The Data Analytics Blog

Our news and views relating to Data Analytics, Big Data, Machine Learning, and the world of Credit.

All Posts

The Pros And Cons Of A Multi-Bureau Strategy In Credit

August 25, 2017 at 8:51 AM

Woman with thought bubbles over her head deciding on a multi-bureau credit risk strategy

Although not a new concept, very few credit-granting organisations have deployed a true multi-bureau strategy in their organisation.  It is, however, talked about fairly regularly, but often dismissed as “too hard” or “not important enough”.  So why should you consider a multi-bureau strategy?  What are the key considerations? How do you go about deploying a multi-bureau strategy? This blog series will address these questions.

Many countries enjoy an environment with multiple credit bureaux.  South Africa alone has 14 bureaux registered through the Credit Bureau Association.

There are indeed many reasons that a multi-bureau strategy should be considered. We will cover this across each customer lifecycle area in a future post.  This post deals predominantly with customer originations. 

Table listing the benefits and challenges of a multi-bureau strategy

The key benefits of a multi-bureau strategy

1. Pricing Leverage

Utilising more than one bureau will give you a position to negotiate price. We have witnessed organisations that have locked into one bureau taking two years to shift bureaux simply because of scorecards, strategies and systems have been built to cater for the incumbent bureau.  This has meant they have been in no position to negotiate price.  There is much talk about the commoditisation of bureau data, however price per live record can vary by over 1,000%.

2. Contingency

Occasionally links to certain bureaux are down and while bureaux are fairly good at ensuring down-time is kept to a minimum, applications still need to be scored and processed. Similarly, even the leading bureaux suffer from large scale data-issues that may take months to resolve.  Having an alternative bureau allows you to make decisions with more certainty during these times.  Ultimately having a fall-over bureau will ensure peace-of-mind.

3. Continued Bureau Comparison

Running two bureaux also allows for continued comparison of each bureau. As mentioned earlier, each bureau occasionally has data issues, if you are stuck with this bureau your business strategy will be exposed.  Also, if you are using a credit bureau score in your strategy and the bureau is migrating over to a new score, you may be exposed here too forcing you to redesign your new strategies immediately.  If you are running a second bureau, you have the ability to rely on their trusted score and simply test the new score from the other bureau.

4. Diverse data sources

Although much of the bureau data available is commoditised and offered by all leading bureaux, certain bureau offer some data not offered by others. Examples of this may be municipal collections data, vehicle registration data, insurance claims data, geo-spatial data, call-centre data, etc.  It may be that these data are crucial for certain segments of the population (e.g. “thin-file” applications) and it may be useful to bring into the application process.

5. Unique bureau products

Some bureaux offer unique products that can assist in part of the originations process. Examples of this are authentication – here digital applicants are asked automated questions about their credit profile to verify that the ID number is indeed of the individual applying. Some bureaux offer quick-apps; others offer application fraud services.  It should also be noted that while each bureau may receive the same payment profile information, they all aggregate the data differently (this is the data used in credit scoring).  So the explicit data may be the same, the summarised data is unique and this may offer new opportunities in scorecard builds.

6. Belts-and-braces

Another good reason for a joint bureau strategy is that occasionally a credit bureau does not have the same shared-data as another. Although credit provider groups (like SACCRA in South Africa) do what they can to ensure consistency, occasionally data is omitted from a profile (this topic deserves its own blog post!).  A second check for those that pass the initial bureau call can give peace-of-mind. 

The key challenges of a multi-bureau strategy

1. Developing and running two strategies

Instead of an origination’s strategy incorporating one bureau, you will need to support two strategies which can literally mean double the work and double the monitoring. The extra cost and time of this needs to weighed against the benefits listed above.

2. Software supporting two bureaux calls and strategies

Dependent on your use of MBS, you will need suitable software to support MBS. This comes down to a variety of functionality, but essentially a decision engine or originations engine that supports a dual-bureau strategy (this should have champion/challenger capability).  The allocation percentage to each bureau should be easily configurable.  The second software consideration is the joint bureaux connector.  This should support the communication to each bureau (you may wish to test out a third/forth bureau too). It may also deal with ensuring that similar fields are sent back to the originations system regardless of source bureau.  It should also have the ability to store bureau enquiry data so that duplicate enquiries to a bureau are not performed incurring additional cost.

For Principa’s bureau connector offering – see BureauSmart

Despite the challenges there are many benefits that can add significant value to credit granting organisation from tier 1 to tier 3.  Principa offer BridgeSmart as a Smart connector to multiple bureaux (including all South African bureaux).  Similarly, Principa’s originations platform AppSmart and business rules management system DecisionSmart are capable of supporting a multi-bureau strategy.

In our next blog we will look at the advantages of a Multi-bureau Strategy across the entire customer lifecycle.

Boost Collection yields with Machine Learning applications as a service
Thomas Maydon
Thomas Maydon
Thomas Maydon is the Head of Credit Solutions at Principa. With over 17 years of experience in the Southern African, West African and Middle Eastern retail credit markets, Tom has primarily been involved in consulting, analytics, credit bureau and predictive modelling services. He has experience in all aspects of the credit life cycle (in multiple industries) including intelligent prospecting, originations, strategy simulation, affordability analysis, behavioural modelling, pricing analysis, collections processes, and provisions (including Basel II) and profitability calculations.

Latest Posts

The 7 types of credit risk in SME lending

  It is common knowledge in the industry that the credit risk assessment of a consumer applying for credit is far less complex than that of a business that is applying for credit. Why is this the case? Simply put, consumers are usually very similar in their requirements and risks (homogenous) whilst businesses have far more varying risk elements (heterogenous). In this blog we will look at all the different risk elements within a business (here SME) credit application. These are: Risk of proprietors Risk of business Reason for loan Financial ratios Size of loan Risk industry Risk of region Before we delve into this list, it is worth noting that all of these factors need to be deployable as assessment tools within your originations system so it is key that you ensure your system can manage them. If you are on the look out for a loans origination system, then look no further than Principa’s AppSmart. If you are looking for a decision engine to manage your scorecards, policy rules and terms of business then take a look at our DecisionSmart business rules engine. AppSmart and DecisionSmart are part of Principa’s FinSmart Universe allowing for effective credit management across the customer life-cycle.   The different risk elements within a business credit application 1) Risk of proprietors For smaller organisations the risk of the business is inextricably linked to the financial well-being of the proprietors. How small is small? The rule of thumb is companies with up to two to three proprietors should have their proprietors assessed for risk too. This fits in with the SME segment. What data should be looked at? Generally in countries with mature credit bureaux, credit data is looked at including the score (there is normally a score cut-off) and then negative information such as the existence of judgements or defaults; these are typically used within policy rules. Those businesses with proprietors with excessive numbers of “negatives” may be disqualified from the loan application. Some credit bureaux offer a score of an individual based on the performance of all the businesses with which they are associated. This can also be useful in the credit risk assessment process. Another innovation being adopted internationally is the use of psychometrics in credit evaluation of the proprietors. To find out more about adopting credit scoring, read our blog on how to adopt credit scoring.   2) Risk of business The risk of the business should be managed through both scores and policy rules. Lenders will look at information such as the age of company, the experience of directors and the size of company etc. within a score. Alternatively, many lenders utilise the business score offered by credit bureaux. These scores are typically not as strong as consumer scores as the underlying data is limited and sometimes problematic. For example, large successful organisations may have judgements registered against their name which, unlike for consumers, is not necessarily a direct indication of the inability to service debt.   3) Reason for loan The reason for a loan is used more widely in business lending as opposed to unsecured consumer lending. Venture capital, working capital, invoice discounting and bridging finance are just some of many types of loan/facilities available and lenders need to equip themselves with the ability to manage each of these customer types whether it is within originations or collections. Prudent lenders venturing into the SME space for the first time often focus on one or two of these loan types and then expand later – as the operational implication for each type of loan is complex.   4) Financial ratios Financial ratios are core to commercial credit risk assessment. The main challenge here is to ensure that reliable financials are available from the customer. Small businesses may not be audited and thus the financials may be less trustworthy. Financial ratios can be divided into four categories: Profitability Leverage Coverage Liquidity Profitability can be further divided into margin ratios and return ratios. Lenders are frequently interested in gross profit margins; this is normally explicit on the income statement. The EBIDTA margin and operating profit margins are also used as well as return ratios such as return on assets, return on equity and risk-adjusted-returns. Leverage ratios are useful to lenders as they reflect the portion of the business that is financed by debt. Lower leverage ratios indicate stability. Leverage ratios assessed often incorporate debt-to-asset, debt-to-equity and asset-to-equity. Coverage ratios indicate the coverage that income or assets provide for the servicing of debt or interest expenses. The higher the coverage ratio the better it is for the lender. Coverage ratios are worked out considering the loan/facility that is being applied for. Finally, liquidity ratios indicate the ability for a company to convert its assets into cash. There are a variety of ratios used here. The current ratio is simply the ratio of assets to liabilities. The quick ratio is the ability for the business to pay its current debts off with readily available assets. The higher the liquidity ratios the better. Ratios are used both within credit scorecards as well as within policy rules. You can read more about these ratios here.   5) Size of loan When assessing credit risk for a consumer, the risk of the consumer does not normally change with the change of loan amount or facility (subject to the consumer passing affordability criteria). With business loans, loan amounts can range quite dramatically, and the risk of the applicant is normally tied to the loan amount requested. The loan/facility amount will of course change the ratios (mentioned in the last section) which could affect a positive/negative outcome. The outcome of the loan application is usually directly linked to a loan amount and any marked change to this loan amount would change the risk profile of the application.   6) Risk of industry The risk of an industry in which the SME operates can have a strong deterministic relationship with the entity being able to service the debt. Some lenders use this and those who do not normally identify this as a missing element in their risk assessment process. The identification of industry is always important. If you are in manufacturing, but your clients are the mines, then you are perhaps better identified as operating in mining as opposed to manufacturing. Most lenders who assess industry, will periodically rule out certain industries and perhaps also incorporate industry within their scorecard. Others take a more scientific approach. In the graph below the performance of an industry is tracked for two years and then projected over the next 6 months; this is then compared to the country’s GDP. As the industry appears to track above the projected GDP, a positive outlook is given to this applicant and this may affect them favourably in the credit application.                   7) Risk of Region   The last area of assessment is risk of region. Of the seven, this one is used the least. Here businesses,  either on book or on the bureau, are assessed against their geo-code. Each geo-code is clustered, and the projected outlook is given as positive, static or negative. As with industry this can be used within the assessment process as a policy rule or within a scorecard.   Bringing the seven risk categories together in a risk assessment These seven risk assessment categories are all important in the risk assessment process. How you bring it all together is critical. If you would like to discuss your SME evaluation challenges or find out more about what we offer in credit management software (like AppSmart and DecisionSmart), get in touch with us here.

Collections Resilience post COVID-19 - part 2

Principa Decisions (Pty) L

Collections Resilience post COVID-19

Principa Decisions (Pty) L