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- 1. 1 Profitability Based Real-Time Decisioning Credit Risk Modeling and Decisioning May 28-30, 2002 Vijay Desai, Director of Modeling Terrance Barker, Staff Scientist HNC Software
- 2. 2 Agenda • HNC and HNC Profitability Predictor Introduction • Profitability Prediction Algorithm • Going Beyond the Credit Risk Score • Monthly versus Transaction Based Scoring • Questions and Answers
- 3. 3 HNC and HNC Profitability Predictor Introduction
- 4. 4 • Founded 1986 • U.S. offices – San Diego HQ – Chicago – Irvine – Los Alamos – Philadelphia – New York • International offices – London – Singapore – Tokyo • 1,000 + employees • Initial Public Offering: June 1995 (NASDAQ symbol: HNCS) • 2000 Revenues $254.9 million San Diego Headquarters Who is HNC Software?
- 5. 5 HNC Profitability Predictor Uses HNC Technology • HNC’s enhanced neural network technology provides core predictive model capability • Transaction data provide additional information typically lost in summarization • Models use account profiles – Updated with every transaction – Reflect entire account relationship • Models and software are designed for real-time decisions using the most recent available information
- 6. 6 Revenue model Expected revenue if account does not attrite and does not fall into collection Credit risk model Expected loss due to failure to pay Combines probability of loss with amount Attrition risk model Expected loss of revenue due to a sharp and lasting reduction in balance and activity Profit Calculator ties results together Cost computation Expected operation & funding costs, using expense parameters & predicted transact, revolve, & delinquency behaviors HNC Profitability Predictor Profitability Components
- 7. 7 Profitability Overview Risk Adjusted RevenueRisk Adjusted Revenue (Costof Funds+ Operation costs) (Costof Funds+ Operation costs) less equals ProfitForecastProfitForecast (Forecasted Revolving Revenue + Fees + Forecasted Interchange Revenue) (Forecasted Revolving Revenue + Fees + Forecasted Interchange Revenue) (CreditRisk Adjustment + Attrition RiskAdjustment) (CreditRisk Adjustment + Attrition RiskAdjustment) less equals Risk Adjusted RevenueRisk Adjusted Revenue
- 8. 8 Going Beyond the Credit Risk Score •Credit risk score not the best measure of future profitability •Multi-dimensional view of customer vital •NPV and ROI based approaches
- 9. 9 0 100 200 300 400 500 600 Avg. Profit Portfolio organized by Credit Risk score -50 0 50 100 150 200 250 300 350 Low High CreditRiskScore % Bad Managing Profitability: Using Credit Risk Predictions
- 10. 10 Portfolio organized by Profit Score prediction -50 0 50 100 150 200 250 300 350 50 70 90 110 130 150 Low High ProfitabilityPrediction Avg. Profit % Bad Managing Profitability: Using Credit Risk Predictions
- 11. 11 Most Common Uses • Profit Score – Retention Queue – Segmentation Variable • Credit Risk Score: – Minimal Acceptable level of risk – “Knock-out” criteria for Marketing Programs • Revenue Score: – Needs based approach to credit line increases – Revenue reason codes used for targeting • Attrition Score – Proactive Retention offers – Profit@Risk metric
- 12. 12 Additional HNC Profitablity Predictor Benefits Will Also Come From... • Revenue Score – Tracking and Reporting - trending over time – Testing Validation - incremental change over control position • Profitability Score – Prioritizing calls in VRU (best customers wait less) – Making it more difficult for unprofitable accounts to talk to a live representative – Reactive retention queue has on-line access to profit number; can tailor save offer – Best customers routed to best offer
- 13. 13 HNC Profitability Predictor and Basic Segmentation Risk Revenue Attrition Generic Strategy Low Low Low Develop Low High Low Grow Low Low High Develop Low High High Defend High Low Low Exit High High Low Maintain High Low High Exit High High High Selectively Defend
- 14. 14 Organized by Profit Score NPV Organized by HNC Profit Score Low High A Comparison of Profit Score v/s NPV -1000 -500 0 500 1000 1500 1 2 3 4 5 6 7 8 9 10 Revlrs Trans. Other -600 -400 -200 0 200 400 600 800 1000 1200 1 2 3 4 5 6 7 8 9 10 Revlrs Trans. Other
- 15. 15 True ROI Organized by Predicted ROI Organized by HNC Profit Score Low High A Comparison of Profit Score v/s ROI -1 -0.5 0 0.5 1 1.5 2 2.5 3 1 2 3 4 5 6 7 8 9 10 P_ROI T_ROI -0.6 -0.5 -0.4 -0.3 -0.2 -0.1 0 0.1 0.2 0.3 1 2 3 4 5 6 7 8 9 10 Revlrs Trans. Other
- 16. 16 Monthly v/s Transaction Based Scoring
- 17. 17 Transaction Data Improves Predictive Power 0 10 20 30 40 50 60 70 80 0 2 4 6 8 10 % Goods %Bads ProfitMax Monthly
- 18. 18 Transaction Based Neural Net Score is Stable Over Time Month1 Month2 Month3 Month6 Month9 %units Avg.Scr.%units Avg.Scr.%units Avg.Scr.%units Avg.Scr.%units Avg.Scr. 1st Pro 100 545 79.5 543 74.2 543 68.8 544 66.1 537 QuartileMonthly 100 553 60.1 552 58.2 551 63.1 556 60.7 551 2nd Pro 100 614 65.5 614 60.0 616 50.2 618 46.4 622 QuartileMonthly 100 610 47.5 609 46.5 609 45.0 618 43.8 620 3rd Pro 100 654 62.7 657 55.7 659 44.0 663 40.7 667 QuartileMonthly 100 657 48.2 645 47.0 645 35.2 654 31.8 654 4th Pro 100 707 84.2 709 78.4 712 71.9 715 66.8 717 QuartileMonthly 100 707 77.1 688 76.8 688 69.3 691 67.7 681
- 19. 19 Worst 20% of Accounts Benefit Over Monthly Score Increases with Time * 31 basis points higher than Monthly score Dollar BasedPerformanceSpreadover Monthly Score 10Months12Months14Months19Months C/O 31* 65 97 191 BKO 44 45 43 96 Ever 95+ 30 88 114 185 Ever 65+ -14 22 39 100
- 20. 20 Best 30% of Accounts Benefit Over Monthly Score Increases with Time (contd.) * 6 basis points lower than Monthly score Dollar BasedPerformanceSpreadover Monthly Score 10Months12Months14Months19Months C/O 6* 11 15 32 BKO 8 9 10 20 Ever 95+ 13 27 35 51 Ever 65+ 18 30 37 55
- 21. 21 Benefit by Scoring and Decision Points Comparison of Dollar Savings $0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% Percentage of Accts W orked per Month AnnualDollarBenefitperAccount Cycle-Cut Real-Time Daily Batch