Credit Scoring is a technique used world-wide in the consumer credit industry to assist credit managers in the management of different product portfolios. It enables the level of risk associated with an application to be estimated at the time of application, and therefore assists in the decision as to whether an application should be accepted or declined. Proaxiom specialise in the development and implementation of customised and generic scorecards for use in the credit industry.
The use of decision support systems is now well established around the world, and is widely accepted as being best practise for the granting of consumer credit. Research has proven conclusively that scorecards can out-perform traditional subjective lending practices. Within Australia and New Zealand scoring is becoming increasingly more established as the larger organisations re-engineer and refine traditional approaches, and smaller organisations look to increase their market share by improving their ability to process high volumes of applications in a controlled and efficient manner.
How does Credit Scoring work?
A credit scorecard is generally developed for a specific portfolio. The credit scorecard is the result of detailed statistical modelling that analyses the relationship between application characteristics, for example ‘Age of Applicant’, and future account performance. The scorecard summarises all such relationships and produces a single estimate of the risk associated with a given application.
For a new application, points are awarded for all the scorecard characteristics, and the sum total of these points is the credit score. The score, therefore, gives a continuous measure of risk with a high score indicating a low level of risk, and a low score indicating a high level of risk. The score is then compared to the cut-off score to determine whether the application should be accepted or declined. To assist the credit manager in choosing the most appropriate cut-off score, forecasts are produced as part of the development which predict the level of risk and reject rate association with implementing a variety of cut-off scores.
The Benefits of Credit Scoring:
Credit Scoring has been proven to outperform the traditional approach of subjective decision making by a significant margin. When scorecards are first implemented at organisations thy generally reduce the incidence of new bad debt by 15% – 25% through improved, unbiased and consistent decision making. In addition, the ease with which scorecards can be automated facilitates rapid and cost effective processing, improves management control and establishes a comprehensive database for the purposes of monitoring and future development work.
Why work with Proaxiom?
Proaxiom has over 22 years’ experience specializing in understanding both business and credit processes. Proaxiom is not just a “scorecard building company” and because of this it is free to consider and recommend the solutions that best suit the individual business. This may or may not involve the implementation of a scorecard.
Proaxiom applies multivariate statistical techniques that have become the industry standard among scorecard developers for more than three decades. Proaxiom also have a participative approach to scorecard building and welcome client participation throughout all project phases. This approach ensures that Proaxiom scorecards are developed to the highest analytical standards and provide the optimum business outcomes for our customers.
The optimal approach when building a credit scorecard is to develop a customised model for a specific portfolio. This ensures that scorecard parameters are set according to the true statistical deviations evident in, and determined by, examination of the clients sample population. However, a customised scorecard requires comprehensive historical information, and it is not always possible to gather the required information when applicant data is missing, application volumes are too low, or when a new product is being launched. In these cases, an alternative solution to developing a customised scorecard is required.
The alternative is a generic scorecard, which can be used as an immediate and low cost solution to improved portfolio management. The implementation of a Generic Scorecard will provide all the benefits associated with credit scoring for those organisations that are unable to develop a customised model. Furthermore, with the implementation of a generic scorecard, the data collected and stored in the database can be subsequently used for customised development.
A scorecard is the result of an analytical process, with the end result being a complex mathamatical algorithm and comprehensive documentation. It does not include any software. Although this would enable manual implementation, we strongly recommend against this. Delivery of the considerable benefits that scoring can provide necessitates automation. These include consistency and speed of decision making, integrity and security of the scoring algorithm and the accumulation of data for management reporting, feedback and continual improvement of the process.
Proaxiom have developed the MAPS Application Processing system as a best of breed solution for automation of the decision making process. The flexible architecture and modular design of MAPS makes it ideal for integration into almost any ICT environment.
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