Gaming the Odds and Gaining Competitive Advantage with Automated Onboarding
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In the world of risk and fraud, innovation is happening fast. Ignoring new technology innovations is simply not an option for financial services organizations looking to scale and grow their business. This session will cover how organizations can find new revenue in the underwriting department leveraging their risk scorecard. Learn about the importance of data capture and analysis in the underwriting process, in order to increase the size of your customer base.
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Gaming the Odds and Gaining Competitive Advantage with Automated Onboarding
- 1. Gaming the Odds and Gaining Competitive Advantage with Automated Onboarding Presented by Recombo CEO, Mike Gardner on Wednesday, March 11th 2015 at:
- 2. So you probably think that I’m going to tell you how much faster you could underwrite, and how much money you could save, if you automated your underwriting? Well I could… But, my guess it that you already know that’s something you should be doing.
- 3. What you will learn today: 1. How your risk department can use basic statistics concepts to unlock revenue 2. How a risk score is developed and how it is often determined improperly 3. What you need to do get started for your organization
- 4. Las Vegas is the best city in the world to teach us that there is MONEY tucked inside of RISK.
- 5. There’s a lot that needs to be done to unlock the value of merchants… Pass/fail reviews only provide “buckets” for sorting merchants
- 6. A histogram of your merchants can provide a a view of your merchant profile.
- 7. So if this a chart (histogram) of all the merchants that submit applications to your firm, can you see the money you’re leaving behind?
- 8. How about now? Too Risky to do Business With
- 9. OK, how about now? Too Risky to do Business With
- 10. Do Your Own Math Assume the following: • Average monthly value of a merchant $2500 • Average merchant applications per month 100 • 80% of merchants get approved The cost of false positives in your risk model: 5%: $30,000/annum 15%: $90,000/annum 25%: $150,000/annum
- 11. Consider the following: How much time, if any, is your organization spending reviewing the merchants you declined, rather than looking for new merchants?
- 12. Hang on though, Mike! I don’t want to be taking on more risk for my organization!
- 13. Risk isn’t a point – it’s a range. High Risk Low Risk Your Threshold of Risk 0 100 Your Risk Score
- 14. What you score, is as important as how you score Reputation 45pts Delivery Method68pts Value 20Pts Identity75pts 1. Identity 2. Validity 3. Legitimacy 4. Financial Acceptability 5. Risk Level High Risk Low Risk Your Threshold of Risk 0 100 Your Risk Score
- 15. Remember that underwriting is like a court room; your merchants are presumed innocent, and your underwriting team is a prosecuting attorney
- 16. As the case stacks against merchants, the less desirable they become as clients Reputation 45pts Delivery Method68pts Value 20Pts Reputation 45pts Delivery Method 68 pts Value 20 Pts Identity75pts Sorry, too risky High Risk Low Risk Your Threshold of Risk 0 100 Your Risk Score
- 17. But when we use lots and lots of data sources in our underwriting, we increase the probability that our data potentially “overlaps.” This is a “specification error” and I can almost guarantee that if you’re scoring, you’re over specifying.
- 18. Imagine our fictitious merchant is the big yellow circle below, and we want to use just three variables to describe his risk: • Reputation • Chargebacks • BBB rating Rep Chargebacks BBB All these little areas of overlap are the problem
- 19. If we COULD calculate that overlap area (which we can’t), and we took out that double counting, we’d find our merchant is actually within our threshold of risk – but we turned him down! Reputation 45pts Delivery Method 68 pts Value 20 Pts Hey, I’m not risky; I’m a false positive.
- 20. So now, when you look at your merchants, you know the money is sitting right on the edge – it’s the “good” people you’ve said no too
- 21. Since our risk models are likely “over specified,” our first, and possibly most valuable place to look for opportunity, is with the people you’ve turned away. Rep Chargebacks BBB
- 22. So what do I you want you to do? Score everyone – At minimum, you should be automating your underwriting process so that you’ve got good data.
- 23. What else do I want you to do? • Keep every score you’ve calculated. You need this data to understand the distribution of your applicants • Regularly review the “marginal no applicants”. These are opportunity
- 24. And finally… Monitor your data sources to make sure they aren’t “getting smarter” at your expense. As your data providers widen the number of variables they are considering, they are increasing your probability of “overlap.” You need to keep adjusting your risk models and weightings accordingly.
- 25. The ETA recommends that companies maintain an “agile approach to underwriting…constantly reflecting improvement”. Remember this: Constantly reflecting improvement means it is TURNING DOWN AS FEW merchants as possible, NOT checking every imaginable item to reduce your risk to zero.
- 26. To learn more about Rapid Customer Onboarding, and how it impacts and shapes underwriting in the payments market, come visit us at www.recombo.com, here at MAC, or upcoming at Transact15 in San Francisco.