Equifax: Is It Time to Revisit Your Deposit Account Risk Assessment Model?
Yes, according to industry regulators.
In an industry where change seems to be one of the few constants anymore, financial institutions are now facing pressure to modify their long-standing risk assessment practices of deposit accounts. More specifically, industry regulators want financial institutions to move away from a decisioning process fueled by negative financial data to create more inclusive account opening policies that allow more people, particularly those who are unbanked or underbanked, to open bank accounts1. Financial institutions are being asked to find ways to say “yes” more often, instead of turning down account applicants based on negative information from a closed for cause consortium..
For many organizations, this is easier said than done. Deposit account risk assessment is a dynamic process within the larger account opening process that involves integrated data sources, automated scoring models and much more. Adjusting one workflow or data source directly affects the larger process.
So, where do you begin?
First, take some time to look inward and evaluate your current processes. Then, reconsider the integrity and composition of the data that fuels your processes and customer decisions. Here are a few things to think about.
Quality control and account management can help drive positivity
How you manage the data used in your customer decisions can influence your ability to get the most accurate and updated view of a consumer, which may directly impact your decision. If your deposit account risk assessment is not comprehensive enough, lacks consistency or is outdated, it can often negatively skew your outcomes.
Do you follow a strict quality control (QC) process when handling and using your customer data and data from third-party sources? What about your data providers—do they follow similar QC protocols? If so, are these processes consistently documented in order to detect changing patterns and trends? Do you routinely spot-test your data for currency, accuracy and completeness? When was the last time you updated your new account decisioning models, and do you have a regular schedule for testing and updating them? These measures can help ensure your decisions and risk policies stay fresh, accurate, and aligned with the most current consumer patterns and trends.
Another place to look internally is your account management process, an often overlooked area in terms of deposit account risk assessment. Do you monitor and track customer activity in order to better understand and anticipate their current and future needs? Do you have a clear and connected view of a customer’s accounts across different channels (mobile, online and in-person) and lines of business (consumer and commercial)? This, in particular, can help you spot fresh opportunities to improve retention, and cross-sell and upsell services.
Don’t sterilize your data, expand it
It may be unsound to rely solely on closed-for-cause lists from account verification providers. Since the cause for account closure is generally based on some sort of documented account abuse, regulators feel it’s too biased against consumers who may have simply experienced a temporary setback2.
Instead of sterilizing consortium data to the point of being useless, try augmenting it with alternative data insights for a broader understanding of the consumers.
Alternative payment data can fuel specialized risk scores for retail banking. These scores deliver relevant, predictive information designed to help you more securely evaluate consumers beyond legacy “No Records Found” or account abuse only transactions, and potential upsell and cross-sell opportunities based on an expanded risk profile.
So, while a consumer might have an old closed-for-cause entry on his/her bank report, alternative data can help expand a view of the consumer by also revealing that they pay their bills on time every month. Instead of declining to open the account, you might feel more comfortable approving it with risk-appropriate account limits, or other conditions. Insight Score for Retail Banking (ISRB) helps financial institutions with demand deposit account (DDA) risk segmentation.
Last, consider using trended data which reveals consumer financial behavior over time, generally a 24-month period. Trended data may be more predictive than a one-dimensional bank report, since it demonstrates a consumer’s financial behavior. For example, trended data can show you that, a person has been paying off credit balances and making on-time or more than minimum payments for the last six months. This could be a prime opportunity to say, “Yes, you’re approved for a new checking account, with a few conditions.”
Transitioning to a more enhanced account opening policy will take time. But, considering the increased focus from industry regulators, now is the time to get started3. Advanced new tools, technology and data resources are available to help you smoothly align your process with the latest standards. Apart from strengthening account management, intelligently adjusting your deposit account risk assessment process to potentially approve a wider audience may help grow your household portfolio while mitigating risk. Best of all, you can further offer a positive customer experience that helps you win, retain and grow loyal customers for life.
1 Source: CFPB Looking at How Banks Use Credit Reports for Checking Accounts, October 2014, http://www.americanbanker.com/issues/179_195/cfpb-looking-at-how-banks-use-credit-reports-for-checking-accounts-1070420-1.html
2 Source: CFPB Looking at How Banks Use Credit Reports for Checking Accounts, October 2014, http://www.americanbanker.com/issues/179_195/cfpb-looking-at-how-banks-use-credit-reports-for-checking-accounts-1070420-1.html
3 Source: Prepared Remarks of CFPB Director Richard Cordray at a Field Hearing on Checking Account Access, February 2016, http://www.consumerfinance.gov/newsroom/prepared-remarks-of-cfpb-director-richard-cordray-at-a-field-hearing-on-checking-account-access/