test, validate and calibrate existing models – Leverage GDS Link’s subscription-based model governance package to:
    • Measure population stability of existing features in your models
    • Introduce new alternative data
    • Identify population mix, variable shift to address assumptions in the models using most recent data
    • Utilise our service to create new monitoring plans, centered on COVID-19 specific segmentation strategies
  2. Credit bureau is stale, needs time. Leverage the GDS Link Bank Transaction products to:
    • Set up in under a week and exposes 6,000 premium features using the credential bank aggregation solution
    • Provide expert rules to measure income, income shift, outflows changes, overdraft, and consumers DTI
    • Use the alternative data to augment fraud, default, account management, payment, and collections models
  3. GDS Link leverages AI methodologies such as Machine Learning models, which have proven to outperform the majority of the time vs traditional approaches.
    • Enhance model performance
    • Speed to re-tune and re-deploy complex models.
    • Build and execute on real time data, rather than static monthly outcomes
  4. Dynamic model solutions [validate, re-adjust & re-deploy]
  5. Our model solutions are not squared black boxes, but IP owned by the client

Augment the short term solutions with an eye for the long term

At GDS Link, we have positioned our tools and analytics to enhance your transformation through the crisis with an ensemble of expert rules, enabling technology to enable your strategy and the platform to execute at speed and adjust for market shifts quickly and efficiently.  We can help you not just survive the downturn but thrive through uncertain times.

To see how GDS Link’s Modellica Analytics solutions and services could help your organisation, contact us for a brief, complimentary consultation:

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[1] US Bureau of Labor Statistics – https://www.bls.gov/cps/

[2] The IMF says its forecast for the COVID-19 recession might now be too optimistic – https://www.weforum.org/agenda/2020/04/imf-economy-coronavirus-covid-19-recession/

[3] COVID-19 Crisis Poses Threat to Financial Stability – https://blogs.imf.org/2020/04/14/covid-19-crisis-poses-threat-to-financial-stability/

[4] Does This Change Everything? Private credit and coronavirus – https://www.eib.org/en/stories/coronavirus-impact-private-credit

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