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Monday, April 28, 2014

Flexible risk-based pricing models. Is it possible with outdated cores?

The term is quite simple to remember "What-If", something that has been used ever and ever for simulations. Yes, and Risk is a kind of simulation when Banks deals with loans such as mortgages. What-If the customer has a good credit record, what if the customer does not? Is it possible to negotiate a lower interest for a  higher down payment?

So, in cases when banks try to capture more customers, it is very important to be flexible, to have a 360 degrees view of customer´s products and historical behavior for existing customers and have other means to qualify new customers. Something that old fashioned legacy systems have never offered.

This only feature reflected and available in all channels can make a remarkable difference among all the competency. But, why is that not all banks have implemented such tool? Well, mainly because current core systems do not support this feature and sometimes, maybe the in almost all cases, the process to transform or implement such functionality is complex, expensive and sometimes incomplete. There a number of things to consider, beginign with customer file records (the repository commoly known as CIF: Customer Information File), customer´s products in the bank, credit records from credit bureaus, data from other sources such employment history, insurance, etc. So, in plain words, modifying an aging core system to fullfill the highest requirements for achieving risk-pricing is a titanic enterprise. At all sights the first possible solution should be to aquire an standalone application that integrated with the core system. This means more interfaces, more user screens but at the end, the institution could have its solution up and running.

Using the right data analysis it is possible to identify the customer´s  position in the right relationship tier that the bank has defined. It means that depending on the customer pre-qualification, some prices, fees, rates and considerations are autmaitcally applied, this can lead to less negotiating time expent with every customer. Chances to deploy campaigns oriented to capture more customers and turn leads into profitable sources. As San Francisco based Bank of the West defines, this is a "realtionship pricing".

i f we consider the difficult track to walk starting from old legacy core systems, the more advisable solution is to migrate to a new core banking solution, with modern technology, far away from Cobol and related technology elements. Since a system, to deal with all the features that risk-pricing stands for, requieres technical features such services management to capture and share information with external systems.  And the chances do not end with servicing current customers or to aquire new ones that come from other institutions but to serve "unbaked" or "underbanked". There is an endless possibility to create and maintain risk analytics databases. 

There is a "must consider" step under the current consideration, to expand service capabilities to all channels, it means renewing or uptating Internet Banking, Mobile Banking and Self Service Hardware (ATMs, Automatic Deposit Terminals, Kiosks, etc). This question always arises when speaking about modernization, and the answer is "Do it now", because doing it now is not a short process, it requieres to change a lot of things, begining with administrative process and diving deep in software changes and sometimes hardware. Always thinking on old cores as the starting point.

This lead to outstanding competitivity, because chances to keep gold medal customers increases as rates and services get better, and on the other hand attracts good profiles to obtaint the same benefits. Other page has to do with risk reduction because high rates and stiff rules for customers with low qualification that constitute high risk reduces the chance of loosing money.  With this model in production , it is easier than for other banks to approach to unbanked in some specific services and to attract them. 

For institutions that own an old cores, this is more that changing habits, renewing process and implement a new island to its archipelago. Thinking about chances to have a Frankenstein living under the hood of modern servers, upgrading and aquiring a new core and implement new products and services around  this last one is a better choice.


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