credit scoring and credit control xi, edinburgh 2009€¦ · © 2009 experian limited. all rights...

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Iain.Deuchars@uk.experian.com

Credit Scoring and Credit Control XI, Edinburgh 2009

Scoring Models for Collections & Debt Recovery

© 2009 Experian Limited. All rights reserved. 2

Introduction

� Why do we need collections / recovery scores?

► Due to difficult financial conditions more people are going into arrears

► Optimising the use of collections resources is therefore key

► The use of collections scores facilitates the automation of a number of collections activities

► Account level scores achieve this reasonably well but a more holistic approach offers a marked improvement

� Targeting the best prospects for debt recovery can also be automated

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Agenda

� High Level Overview

� Collections

� Debt Recovery (Charge-Off’s)

� Summary

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High Level Overview

� Investigated 2 main areas

► Tools to improve the management of accounts in collections across a range of financial products

► Tools to highlight the best prospects for debt recovery action

� Show how each solution has evolved

� Illustrate the power of consumer level data in collections / debt recovery

© 2009 Experian Limited. All rights reserved. 5

Agenda

� High Level Overview

� Collections

� Debt Recovery (Charge-Off’s)

� Summary

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Up to Date Accounts Accounts in Arrears

Collections Identifying development samples

X

Credit Portfolio

Outstanding DebtSettled Good’sX

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Collections Objectives

� Determine the probability an account in arrears will make further payments in order to determine the most appropriate collections path

� Objective function is therefore:

► Goods: At least one (minimum) payment received in the 3 months following observation and account does not default during outcome

► Bads: Not Good

� For Communications accounts the good / bad definition is generally harsher to reflect the industry view of accounts in arrears

© 2009 Experian Limited. All rights reserved. 8

CollectionsSegmentation

� For the active element of the portfolio which is in arrears there will be a range of profiles that make applying a single solution difficult

� These range from slow payers who normally are up to date to accounts in serious financial difficulty

� These profiles will behave differently across credit products

� Further segmentation is therefore required to build an effective collections score

► You don’t want to put a good payer who has simply forgotten to pay the bill through an intensive collections path

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Collections Segmentation

� Early collections includes “target accounts” 30 days past due

� Mid collections would be 60-90 days past due (60 dpd for Communications)

� Late Collections are 120 days past due (90 dpd for Communications)

Accounts in Arrears

Early Collections Mid Collections Late Collections

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CollectionsSample profiles

0.120.411.04Communications

0.371.025.08B&F (Unsecured)

Good / Bad Odds

1.714.8515.40B&F (Secured)

0.982.4012.24Retail

LateMidEarly

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CollectionsCombining client / consumer data

Target Account Data

Consumer Data (Other Lenders)

All Accounts in Arrears

Early Collections Mid Collections Late Collections

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CollectionsKey predictors – Financial services

Financial Services - Key Predictors

0.00

5.00

10.00

15.00

20.00

25.00

30.00

0 1-10 11-20 21-30 31-40 41-50 51-60 61-70 71-80 80+

Consumer Indebtedness Index

GB

Odd

s

Early

Mid

Late

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CollectionsBuilding a solution

� Results from Bureau only contribution

Performance of Collections Scorecards

70

50

68

59

0

10

20

30

40

50

60

70

80

90

100

B&F Unsecured B&F Secured Retail Communications

Sector

Gin

i Coe

ffici

ent

Bureau Data

© 2009 Experian Limited. All rights reserved. 14

CollectionsCombining client / consumer data

Target Account Data

Consumer Data (Other Lenders)

Target Account Data + Key Bureau

Variables

All Accounts in Arrears

Early Collections Mid Collections Late Collections

Vertical Market Niches

Vertical Market Niches

Vertical Market Niches

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CollectionsKey predictors

Observation Balance

0.00

2.00

4.00

6.00

8.00

10.00

12.00

Q1 Q2 Q3 Q4 Q5

Quintile

GB

Odd

s B&F

Mortgages

Retail

Telcos

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CollectionsPerformance

� Results from Combined Bureau + Target Account contribution

Performance of Collections Scorecards

70

50

68

59

76

54

75

65

0

10

20

30

40

50

60

70

80

90

100

B&F Unsecured B&F Secured Retail Communications

Sector

Gin

i Coe

ffici

ent

Bureau Data

Combined T&B

© 2009 Experian Limited. All rights reserved. 17

• The large uplift over the generic behavioural score illustrates the importance of utilising a score based on collections specific predictors & performance

Performance of Collections Scorecards

76 75

54

65

5054

19

30

0

10

20

30

40

50

60

70

80

Banking & Finance Retail Mortgage Communications

Sector

Gin

i Coe

ffici

ent

Collections

Behavioural

CollectionsComparison to generic, all purpose behavioural scor e

© 2009 Experian Limited. All rights reserved. 18

CollectionsLimitations of generic collections scores

� Clearly collections specific scores are much more effective than using a standard behavioural score

� Bureau data is very powerful when combined with account level data for use in collections

� However, generic collections scores cannot take into account

► Client specific account performance

► The effectiveness of each clients own collections departments

© 2009 Experian Limited. All rights reserved. 19

CollectionsBespoke collections scoring

� Here the overall objective is to build a bespoke consumer collections score derived on client data

� Combine the power of specific external data with a lenders internal data

� Derived using similar Early, Mid & Late collections segmentation

� In addition to the usual bureau variables a few new ones were generated looking solely at the recent performance of other accounts in collections

► Number of accounts in collections

► Number which have received a recent payment

► Number which have received a significant recent payment

© 2009 Experian Limited. All rights reserved. 20

CollectionsBespoke collections scoring - Results

52.945.5All

50.641.5Early

GINI

41.531.7Late

42.833.9Mid

Bespoke Collections Score

Generic Collections Score

• The existing scores performed considerably worse than either the generic or bespoke collections solutions above

© 2009 Experian Limited. All rights reserved. 21

Agenda

� High Level Overview

� Collections

� Debt Recovery (Charge-Off’s)

� Summary

© 2009 Experian Limited. All rights reserved. 22

Debt Recovery (Charge-Off’s) Objectives

� These are typically non-paying accounts with Debt Collection Agencies (DCA’s) that can also be passed back to the original lender for further action

� Focus on non-paying / dormant debt where the objective is to identify which individuals are likely to repay some or all of the balance owed

� Objective Function is therefore

► Goods: Any payment received in the next month

► Bads: No payment received within the next month

► Exclusions: Forwarding address located

© 2009 Experian Limited. All rights reserved. 23

Debt Recovery (Charge-Off’s) Segmentation / sample composition

� Sample of credit defaults from multiple DCA’s

� No segmentation applied for initial investigations

� Sample G/B odds equate to 0.14

© 2009 Experian Limited. All rights reserved. 24

Debt Recovery (Charge-Off’s)Combining client / consumer data

Stage 1

Stage 2

Target account information &Default level consumer Variables

Full credit information

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Debt Recovery (Charge-Off’s) Key predictors

Number of Paid Up Defaults L12M

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

None 1 2 3+

Number

GB

Odd

s

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Debt Recovery (Charge-Off’s) Key predictors

Original Default BalanceLow - High

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th

Decile

GB

Odd

s

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Debt Recovery (Charge-Off’s) Score Distribution

12.00%Overall

55.48%10th

34.57%9th

19.52%8th

9.51%7th

4.33%6th

3.32%5th

2.19%4th

1.35%3rd

1.07%2nd

0.57%1st

Propensity to

Pay

Score Decile

(Low to High)

• Initial results produced GINI figures in excess of 75 for a score using combined client and consumer level default data

© 2009 Experian Limited. All rights reserved. 28

Debt Recovery (Charge-Off’s) Using a DR Score

• The resulting score can be used to target the top X% of the population for additional debt recovery action

• Such a score can be delivered relatively easily in a batch environment that monitors an individuals credit profile to detect signs of improvement

• Experian’s batch scoring system also indicates where an individual in debt recovery has changed address

© 2009 Experian Limited. All rights reserved. 29

Agenda

� High Level Overview

� Collections

� Debt Recovery (Charge-Off’s)

� Summary

© 2009 Experian Limited. All rights reserved. 30

Summary

� Account level information is limited in predicting collections (and debt recovery) success

� A more holistic solution provides a significant uplift

� This is even greater when a client specific model is developed

� A bureau based collections / debt recovery approach can greatly simplify the overall solution

© 2009 Experian Limited. All rights reserved. 31