Business of consumer
lending deals with extending credit to individuals for personal
household use. There is no single generally accepted definition for
but as broadly defined, it includes all forms of installment credit
such as auto loans and open-end credit products such as credit cards.
of installment loans for personal use, home mortgages and lease
normally excluded from the consumer lending category.
Let us look at these distinctions
before we start
using the term ‘consumer lending’ throughout this book.
installment credit products have a fixed amortization period and paid
equal periodic (monthly) payments of principal and interest. Loans to
automobile or boats, education loans and personal loans etc. are some
An Open-end credit,
also known as a revolving line of credit, is a pre-approved loan and
account holder could use the credit repeatedly up to a certain limit.
holders may payoff the entire balance each month or payoff a part of
with interest accrued on the balance outstanding. A
credit card or a line of credit offered by
retailers are two commonly available
revolving credit products.
text book we refer to consumer lending to denote revolving credit
- A pre-approved credit
- Open to buy (available
credit limit) decreases and increases as funds are borrowed and then
- The credit may be used
- The borrower may repay
over time (with accrued interest), or in full at any time.
Common examples of
revolving credit lines are bank credit cards, store credit cards and a
credit offered in the retail stores.
cards; Visa, Master card, Discover or American Express, are issued by
banks, credit unions and other financial institutions. Although credit
bear the logo of Visa, master card or one of the other networks, they
actually issued by a financial institution or a bank. The leading
credit card issuers are Bank of America,
J.P. Morgan Chase, Citigroup, Capital One, Wells Fargo and HSBC.
credit cards (PLCC) are issued by retailers – like Sears, Gap,
with their name and logo– but usually managed by financial institutions
Money, Citibank or their own captive finance company.
Revolving lines of
credit- with or without a plastic card – are issued by retailers like
stores, home improvement or electronics shops and offered through a
institution like Wells Fargo, GE Money or HSBC. SplashCard
revolving credit program designed
for retailers in above-ground pool and spa industry is a good example.
witnessed an astounding growth in terms revolving credit in the last
decades. Federal Reserve Statistical releases show that in 1985 the
revolving credit outstanding was about $ 115 Billion (20% of the total
credit).In 2006, these average numbers soared
Billion (36% of total consumer credit). Survey
of Consumer Finances observed that, of the 75% households with a
credit line, 58% had a balance outstanding. This growth was noticed by
a lot of
financial institutions that led to their entry into consumer lending
Source – Federal
Statistical Releases. Jan 2007.
Within the last
decade many consolidations happened in consumer lending businesses
acquisitions, mergers and purchases. Bank One’s acquisition of First
1997, Chase’s purchase of Providian in 2002, HSBC’s acquisition of
2003, Citi’s purchase of Sears in 2003, Chase’s purchase of Bank One in
Bank of America’s acquisition of Fleet Bank and Bank of America’s
NBNA in 2005 were some of the major deals impacted the market share of
lending businesses. Bank of America now leads the bunch with 40 million
accounts and $143 billion outstanding balances. Chase, Citigroup,
and Discover are the other four players in the top five.
by the Odds.
Over the period of
time, lending to consumers profitably proved to be one of the most
to the businesses involved. Intense competition for market share and
volume of small loans to service are the two major reasons prompted the
to approach the way they do business differently. Increased automation
decision processes and managing the portfolios by the odds (in a
predictable manner) were opted by all the lenders to stay competitive.
scale investments were made on rule based systems, data warehouses and
mining. The benefits were tangible;
responses on the expensive mail solicitations, higher approval of
consistent underwriting processes,
improved fraud detection, data driven portfolio management,
comprehensive reporting and MIS ,
optimization of call
center operations, early delinquency detection and
efficient collection efforts to name a
All these efforts, collectively named as ‘analytics’, hence formed an
inevitable part of the consumer lending business.
Consumer lending is
based business with millions of small loans and transactions
on a daily basis with thin profit margins. In such a scenario, managers
on the analytics departments to control the risk-returns statistically.
requires data warehousing, scorecard development, data segmentation and
analysis, tracking dashboards and comprehensive reporting systems. SAS
is widely used by these businesses in meeting these requirements.
SAS System is
mainly used for data management, scoring and modeling, statistical
reporting by various departments like marketing, risk management,
and operations. Further, all these activities fall into one of the two
cycle phases of a lending business; Acquisition and Account Management.
activity precedes a data preparation stage in which significant amount
of time and
efforts are spent to consolidate, clean and format data. Consumer
businesses usually have a complex data environment with large data
built to store application data, billing information and every day
transactions. Additionally, data from credit bureaus and other data
also stored for various analytics purposes. SAS has built in modules
functions to handle data from various sources and convert them into a
required for the analytics purposes.
Scoring and Modeling
Scorecard is a
statistical model that attributes a number (score) to a customer which
corresponds to a probability that the customer exhibits certain
behavior in the
future. A most widespread type is an application scorecard which
probability of a person default on the borrowing. Objective of the
can vary depends on the department; A behavioral scorecard predicts the
probability of an existing account turning bad; A response scorecard
the probability of a person likely to respond to an offer; A collection
scorecard predicts the probability of a customer pays back the owed
of scorecard is a detailed statistical procedure typically using
regression and other procedures in SAS.
analysis can be classified as a one-time report or diagnostics with a
objective. For example, identifying the loss drivers in a portfolio or
segmentation for a credit line increase or recognizing a fraud pattern
be considered as a typical analysis project. Analysis
involves dealing with large
amount of data and drawing
relationship out of them using statistical procedures.
An accurate and
robust reporting system is an essential part of any consumer lending
The management relies largely on reporting to get early pointers on
well as troubles. Regular reports
produced at various frequencies report different metrics
like number of applications,
approvals, average scores and average credit limits ; Performance
outstanding amounts , sales, charge-offs
, bankruptcy, fraud ; Collection related metrics like delinquency
amounts , collection efficiency, roll rates and recoveries ; Vintage
of performance metrics by acquisition and account management scores ;
tracking dashboards in a champion challenger framework ; Scorecard
reports etc are some examples of standard
reports produced in a lending environment.
Now let us look at
the applications of SAS in various life cycles of consumer lending.
This is the initial
phase in lending where the analytics is used to target and acquire the
people. One of the main channels of acquisition is through the direct
campaigns and often, the pre-approved (pre screened) credit cards are
prospects. Mail campaigns are expensive
operations and so it’s important that the response rates for such
sufficient to balance the cost-benefit sides of the equation.
SAS System is
to segment the large address lists and demographic information
available in the
credit bureaus and the segments that are most likely to respond (based
experience) to the campaign are selected for the mail solicitation . In
through-the-door or internet applications, the business rules developed
SAS – also known as data driven strategies- is used to evaluate the
applications, often online, to come out with a decision. Further,
and strategy tracking dashboards are developed using SAS to monitor the
acquisition process and also to compare the performance of various
Now let us look at
how various analytics department use SAS System at the acquisition
team scores the prospects based on the risk rules and does the
avoid the chances of soliciting bad accounts. Marketing
department profiles the prospects
and identify the likely segments that are going to bring more sales.
team does the segmentation to maximize the response rates for the mail
campaign. All these teams develop the monitoring dashboards using SAS
their objectives once the plan is rolled out and share their finding as
reports/analysis to the senior management.
We will discuss the
campaign operations and custom score card development process using SAS
in this books These two processes are widely used in the lending
for the prospecting and acquisition.
Once the accounts
are acquired, authorization of repeated credit purchases, credit line
fraud detection, sales promotion, cross-selling and collections are
some of the
life-cycle events that occurs in account management phase. Departments
on analytics to effectively manage these business situations.
closely monitors the delinquency and utilization patterns along with
charge-offs, bankruptcies and fraud occurrences. Authorization
and credit line policies are modified
based on the learning to reduce loss or improve profitability.
cards, vintage performance dashboards and reports are developed support
activation and sales patterns and prompt the customers to buy more
rewards and other offers. Cross-selling of financial products like
and mortgages to existing customers is another area marketing analytics
analytics team identifies the likely defaulters using behavioral
based on the risk profiles, devise strategies for collections. They use
past experiences to improve the collection efficiency and work closely
operations team to implement the data driven strategies.
team, typically aligned with customer service operations, forecasts the
volumes and analyzes call logs to improve the call routing and support processes. Collection efficiency of the
analysts in terms of number of calls and amount collected are some of
metrics monitored by this department.
Sum-up, SAS System provides a
tools and utilities for analysts in consumer lending environment to
array of analytics activities ranging from simple reporting to complex
modeling . Number crunching abilities of SAS in a voluminous data
is much appreciated in consumer lending than any other industry.
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