Optimising unused credit by applying psychometrics

We’re often told that the UK has a credit problem – that we’re too reliant on cheap debt – but many lenders would say they have the opposite problem with their customers.

Recent research suggests that there is as much as £90 billion of unused credit in the UK: credit lines to which consumers are entitled but which they choose not to access. In many cases, they have used their “dormant” credit cards only once, or maybe even never.

Such borrowers are of course potential customers for lenders, but this unused credit is about to become a costly problem for banks. To explain, we’ll have to briefly enter the rarefied world of accounting regulation – IFRS 9 to be precise, which from January 2018 will require card issuers to make provision for a year’s worth of unexpected loss on credit accounts. For the first time, this will include unused credit lines. For the highest-risk customers, banks must hold enough capital to account for lifetime losses.

This will be a costly requirement but it could be just the push banks need to either retire inactive accounts or galvanise their relationships with dormant customers.

My own experience is that they’re not great at the latter. I have a current account, a savings account, my mortgage and an ISA with one major UK bank which persists in offering me financial products that I simply do not need. What’s particularly frustrating about this is that it has all the information at its disposal to tailor its offering precisely to my lifestyle and financial requirements.

As banks decide how to solve the problem of unused credit, they should look to what they already know about their customers. But to really get this right they need an insight into what drives borrowers’ behaviour.

Psychometrics – the measurement of personality, values, aptitude, opinions and other traits – offers lenders a direct, predictive window into the impulses governing their customers’ financial decisions.

At one end of the spectrum, psychometric testing can identify the kind of customers lenders simply don’t want – irresponsible people who do not prioritise their obligations. In an environment when unused credit in itself is expensive, regardless of loss, identifying this cohort is critical as banks rebalance their customer base.

But more intriguing is the capacity of psychometrics to help credit providers re-energise their relationships with the customers they do want, by giving them the insight to offer products of direct relevance. Conscientious people might respond to a bank offering products tailored to home improvements, for example, while adventurous types might respond well to offers related to travel.

Psychometric testing offers exactly this level of perception about the customer base. All borrowers need to do is take a quick image-based test, provided by the bank, which can then use that information to offer a highly tailored product set to individuals.

 

Lynsey Hoxha, Business Development Director at COREMETRIX

COREMETRIX launches collections scorecard

New service offers personality insight for struggling borrowers

COREMETRIX, the world’s leading provider of psychographic data, has announced the launch of a new product allowing lenders and debt collection agencies to assess the likelihood of customers recovering after they fall into arrears.

The Collections Scorecard helps lenders differentiate between borrowers who have fallen into arrears but will recover and those customers who can’t pay or won’t pay, allowing them to determine the best approach to ensure that they recover their funds cost-effectively from individual customers.

As with all COREMETRIX services, the product is based on a robust sample of underlying data. The firm analysed around 5,000 credit card accounts, looking at early arrears – people who fell into difficulties within one to six months of obtaining credit – and performance six months later.

COREMETRIX’s data scientists focused on those who recovered, identifying the psychometric traits that helped them do so – variables like attitude to money, financial goals and commitment to the future. The resulting Collections Scorecard offers a predictive insight into how different borrowers will cope with being in arrears.

Clare McCaffery, Managing Director of COREMETRIX, said the Scorecard will help lenders and debt management organisations refine their collections processes and cut costs.

She said: “A single high-street lender can pass millions of pounds of non-performing debt on to debt collection agencies in a year. Each of those agencies’ agents will have a similar script and work to a uniform process. But as we know, every borrower is different and it’s both wasteful and unnecessarily distressing for consumers to be subjected to a ‘one-size-fits-all’ approach.”

The COREMETRIX Scorecard allows lenders to identify people in three broad categories: those likely to self-cure, those who need some help and consumers for whom the burden is simply too onerous.

Stephen Connolly, Head of Analytics at COREMETRIX and part of the team behind the product, said: “Any scoring mechanism that puts people through the right strategy is invaluable to lenders but up to now the data hasn’t been available to investigate the personalities of people in arrears. Our score gives lenders the confidence to select the right procedure for different people.”

While the Collections Scorecard offers meaningful cost savings for lenders, it will also perform an important social role. In addition to sparing responsible customers unnecessary official communications, it may allow lenders to identify customers with mental health problems, or those experiencing extraordinary stresses such as a bereavement or unemployment.

McCaffery added: “Our core mission is to help unlock financial services, at an affordable rate, to as many people as possible and this product is an extension of that. We want to help both lenders and consumers achieve the most favourable possible resolution to arrears situations. The scorecard is freshly out of the development stage and is already in beta mode with a client”.

Should we all be designers?

‘Design Thinking’ is an observational method used by businesses to analyse, assess and solve problems. Practitioners do not have to be designers but should bring a designer’s attitude to their work, or at least an inclination to change.

From IDEO’s founder “fail early to succeed sooner” to Guy Kawasaki’s “don’t worry be crappy”, ‘Design Thinking’ is based on three principles: ideate, prototype & iterate.

A great example of experiential innovation through ‘Design Thinking’ is represented by Bank of America’s collaboration with IDEO in late 2005.

One result of it, “Keep the Change”, is a saving account allowing customers to round up card purchases to the nearest dollar, automatically depositing the balance. Inspired by the habit of saving the change from cash purchases, the product indicates how design thinkers rely on customer insights gained from real-world experience, not just historical data or market research. In less than a year the programme that followed this simple insight gained 2.5 million customers. Enrolment now totals more than 5 million consumers who, together, have saved more than $500 million.

Design Thinking’ taps into our emotions and aims to deliver innovation beyond aesthetics, to meet both our needs and our desires. Products need to appeal both emotionally and functionally.

As Jay Samit explains in “Disrupt yourself”: “Failing to create the complete ecosystem, of which the product is just a part, would result in the failure of the product itself”.

Sony experienced just this outcome in 2005 when it launched Librie, its first digital store. They were among the first to understand the consumer appetite for a digital reading device but failed to design all the services around the product, seeing it purely as a piece of hardware and, leaving the titles to publishers. By the time Sony realised the mistake, Amazon had released the first Kindle, which sold out in five hours.

In the same way, the Kindle wasn’t the first eBook digital reader, Apple’s iPod was not the first MP3 player, but as Guy Kawasaki said, “it was the first to be delightful”.

Once technological feasibility and market viability are met, a business must find desirable solutions for clients. Once a product is performing a task we then expect sophisticated experiences that are emotionally satisfying and meaningful. These experiences are the whole ecosystem in which the product will live.

The added value of ‘Design Thinking’ is the “empathy path”, placing the user’s benefit at the centre of the story.

The benefit of this is exemplified in the development of the ice business in the USA from the late 1800s, which came in the following three stages:

ICE 1.0: The ice harvester would wait for winter, go to frozen lakes and cut blocks of ice to then sell to clients.

ICE 2.0: 30 years later there was a major technological breakthrough: the ice factory, in which ice was made by freezing water and delivered via the ice man in the ice truck, with no more limitations from climate or season.

ICE 3.0: the introduction of the ‘personal chiller’: the refrigerator

This came in three discrete stages, through separate organisations ice harvesters did not become ice factories and the later did not enter the refrigerator business. This is because most companies define themselves by what they do, not the benefit they provide.

 

‘Design Thinking’ at COREMETRIX

Well most of us have been there! Our team is composed of professionals from all over the world and we have 11 nationalities represented. We have been where our clients’ applicants are. Having been ‘thin files’ for a while we can walk in our clients and client’s applicant’s shoes too.

In a dynamic society of ‘working-abroad’ and ‘forever-thin-file’ millennials, COREMETRIX provides a solution to lenders’ and consumers needs and addresses their frustrations by adding a new layer of information about creditworthiness. Consumers who were originally denied credit because of a lack of information, in spite of their financial possibilities, now have the chance to apply for a loan and get accepted based on their psychometric score.

With a psychometric assessment, we enable risk managers to take informed decisions based on data that refers to their applicants’ personality and financial attitude.

COREMETRIX is disrupting the way consumers’ access financial services, enabling lenders to make decisions based on more and better quality data and providing a benefit to both lenders and consumers.

In the end, when it comes to innovation it is quite easy to reach a conclusion: disrupt or be disrupted!

 

Caterina Ponsicchi, Creative Product Manager

Thin file no more!

5th June 2017

Today is a big day for me, and it is appropriate that this is my first ever Linked In article. Today marks the third anniversary of the day I packed my bags and upped sticks from Dublin to London. This has come around far quicker than I expected, and, to be honest when I moved I only ever intended to ‘do’ three years here, but here I am – still going strong.

The three-year anniversary is quite a big one for my fellow ex-pats here as it marks the date when we can FINALLY apply for credit with any real chance of success! Before now, I’ve been classified, in my mind incorrectly, as being a “thin-file.” In the common tongue, this means that the relevant credit bureaux here in the UK do not hold enough data about my financial history to return a thick file to lenders, insurers or anyone else who asks for it, in this case, due to less than 3 years address history.

What happens when a lender’s decision engine gets a thin-file back from a bureau? Its algorithms crunch some numbers, and it spits out a decision: thin-file = no credit. It is quite literally a case of “COMPUTER SAYS NO”.

 
Of course, there can be some situations where it is perfectly acceptable for the computer to say no, for example where the applicant’s historical data indicates a pattern of default, or an inability to meet repayments on time. However, my challenge is far more basic.

As it stands for people like me, we can’t even get that far into the process, because most of the credit application forms require a three-year address history to do the search.

So the applicant is left with a choice – abandon the application? Or say that they have lived here for more than three years? Well-intentioned applicants may be tempted to do just that and stretch the truth about their circumstances. While this, of course, is never acceptable, the fact that otherwise honest people can be driven to such lengths shows how inefficient the system is. This may apply to something as mundane as trying to get a mobile phone or broadband contract.

Three years ago I was amazed at how difficult it was to do simple things like open a bank account. I’m fortunate in that both companies I’ve worked for in the UK have been very diverse places with lots of nationalities represented.

I was a part of a big hiring drive at Zopa, my first employer in London, and there were four others facing the same challenge as me: “how do we open a bank account?’. Luckily for me (and credit to them), HSBC were excellent. They understood the problem and managed to work through it. However, one of my colleagues, a fellow Irishman, was not so lucky with another bank and described the process as like ‘pulling teeth.’

Hitting the three-year mark is great as I am now past the first hurdle and can apply. And as I’ve managed to get some credit over the course of the last three years and I managed it responsibly, my credit file should have lots of lovely data so from now on things should get easier. But I have to ask, why have I had to wait three years? Why all the hoops I had to jump through?

In Ireland, I had a credit card from the age of 18. I’ve had a car loan, which I repaid two years early. I’ve had overdrafts, phone contracts and more. Why, when I moved less than 300 miles across the Irish Sea, did this data disappear? I appreciate that Ireland does not have exactly the most developed credit bureau in the world but still, I think it’s a valid point.

So what can be done to help the ‘new-to-country thin-files’? Fortunately, I can directly help fix this problem. I get to do something that can make this better.

Coremetrix has proven that there is a link between someone’s personality and their credit intent. By marrying an innovative visual quiz with a robust, statistical model, we can add a lot more data to allow a lender to make a decision.

There are a lot of people out there who are highly qualified, in good jobs, with good salaries and who would be worthy borrowers but as they are new to a country and have no historical data, computer says no!

In the Coremetrix world, the first computer (using the historical data) can say no. But it will then refer the applicant to undertake the psychometric assessment. Once Coremetrix computes a score, it’s then returned to the lender, and they can make a new decision.

Maybe it will still be a no for some, but many more deserving people will get a yes!

Critically, we have proved that we can do this without increasing the default rate in the portfolio and that the psychometrics-accepted population would perform in line with, or in some cases outperform their thick-file counterparts.

My thin-file experience was in the UK, but we can deploy our product anywhere in the world.

We have working models in the UK, Slovakia, Poland, Turkey, South Africa, India and are developing them in many more new territories. We localise the quiz to account for language, culture, sensitivities and understanding of imagery. The models are built for specific regions accounting for the target population.

There are many more use-cases, and we have a mission to bank the unbanked, but today especially I am reminded of the challenges of being new-to-country and a thin-file! But change is possible! It’s something I feel very passionate about, hell it’s why I joined the company! Can we get credit? To quote Barack Obama – “Is feider linn!

Conor Redmond

Head of Operations