Posted by MeridianLink | February 21, 2019

Why a One-Size-Fits-All Approach is a Bad Plan for Profitable Credit Decisioning

Have you ever worn something that’s one-size-fits-all? I bet it either wasn’t very comfortable or didn’t quite look right – or both. It may have served a simplistic function, but that’s likely where the satisfaction ended. I recently came across a health article that claimed the same thing applies to health and nutrition.
Fitness expert, “Biggest Loser” trainer and author Jen Widerstrom said it’s important to create a diet and fitness plan based on your personality because one size does not fit all. Widerstrom related her relationship with clients to a teacher in the classroom, CNBC reported. While some students may be strong readers, others may be better in math. Knowing a student’s strengths and weaknesses will help the teacher develop a successful lesson plan.
Similar logic applies to lenders and the scorecards used for credit decisioning.

Generic scorecards that use large, general populations are good at predicting payment behavior on an average population, but custom models that focus only on the customers in your portfolio are even better. By using the origination and payment data from your customers or members, you can identify the distinct characteristics that count most when decisioning your applications.

To help you decide, here are four factors that must be addressed before switching to custom scorecards:
  • Competitors: More lenders are using custom scores than ever before. In such a competitive marketplace, it’s always good to know what you’re up against. Let’s face it, a “keeping up with the Joneses” mentality can be healthy when it helps you evaluate if such a decision will either help you keep up or propel you ahead of the pack.
  • Data history: Depending on volumes, you should have at least two years of application data (including rejects) and account performance monthly snapshots of any accounts resulting from approvals.
  • Data volume: Unless you have a high delinquency rate, you should have approximately 2,000 monthly applications over the time frame listed above.
  • Management environment: To make the best use of a solution like this, changes to the existing credit policy will likely be required. It is helpful to understand the reception your management team will have to policy changes and account for this in your buy-in plan.

ml_decisioning_optimiztion_eb Interested in ditching the one-size-fits-all scorecard and going with more of a custom fit for your institution? MeridianLink’s MLX Consulting turns acquisition and performance data into business intelligence for banks, credit unions, and finance companies. Built with proven technology and expertise, MLX Consulting’s analytic decision management infrastructure enables us to design affordable, customized solutions for our clients that are:

  • Multi-dimensional to manage every category of risk financial institutions face today
  • Scalable to provide the analytics needed today and to lay the foundation for the analytics of tomorrow
  • Expandable across the credit cycle and lending functions
  • Agile for rapid return on decision making investments
Our latest ebook goes into more detail regarding the benefits of custom scorecards and how our experts can help your financial institution design and implement this solution. Please click the button below to download a copy.  
Photo Credit: _G2

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