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Balancing credit risk and growth post-COVID

May 12, 2020 by Gary Stockton

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FinTech firm HighRadius recently hosted a panel discussion titled "Balancing Credit Risk and Growth in an Economy Hit by COVID-19." Dan Meder, Vice President of Solutions Consulting represented Experian along with Michael Flum, from Credit Risk Monitor, Eric Kider, from Infogroup and Ian Thompson, from S&P Global. The talk was moderated by Dustin Luther from Creditsafe USA. You can watch the webinar recording here. 

To kick things off the audience was asked what their #1 risk assessment concerns were.

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Collecting money from existing customers without disrupting relationships was a leading concern, and moderator Dustin Luther of CreditSafe remarked "What do we do with people who are hesitant to be cutting checks? We don't want to lose customers." With half of the audience concerned with evaluating a customer's creditworthiness moving forward, it was time to discuss what that world might look like post-COVID. For this blog post, we will summarize some of Dan Meder's responses on how Experian is helping clients manage credit risk and growth.

What are some innovative measures companies are taking to adjust their credit policy in response to COVID-19?

DM: One of the things that we're seeing is a greater emphasis on portfolio analysis. Clients that we have that weren't doing it before are now starting to do it, and clients that we have that have been analyzing their portfolio are doing it on a more frequent basis, and the reason is to try and stay on top of those areas of risk in the portfolio.

This is a highly fluid environment and things are moving quickly and it's important to understand what segments of the portfolio are challenged. There is also some wisdom I think to look at the different industries that might be showing a different behavior than what you have seen in the past, in areas that you might be at risk. So, for example, if you sold a lot to restaurants, there may be a strategy that you've got to employ to deal with restaurants a little bit differently because we all know that they're one of the most affected industries because of what we have going on now.

Now there's another aspect of this that I’ll put under the innovative category, but it's kind of a step backward from people who had been very innovative. A lot of folks that have used credit scores and use them in an automated decisioning environment are changing the cutoffs to maybe raise the level for automatic approval. But at the same time doing a little bit more manual review, and trying to determine, for lack of a better phrase, determine the winners from the losers, because, I say that in a very general sense. The reason is that if you've had a customer who has been very good in the past, you might want to help see them through these tough times because they are going to end. And at the end of this, it could be that you're building a loyalty base that perhaps you might not have had before.

What are some of the data points we should consider for flagging customers based on COVID-19 risk?

DM: Certainly payment, both external payments and payments to you individually. When I say external — other companies that you have an experience that might show up on a credit report. But I want to maybe go in a little bit different direction and this. This is something that we saw during the 2008 crisis, the increase in fraud, and the importance of verifying that the business applying for credit is who they say they are. So, business verification becomes very big. Also, there's a couple of other data points that are a little bit on the nontraditional side, One of which is the UCC filings and trying to determine is the business you're dealing with showing an increase in UCC filings, which means are they shopping for additional funding or have they gotten additional funding? And what additional collateral might be pledged. It’s kind of traditional, but in a way more so now because things are evolving so quickly, and if you see somebody who's getting funding that's probably a good sign. If you see them getting funding for four or five different companies that are similar to yours, that might not be such a good sign. These are things that you might want to keep an eye on.

And the last thing I would add is, watch for collection activity. I just saw a study not too long ago that indicated the vast majority of credit managers will not be shy about taking legal action to clear open balances. So, there might be this notion that OK we're all going through a tough time and you know we're going extend terms in all this but there's also a big indicator that says that those that are inclined will collect those open balances and will put companies and collection.

Do you think it even makes sense to keep using the same predictive models we're using before? How should credit managers be looking at this kind of modeling your risk going forward?

DM: One of the things that we've found is that over the past few years when our scores have been used through natural disasters and periods of economic instability, and credit crises, they've continued to rank risk and stood up well. You may see risk profiles shift somewhat downward, but since they move uniformly in aggregate it still ranks the risk very well. So, I understand kind of the points that you guys are making but our thinking here is that it is a lot in terms of the policy rules that you assign on the back end.

So if you consider the scores as a way to rank order risk, meaning that a low score is a high-risk high score is a good risk or whichever way scale works, it will still do that, but then it's the things that you consider on the back end of that, that can make the difference as to whether you decide to move forward or not, and some of that might be past performance some of it might be the industry that the company is in, and probably a lot of the data points that you guys were sort of hypothesizing about before. When you're looking at building additional models. What we're saying is, the scores that write the risk are probably still ok, it's the rules that you put on the back end of it that help them take that score and modify it based on the current conditions.

Are the credit bureaus changing their scoring methodology based on Covid-19? Dan, what are your thoughts on this? You sounded like you were in the same spot of not wanting to change the scoring methodology fundamentally but what has changed for Experian?

DM: The way we look at it credit scores use historical data to assess whether a business is likely to exhibit some definition of being a bad account. And you can respond faster with some of the new technologies that are out there, and I think Mike was alluding to some of this before. Things like machine learning techniques that allow you to respond more quickly. But keep in mind there's still not a lot of history yet to base any of these changes on. So, at this point, you know our recommendations have centered on adjusting policy rules around cutoff scores, past performance data, and other things, but not modifying the scores so much. Now, having said that, we do monitor score performance and we perform annual validations of each of our scores. But at this point its still kind of difficult to see what form or to what extent we'll need to make any modifications.

When asked what their top priorities would be when re-opening their businesses, focusing on building a more agile credit function was the biggest concern among 42% of respondents, followed by building a long-term business continuity plan.

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Can you tell me what a more agile credit policy might look like?

DM: I think what this is pointing out is the need to be able to shift gears quickly when a radical event occurs. So, I think investing in an agile credit policy means being nimble enough to be able to react and know probably more important anything else, know what buttons to push to move quickly into a recovery mode.

About Dan Meder

Dan Meder

Dan Meder is Vice President, Solutions Consulting for Experian’s Business Information Services group. Dan’s deep industry experience assists Experian’s B2B clients in leveraging data, analytics, and technology to improve profitability. Dan previously led Experian’s B2B product management for 15 years. Before joining Experian, he spent 20 years with Dun & Bradstreet in a variety of technical sales and product marketing roles.

Dan is a board member of the Business Information Industry Association and Experian’s platinum sponsorship lead with the Credit Research Foundation committee.

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