Reactive (Customer initiated) credit line increase programs — Design and monitoring
Continuing from our last article on proactive line increase, we now move to reactive or customer initiated credit line increase programs. If customer wishes to increase their credit line, they can contact issuer through phone or online medium and request a line increase. At that point issuer needs to have an underwriting policy to decision these requests. Traditionally customer requested line increase request tend to be riskier that proactive ones, however the engagement and usage of increased line is also higher driving profitability. Similar to any other credit program, issuer needs to build decision matrix using risk reward tradeoff.
The way how the decision workflow should be designed will be based upon how much credit customer is demanding. If the requested line increase amount is low then it can be handled systemically, however if the requested amount is higher there needs to be additional assessment where issuer can use some of judgmental decisioning looking at case to case basis. Another aspect is cadence or velocity of requests, if a customer is requesting line increase in very small timeframe it could potentially point towards a bust-out scenario, and hence issuer needs to be cognizant of this aspect and restrict multiple requests approvals in a small timeframe
The decision should be based on customer credit profile both at issuer and bureau. If the customer is relatively new, then a big dependency is on external behavior data. Too many CLI request in early MOB may point to fact that the line given at acquisition may not be adequate and it should be fixed at acquisition stage, unless it is a strategic decision to keep acquisition minimal and use RCLI to optimize as per customer need.
Line assignment should be based on risk profile, product profile and customer engagement. A lot of customers may request credit line increase for one-time large purchases, in that case issuer should also analyze impact of increase exposure once customer purpose is accomplished and customer has paid off.
Measurement of RCLI decisions
Similar to any other decision-making process, there are few parameters on which RCLI decision can be measured
- Is the issuer approving customer who have higher chances of default. — Loss Rate of approved segment compared to benchmark
- Is the issuer declining credit to customer which would have driven significant revenue- Lost revenue based on estimated incremental sales
An additional layer from measurement standpoint is
3. Is the increased line given by issuer driving higher engagement from customer — Increase is sales and card usage
4. Is the line increase amount optimum as per customer need. — Customer requesting more credit or raising complaints that line is not adequate.
5. And finally, if the decision is to decline or give less than expected line increase, could it lead to possible customer disengagement and attrition- Customer attrition and inactivity post CLI decline
While designing a RCLI program issuer must benchmark and set expectations on these parameters and measure performance. Like any other credit program, issuer can try A/B testing and optimize as per their need. The strategy should be robust and should be profitable in extreme economic stress scenario.
We will cover Invitational (Solicited) line increase management in a next article
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