Why should Visa Europe involve itself in the delicate matter of credit risk?
After all, Visa itself does not issue cards. We never lend money to anyone. And we leave our member banks largely free to price, promote and manage their Visa-branded products in the way they see fit.
Consequently, it is our members who realise all the rewards from a successful credit card portfolio – and it is they who suffer if the proper risk management controls are not in place and the portfolio fails to perform as well as planned
Although we may be ‘one step removed’, we are nonetheless involved. To succeed in today’s environment, an organisation such as Visa Europe cannot operate as a back-room payments provider. Instead, we work hand-in-hand with our members, to deliver solutions as a strategic partner. Our members want to know, in very specific terms, what Visa Europe can do to help them maximise the potential from their credit portfolios and drive profitable and sustainable growth.
For card issuers, the management of credit risk is a critical consideration. Thanks to the scale and nature of our business, across 36 countries in Europe, we have a wealth of experience and best practices. And our related skills and services are increasingly sought after.
Broadly speaking, our activity to help manage credit risk falls into three categories.
Understanding customers
First we have all of the classic risk management disciplines, such as credit policies, credit scoring, portfolio management, analysing and predicting customer behaviour, and collections strategies.
The underlying emphasis here is on understanding and responding to particular consumers – evaluating their circumstances, assessing their past behaviour, tracking their current behaviour, and predicting how it may change in the future.
This has become a real area of specialism and a distinct service line for Visa Europe. We have a team of highly experienced practitioners, who help members address everything from account acquisition to write-offs, including the development of scorecards and interpretation of the appropriate management information.
The approach is somewhat different from other providers.
Visa has a single, simple and clear goal: to help member banks improve their commercial results by getting the most value from their Visa portfolio. Hence, the focus is on our members’ business performance and the emphasis is on effective knowledge transfer – so that member personnel retain a clear personal understanding of how to manage risk, long after our consultants have imparted their experience.
As the financial climate has become more challenging, average charge-offs are increasing and delinquency is rising. More of our members across Europe are calling upon the service – and it is one of the key ways that we have been able to deliver real value to their respective businesses.
We are finding that banks generally want to introduce new operational efficiencies alongside improved levels of customer service, better control of their losses and a greater focus on increased margins. A further challenge is the need to modify or redevelop scoring systems to meet the requirements of data protection legislation and Basel II, without losing predictive power. And, to deliver on the necessary improvements, a more objective analysis of data and more scientific asset management methods must be employed.
We also help members target the most profitable customers and implement the most effective processes. This directs their business towards the correct level of provision, while effectively balancing risk with reward.
Influencing behaviour
A related consideration, and an emerging discipline, is the way that banks can actively influence consumer behaviour – protecting individual customers from the risks of a personal crisis, and safeguarding themselves from the related losses.
To this end, Visa Europe has developed an initiative, www.bettermoneyskills.com, tailored initially for the UK market. In partnership with a team of financial capability experts, we created a range of web-based education modules, quizzes, calculators, case studies and guidance. All of the content has been reviewed and vetted by the Citizens’ Advice Bureau’s specialist money advisers.
Participating members are encouraged to look for tell-tale danger signs within their own customer bases, such as over-limit accounts, overdue accounts and rapidly escalating balances combined with minimum repayments. Cardholders who are potentially ‘at risk’ can then be identified and encouraged to register for the programme.
Experience from the US confirms that well-planned, well-managed consumer education initiatives can make a big difference. Working with a range of issuers, Visa created a similar web-based programme – and demonstrated that financial education and preventative servicing can bring a big reduction in credit losses.
To gauge the impact, a rigorous ‘value study’ control group took part in the programme and was compared with a group who had not taken part in the web-based programme but faced similar circumstances. The study revealed stark differences between the behaviour of the two groups and quantified a range of short- and long-term benefits:
- Reduced credit losses.
- Reduced operating costs.
- Increased customer retention rates.
- Increased credit stability.
The consumers themselves were less likely to face the distress of bad debt.
Bettermoneyskills.com is intended to deliver similarly tangible results for both banks and their customers, and we are encouraging our members to be actively involved. Cardholders who could benefit can be encouraged to register on the public website. Alternatively, we can operate tailored websites on a ‘white-labelled’ basis for specific issuers. Either way, comprehensive management information on the progress of individual cardholders is available to issuers, including the number of visits, the number of registered users and quiz results.
Using lower-risk products
Another way of influencing customer behaviour (and thereby managing risk) is to provide cardholders with a highly secure, low-risk product, and give them the tools and the incentive to use it responsibly.
As an example, some of our members are beginning to complement their credit card operations with prepaid cards – and offering a prepaid product to those customers who would fail to qualify for a credit card.
These prepaid products can be positioned as a ‘first-step solution’ for new customers. They can also be supplemented with financial education modules. And, depending on their subsequent spending behaviour, cardholders can progress to their goal of a fully functioning credit card.
These credit builder products could be offered as a “rehabilitation” route for customers who have had issues in the past. They could also help issuers find out more about prospective customers.
In the UK, for example, it is estimated that some two-thirds (63%, according to Equifax) of credit card applications are declined. While a proportion of these will certainly represent an unacceptable risk, it is likely that many of them could be profitable – or could become profitable in the near future.
With a prepaid product, issuers can still provide ‘borderline’ applicants with a Visa payment card – which then becomes a tool to assess customer behaviour and characteristics, for example, by tracking:
- The level of card loading and use.
- The value and nature of transactions across different merchant categories.
- The incidence of declined transactions due to insufficient funds.
By using this data, and supplementing it with external credit checks, issuers can then determine whether and when it is appropriate to upgrade the cardholder to a credit card. And, as their experience grows, it becomes possible to build a scoring model that is progressively more reliable and predictive.
In today’s challenging environment, we know that classic credit risk management techniques are an essential discipline for any card issuer, with a direct impact on overall profitability – and we are actively helping members to improve and benchmark the performance of their card portfolios. We also believe these disciplines can be supplemented by engaging more fully with customers and seeking to actively influence their behaviour.
Mark Austin is head of consumer credit at Visa Europe.
FRONT END
Risk management considerations
- Credit policy review and enhancement
- Acquisition assessment and improvement
- Credit scoring/build and evaluation
- Credit bureau utilisation and incorporation
- Information/MIS review and development
- Situation analysis
- Portfolio acquisitions
- Scorecard, portfolio and process analysis
- Portfolio management review
- Risk management audit
- Risk management start-up/ outsourcing service
Business benefits
- Increase acceptance rate but maintain losses
- Additional channels
- Automated application process
- Improved initial line strategies
Profit and loss benefits
- Number of cards booked
- Decrease in cost of acquisition
- Better uptake of cards
ACCOUNT MANAGEMENT
Risk management considerations
- Credit line analysis
- Cross-sell risk ranking analysis
- Attrition scores and analysis
- Response scores and analysis
- Portfolio management and vintage analysis
- Process management and re-engineering
- Customer service and early collections
- Customer segmentation and analysis
- Authorisation analysis and improvement
Business benefits
- Credit line increases/decreases
- Better cross-sell
- Reduce attrition
- Early collections
Profit and loss benefits
- Favorable utilisation, spend
- Number of cards booked
- Retain customers
BACK END
Risk management considerations
- Portfolio risk strategy integration
- Workforce optimisation/ capacity planning
- Collections assessment/ situation analysis
- Management systems/metrics/ skills based MIS
- Outsourcing and debt sales programmes
- Leadership and performance effectiveness
- Process management and re-engineering
- Collector skill training and development
- Quality assurance/compliance monitoring
- Predictive dialer management
Business benefits
- Early collections
- Collections
Profit and loss benefits
- Better customer service through proactive management
- Acceptable levels of risk
- Improved pricing structure
