Performance

Measuring effectiveness of Authorization risk strategies

In previous article, we covered how do we approach on making decisions for credit card authorizations. Then second part to it is how to measure effectiveness. The steps to measure the effectiveness can be broken into follows

1. Setting benchmark: Based on bank’s risk appetite, the strategy success metrics needs to be set forward. This can be based on historical performance, peer benchmarking and revenue expectations. As always the rewards should outweigh the risk.
2. Monitoring: On a periodic basis credit issuer should monitor performance of strategy with respect to benchmark. In case the actioned population defaults are higher than benchmark, it should be investigated. If it follows a trend then it should be actioned to bring it close to benchmark. See example below

Monitoring performance of auth strategies

In example above, the portfolio is benchmarked to approve over limit to riskier segments till the point default rate stays below benchmark. If the default rate is higher than benchmark, then riskier segments should be cut down in an optimum way till the point it does not impact profitability

While performance periods can be longer, its also important to have some early warning indicators are early defaults, customer doing bad on bureau etc.

3) Action: In case there is need to make change, it needs to be thoroughly reviewed, communicated and discussed with all stakeholders. While making change to strategies it is important to test it on a smaller population for some period. This helps in ensuring the change is working as expected, and reduces chance of customer impact due to error in implementations.

Advanced models and bureau and velocity information can also be used to make a more real time decisions which can further optimise need of credit and risk.

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