European Credit Delinquencies Will Rise Further

The need for small business credit is making headlines in many European countries, with politicians often railing against banks for “withholding” credit. Anyone wondering why banks are being conservative with their lending should review the latest European Credit Risk Outlook released by FICO and Efma.

According to more than 100 European risk professionals, consumers and small businesses are going to find it harder to pay back credit of nearly every sort in the coming six months. The forecast for credit delinquencies was worse across all credit products than in our fall survey.

Right at the top of the worry list are small businesses loans. 70% of risk managers say delinquencies will rise for small business credit, compared to just 52%in the last survey. In the UK, the percentage of respondents that see an increase in small business loan delinquencies for the next six months jumped from 33% in the last survey to 61%. The survey results also show the dichotomy in Europe’s economic health: In Spain and Portugal, all respondents forecast an increase in small business delinquencies, whereas in Germany, Austria and Switzerland just 9% of respondents forecast an increase.

In addition, more than half of respondents now believe mortgage delinquencies will increase in the next six months, compared with 39% in the last survey. The forecast is worse for credit cards: 65% of risk managers see increased delinquency, compared with 41% in fall 2011, an increase of 58%.

Despite all the talk about consumer deleveraging, this survey suggests that, in most European countries, neither small businesses nor consumers are going to find their credit load easy to bear this year.

Bankers getting ready to loosen the purse strings

In my last post, I discussed the optimism of US bankers regarding loan delinquencies in our latest quarterly risk survey. On another positive note, survey respondents also indicated that access to credit was likely to improve.

When asked about credit availability over the next six months, the majority of respondents expect supply to meet or exceed consumer demand for all loan types except mortgages. For car loans, 77% of respondents expect credit supply to satisfy demand, while 71% felt this would hold true for credit cards.

Optimism wasn’t as high for small business and student loans. Only 52% of respondents expect credit supply to satisfy demand for small business loans, and 58% expect supply to meet or exceed demand for student loans.

These results are consistent with general sentiment that delinquencies will be less of a problem over the next six months. As lending risk declines, it’s natural to see credit availability expand—which would be welcome news to consumers and businesses alike, since it's such a critical driver of economic growth.

Unfortunately, a credit gap is expected to persist in housing. With many bankers still unsure about the real estate sector, 56% of survey respondents believe credit supply would not meet demand for residential mortgages. It will be interesting to see if this sentiment changes later this year, particularly if the job market continues trending in a positive direction.

The Buzz on Customer Centricity

My recent conversations with banking professionals in Asia Pacific has made one thing very clear: customer-centricity is all the buzz nearly in every conversation. Every bank is trying their best to attract customers by putting their best foot forward.

Despite gloomy news on the economic horizon, particularly in Europe, the approach of customer-centricity is a very healthy direction for banks. It is a natural reaction to an environment where business conditions are going to be tougher, and competition will be intense. No one can afford to lose loyal customers.

For a long time, banks have operated in silos. Product teams in the same bank did not talk to each other. The customers were bombarded with similar products from different entities in the same bank, resulting in confusion. With a customer-centric approach, banks can not only bring back customer faith and loyalty with superior product delivery, they can also increase profitability.

Becoming customer-centric is no easy task, as we all know. Perhaps the biggest challenge is to unify customer information, which is typically scattered across the organization. It is critical that banks make necessary investments to create a unified customer database.

In addition, banks need analytics, tools and proccesses that enable them to roll out customer-centric strategies. On that front, FICO has long worked to help banks head in the right direction. Our business consultancy team regularly helps clients unearth gaps in current process and system, and provides recommendations on how to leverage existing infrastructure to the fullest and where best to enhance it with additional investment.

While investment in infrastructure is important, keep in mind that without a good driver, even the most expensive car on a beautiful road can be absolutely useless. In other words, managing the business with great infrastructure and state-of-the-art analytics still requires highly skilled people, and this doesn't happen overnight. There is a shortage of the right skill-set in the market. Organizations cognizant of this have benefitted greatly from their foresight by fostering needed skills into competitive advantage.

Optimism grows among US lenders

Are US bankers embracing the economic recovery? According to our latest quarterly survey of 200+ US risk officers, it certainly looks that way. This sentiment is in sharp contrast to the grim forecast expressed in our recent survey of European risk managers.

The US survey showed that risk managers expect loan delinquencies to drop and credit availability to expand (more on the latter in my next post). Not only were these results much more optimistic than last quarter’s, but fewer lenders in the latest survey expect delinquencies to rise on home, car and small business loans than at any time since we launched the survey two years ago.

The number of respondents expecting mortgage delinquencies to rise during the next six months was 12 percentage points lower than last quarter—dropping from 47 to 35%. The survey found 28% of respondents expect delinquencies on small business loans to increase, down 11 percentage points from last quarter. And 20% of respondents expect delinquencies on car loans to increase, down 13 percentage points.

With regard to credit cards, 32% of respondents expect delinquencies to increase. That is seven percentage points lower than last quarter, and it is the lowest figure since the second quarter of 2011.

As unemployment falls, even modestly, and four years of deleveraging begin to pay dividends, it looks like US lenders are feeling some optimism. We’re certainly not out of the woods— foreclosures are still a real concern, and jobs are coming back slowly. But if we can avoid major bumps in the road, such as a spillover effect from the Eurozone crisis, I have every reason to believe we’ll continue to see delinquencies drop.

One area that remains a concern is student lending, with 51% of survey respondents expecting delinquencies to rise. While it's 16 percentage points lower than last quarter, it is still the second-highest level recorded in our survey.

Get full survey results.

More bad news for Europe’s small businesses seeking credit

Small business lending has been a focus for most European nations, looking to increase economic growth and cut unemployment. The going hasn’t been easy, and it’s not going to get easier. Results of FICO and Efma’s latest European Credit Risk Outlook, which surveyed more than 100 credit risk management professionals across Europe, show that a “credit gap” looms for small businesses in 2012.

In this survey, 71 percent of respondents said small businesses will find it harder to get credit in 2012. Looking over the next six months, 31 percent of respondents say the aggregate amount of credit requested by small businesses will increase, while just 13 percent say the amount of credit extended will increase. That’s the widest credit gap for small businesses since we launched the survey a year ago.


Europe’s economic woes have shrunk both consumers and small businesses’ demand for credit, no doubt. But what our survey indicates is that supply will continue to fall faster than demand.

Using Mobile Technology to Improve Customer Interactions

Even lenders with the best analytics and decision management platforms often struggle to communicate advice and offers to customers. Wouldn't it be great if they could do so via a low-cost channel that their customers actually enjoy using, and thus is likely to yield more and higher-quality responses?

Together with Telrock, our partner and experts in mobile digital communications, we’ve been talking to Australian banks about how they can improve customer service and dialogue, while decreasing costs. According to research by Google, Australians have gone from “lagging to leading” in the smartphone revolution, with the second-highest smartphone penetration in the world, at 37%. And if your customer base is already actively using the technology, it makes sense to leverage it as a communication channel of choice.

Some Australian banks are using SMS messaging to alert customers about potential fraud on their credit cards, or to remind them about payments due once they are delinquent. But these communications tend to be one-way only. As such, they typically drive customers to contact call centres, where they may speak to an agent—which many would prefer to avoid, especially if they are busy or in financial difficulty. Or worse, they reach an automated IVR system, which takes them through an often painful and sometimes lengthy process of capturing needed information.

A far better approach is to use two-way SMS messages. This enables customers to have an SMS dialogue with the bank, and even to pay via SMS so they don’t have to contact the call centre. This approach can be combined with web portals, built for and accessible from smartphones (or any web-enabled device or computer), as well as web apps specific to smartphones.

How does it work? Well, the key is to offer the service to customers when they speak to a call centre agent or conduct their internet banking. Agents can collect relevant information—such as mobile number, email, Facebook details and payment details—and log these in a secure environment. The customer then gets an SMS message containing the terms of the new service, and can agree (or decline) to use the service.

Once customers sign up, the service proves to be incredibly useful and effective, particularly in three areas of the customer lifecycle:

• Fraud alerts: When a suspicious transaction is detected, transaction details are sent to the customer, who can determine whether it’s fraudulent and whether the card should be blocked.
• Paying a delinquent account: Making payments, promise-to-pays and payment plans can be automated via SMS messages. The customer gets an SMS reminder before the payment is due, with details of the payment amount and date. They can then send a return message agreeing to the payment, or alternatively opt to pay a different amount (subject, of course, to the bank’s pre-set business rules).
• Account originations/servicing: Account originations can be greatly simplified using mobile services. Customers can apply for new products via mobile apps or mobile web, or even upload identification documents, such as driver’s licenses, via smartphone cameras. This channel is also great for account servicing, including account activations, spend/discount offers, line increase offers, balance transfers and so on.

I’ve only scratched the surface of possibilities for this communication channel. As we've discussed these opportunities with banks over the past week, their excitement has been incredible. I’m certain we’ll be seeing many of them expanding their use of mobile services in the very near future.

How-To Guide for Knowledge Automation in the Era of Big Data

FICO’s own Alan Fish has just published Knowledge Automation (Wiley). The book provides a how-to guide for improving business processes by automating business knowledge, which includes not just human knowledge but “artificial” knowledge extracted from data using analytics.

Knowledge Automation: How to Implement Decision Management in Business Processes describes a simple but comprehensive methodology for decision management projects, which use business rules and predictive analytics to optimize and automate high-volume business decisions. Fish describes a new method called Decision Requirements Analysis, which can help IT professionals run any project to implement decision management with reduced risk and increased profit.

According to Fish, “Business managers and IT professionals looking to get value from Big Data need to focus not just on how it can be stored but also how it can be analyzed, and how the resulting knowledge can be used in automated decisions. The biggest reason businesses fail at this is that they don’t clearly define the scope and structure of their decision management projects.”

Learn more about the book by reading an excerpt or the news announcement, or by visiting the Wiley website at: www.wiley.com/buy/978-1-118-09476-1.

Four out of five European bankers see another recession coming

The latest European Credit Risk Outlook, published by FICO and Efma today, provides a grim forecast for Europe. More than 100 credit risk management professionals across Europe answered the survey in January and February, and here’s some of what they said:

• 79 percent of respondents forecast a new European recession for 2012.
• 100 percent of Spanish and Portuguese respondents said their countries were going to experience another recession this year. That might be expected, but more than half (53 percent) of respondents from the UK and Ireland also forecast a recession in their countries. Go to Germany, Austria and Switzerland, and that number drops to just 25 percent.
• 60 percent of respondents said the housing market would not improve in 2012 — compared to just 2 percent who said it would. Again, it depends on where you sit. 56 percent of risk managers in the DACH region said the housing market would get stronger in 2012. Just 18 percent of respondents from the UK and Ireland agreed, and no one in Spain and Portugal forecast an improvement.

The report, which is available on the FICO website, also has interesting forecasts of credit supply and demand, and credit delinquencies. I’ll comment on those later. For now, I think I’ll go stimulate the economy by buying a drink!

New Defense Fights Bank Robbery

BankInfoSecurity has published an article and podcast that feature FBI Special Agent Erik Vasys discussing work with FICO on Bandit Shield, their new anti-bank robbery initiative.  Here's an excerpt from the article:

Bank robberies are old-world crimes, but they are still devastating to institutions and their communities. How is the FBI now working with banks to change how they respond to these violent crimes?

Relative to white-collar financial crimes, such as ACH fraud, financial losses linked to physical branch robberies remain low... But the long-term psychological impact on branch staff and citizens is financially immeasurable, says Special Agent Erik Vasys. "It definitely affects the community," says Vasys, who works for the San Antonio Division of the Federal Bureau of Investigation. "The basics of bank robberies have not changed; but what we want to do is try to make it easier for banks to fight back, by training the branch personnel and enhancing security best practices."

Check out the BankInfoSecurity podcast and article "New Defense Fights Bank Robbery." And read the post by FICO blogger John Buzzard on how FICO is teaming with the FBI on Bandit Shield.

Don’t forget about low-tech fraud

In today’s fast-paced world of electronic crime and scams, we often focus on large-scale card fraud attacks, perpetrated by criminals who employ sophisticated technology to steal large amounts of personal and financial data.  These thieves are highly proficient at exploiting technology that allows them to reap sizeable financial rewards while maintaining the lowest risk of detection, arrest and prosecution. 

But let’s not forget that card fraud perpetrated by low-tech methods remains a big concern, particularly with the downturn of the US economy.  The very low-tech physical removal of an ATM from its foundation (aka “ram raids”) is the second-largest threat to ATM security after card skimming.  Low-tech financial crimes are, of course, characterized by largely unsophisticated technology usage, employing techniques like ATM vestibule skimming or poorly executed ATM thefts.  While each breach tends to affect fewer consumers and financial institutions than high-tech methods, the frequency of low-tech crimes means you can’t let down your guard.

Regardless of the fraudster’s sophistication level, the victims are still financial institutions and their customers.  To fight back, banks must employ a two-fisted approach, on the one hand proactively using analytics to prevent as much fraud as possible before losses occur, and on the other, employing reactive strategies to quickly detect and shut down breaches.