High-Performance Predictive Analytics

High-Performance Predictive AnalyticsTuning financial scorecards to maximize business performance

©2014 Fair Isaac Corporation. All rights reserved. 2

Why are credit card delinquencies higher than we expected?

Analytic scorecards:Will yours deliver top performance when it really counts?

For decades, organizations have used the power of predictive analytic scorecards to help manage critical aspects of their businesses—from deciding which applicants are creditworthy to determining regulatory capital requirements.

In today’s rapidly changing economic conditions, every credit-granting business should be constantly reevaluating

its scorecards to be certain they are still valid and delivering highly competitive performance.

Is your organization beginning to identify and question issues like these:

Is our bank holding the right amount of required capital, or can it be reduced?

Are we in compliance with the latest regulations?

If so, you could probably benefit from adopting scorecard best practices with the help of FICO, the global leader in applying predictive analytics to solve business problems.

Why can’t we analyze mortgage applications using all of the information about this customer’s entire relationship with our bank?


High-performance predictive analytic scorecards can help institutions make the right strategic decisions at precisely the right time to provide highly personalized customer service across all product lines. FICO’s Customer Level Scorecard developments have provided 3% to 10% increases in predictive power compared to account-level scorecards—resulting in more appropriate lending decisions and better loss control.

Today, financial organizations worldwide use FICO’s scorecard expertise to:

� Understand the risk associated with on-boarding new customers, and determine the best up-sell or cross-sell to offer existing customers.

� Analyze unstructured data, such as collection agents’ notes, to predict which delinquent accounts will go further into default.

� Assess flows and trends for transactions to identify risks and opportunities—including areas such as transaction fraud, authorizations and identifying potential attrition.

And much, much more.

Predictive analytics: Steering the customer relationship through every turn

More than ever, banks and other financial institutions are focused on two goals:

Consumer loanMortgage

Line of creditDelinquency

Credit card

Savings account

Checking account

New customerOptimizing the customer experience to build long-term customer loyalty

Maximizing the value of every relationship by providing the right mix of financial products across the customer lifecycle


Design:The scorecard development process

A scorecard design meeting is an essential first step in creating higher performance scorecards, bringing together collections organization analysts, business stakeholders and FICO® Predictive

Analytics experts to define the performance goals, business and regulatory constraints, and data sources for the scorecard development project. Here, FICO’s expertise in defining opportunities for scorecard improvement and avoiding potential pitfalls can be an invaluable asset.

FICO brings incomparable experience and predictive analytics expertise to the selection and refining of data sources, defining characteristics, performing actionable segmentation of customer groups, and moving from portfolio-level to customer-level scorecards. All are critical to improving the performance of scorecards, protecting valued customer relationships and delivering improved downstream business results.

The following pages highlight some of the issues that can affect the accuracy of scorecards—and FICO’s strategies to identify and mitigate them.

The most important step in moving scorecards from a broad-stroke portfolio-level focus to the most precise and effective customer-level is precise, business-driven segmentation of the customer base. The more closely model segmentation is tuned to the key groups in the credit portfolio, the stronger the results. FICO leverages sophisticated tools and domain experience to identify and compare segmentation splits. This allows the development of highly sensitive and accurately predictive scorecards to protect your most valuable customer relationships: high-value customers and customers most likely to resume timely payment.

Segmentation: The key to customer-centric scorecard development


Data sources: Refined and blended to boost predictive power

Not all data is created equal—particularly when it comes to developing scorecards. FICO has decades of experience in understanding how data quality affects scorecard results and downstream business performance.

FICO consultants are experts in shaping data into scorecards with FICO® Model Builder and building data and decision management frameworks with FICO® Blaze Advisor® business rules management system. Equally important, your in-house team will have access to FICO’s unmatched analytic technology and expertise, leveraging these resources to continually maximize your scorecards’ business value.

FICO can help your financial organization benefit from best practices to:

� Learn which types of data can be predictive, and which types can skew scorecard results.

� Have our highly trained consultants validate extracted data, highlight any potential issues the validation process reveals—many of which may be previously unknown—and advise on how best to mitigate them.

� Combine data from disparate systems to create a customer view that spans all products, fully quantifies risk and rewards loyalty.

� Incorporate unstructured data into scorecards to extract its predictive value—for example, words and phrases extracted from call center agents’ notes, or click-stream, transaction or social media data.


Characteristic generation: Capturing customer behaviors that impact results

With decades of experience in characteristic definition, FICO does it with predictive accuracy that is truly unique. FICO’s intellectual property includes a suite of over 1,000 behavior characteristics and their cross-characteristic relationships. This extraordinary asset, coupled with FICO analytic expertise, can help you pinpoint

the specific characteristics that influence scorecard outcomes.

In addition to the vast library of behavioral characteristics FICO offers, we can generate new characteristics from your raw data, adding even more value to your scorecard efforts.

Fine-Tuning Predictive Characteristics

Income level is an important scorecard characteristic. Most scorecards look at the amount—the more income a customer deposits into their checking account on a regular basis, the more positive a predictive factor it is. The Payment to Income ratio (PTI) is also widely utilized as a significant indicator of stability.

Neither is necessarily the best indicator. Instead of defining income data as a raw monetary value, FICO analytics look at the stability of the income—and as a best practice recommends analyzing income stability over longer than the typical six-month period.

Fine-tuning characteristics is one of the ways FICO can extract more value from your organization’s data.


Development exclusions: Don’t get sidetracked

When developing a scorecard, incorporating the wrong data into scorecard development can bias results and can have severe business repercussions.

The performance definition itself might introduce subtle bias. For instance, candidates for default might be defined as customers who have missed two or more payments within the last six or twelve months. However, if the population to be analyzed includes all customers, it would include inactive customers—those customers who have never missed a payment because they’ve never had to

make one. Rating these customers as “good,” even though they haven’t been proven to be “good,” potentially diminishes the ability of the scorecard to accurately predict default.

FICO can help your organization develop best practices in choosing the right data exclusions, to help maximize any scorecard’s predictive accuracy.

Inference: Predicting hazards outside your view

Most originations scorecards are based on the historic account performance of existing accounts—customers whose applications were previously accepted. But including only accepted accounts in your scorecard development can significantly bias the results and mean your scorecard may not work well on marginal or higher risk applications.

To make the best originations decisions, the scorecard must accurately assess all new applicants—including the applicants who were rejected, as well as the applicants who were approved but chose not to accept the offer. That’s a complicated hypothesis, requiring the scorecard to infer the performance of two unknown populations.

FICO has deep experience with performance inference and scorecard development. We can combine a number of approaches, including variations used by your financial institution, to create a best-practice approach for reject inference.


Meeting performance expectations: Scorecard monitoring services

Best practices for scorecard development include periodic monitoring to make sure that underlying assumptions remain as expected, and true.

Any number of forces can impact scorecard outcomes. For example, a marketing campaign directed at a specific demographic target can cause the group’s percentage of a card issuer’s population and its risk to spike within weeks.

Similarly, rapid economic changes can impact scorecard assumptions within weeks or even days. The US recession of 2008 and multiple European debt crises in the years following quickly affected consumers’ financial health and habits.

To help ensure that scorecards are performing as expected, FICO Consulting offers Scorecard Monitoring services on a monthly or quarterly basis. Importantly, FICO can link scorecards from multiple product portfolios to view the health of entire customer relationships. This can help banks to both improve the customer experience and maximize the value of total customer relationships.

Accelerating Success

Now, clients worldwide are calling on FICO Consulting and utilizing the FICO® Model Central™ platform to provide automatic scorecard monitoring on a constant or scheduled interval basis.

Model Central is a highly automated platform for developing, deploying, monitoring and managing analytic models, across all product lines and through their entire lifecycles. It speeds analytic models into production up to 80% faster, accelerating response to changing conditions and maximizing profitability.


FICO® Model Builder: Accelerating the modeling lifecycle

FICO® Model Builder gives your organization the power to explore and analyze data of any size and complexity, empowering your business decisions with insight into future outcomes. By better predicting behaviors, you can increase the precision of your data-driven scorecards, and substantially impact your bottom line.

FICO® Model Builder offers a rich graphical interface to prepare and explore analytic data, and interactively develop complete predictive models.

With FICO Model Builder, you can:

� Quickly develop analytics with timesaving features and extensibility.

� Extract business insights from your Big Data assets—including very large and unstructured data.

� Use industry-leading FICO scorecard technology that combines analytic science and business expertise.

� Engage new team members with an approachable graphical user interface.

� Design solutions using intuitive wizards, then generalize for repeated use with automatically generated scripts.

� Collaborate easily using consistent logic, common methodologies, reusable libraries and templates, and robust model documentation.


FICO scorecard consulting: Scoring wins for clients worldwide

A Middle Eastern Bank—The analysis staff at one of the largest banks in the Middle East is among the most sophisticated on Earth. Yet, the bank has enlisted FICO expertise to help on-staff experts develop and manage a wide range of predictive lending scorecards—from utilizing FICO® Expert Models for new business lines to advanced custom models that determine their capital requirements, all compliant with extremely strict regulations and cultural requirements.

A Scandinavian Banking Conglomerate—Over the past 7 years, FICO has completed over 30 scorecard development projects for a retail, private and on-line banking conglomerate serving Scandinavia and Northern Europe.

A South African Retail Giant—One of the largest fashion and jewelry retailers in South Africa and the Southern African region depends on FICO scorecards and models for their rapidly expanding revolving credit lines.

A French Commercial and Investment Bank—FICO is now working with a leading bank group in structured finance, debt optimization and distribution, capital markets and investment banking. FICO’s role is to review internal scorecards to detect gaps and assure best practices throughout their large-scale lending businesses.

For more information North America toll-free Latin America & Caribbean Europe, Middle East & Africa Asia Pacificwww.fico.com +1 888 342 6336 +55 11 5189 8222 +44 (0) 207 940 8718 +65 6422 7700 [email protected] [email protected] [email protected] [email protected]

FICO, Blaze Advisor and Model Central are trademarks or registered trademarks of Fair Isaac Corporation in the United States and in other countries. Other product and company names herein may be trademarks of their respective owners. © 2014 Fair Isaac Corporation. All rights reserved.

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Make FICO part of your teamFor decades, FICO has provided powerful custom analytics and analytic consulting, earning a reputation for excellence in the many industries we serve. FICO can help your organization to maximize the value it derives from analytics, with engagements ranging from model development to full analytic partnerships.

To speak with a FICO representative about how FICO can help your organization build a winning scorecard practice, please contact FICO today.

Learn moreDownload the white paper on this topic:

Building Powerful, Predictive Scorecards

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Banking Analytics Blog

http://www.fico.com/en/assets/building-powerful-predictive-scorecards/

http://bankinganalyticsblog.fico.com/

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