Reduce your default rates! Increase your volumes! We’ve all heard the standard benefits of new scores, data sources, and analytic methods.
If you buy this story as a lender, you’re selling yourself short. If you sell this story as a vendor, you’re selling yourself short.
Optimize your portfolio with new data sources, insights, and innovations.
New scores, data sources, and analytics can have a much more powerful impact – through their ability to deliver portfolio shaping.
What is portfolio shaping and why is it so important?
Our CEO Michelle Katics, curated an article on Perplexity.ai explaining Portfolio shaping as “a strategic approach to optimizing the overall performance and risk profile of a lender’s loan book. This process involves actively managing the composition and characteristics of the portfolio to achieve desired outcomes in profitability, risk management, and growth while aligning with the lender’s strategic objectives and risk appetite.”
Viewing the portfolio through the lens of default rates and volume? Tactical. Viewing the portfolio as a shapeable, dynamic entity allows us to optimize broader financial outcomes. We might look at the portfolio through the more meaningful lens of:
Spending behaviors
Profitability metrics
Customer price sensitivity
Customer attrition behaviors
This sounds interesting, but how do I move the needle?
Reimagine and define your ideal portfolio shape. The desired portfolio shape and composition is informed by your risk appetite statement. More mass market customers? More underserved customers? More credit card translators? More Millennials?
Explore and define your customer segments. Machine learning to the rescue.
Create test-and-learn strategies to target new customer segments, increase customer retention, stimulate spending, etc. Now is your chance to test out new data sources and scores.
This is not a one-time thing. Create continuous testing loops, always comparing the rest results to your target portfolio shape characteristics.
Let’s walk through an example…
Your credit card portfolio has become too tilted towards the over-indebted. While they are providing strong income as ‘revolvers’, they are also not as resilient to economic stress. You also want to create a stronger funnel from your credit card portfolio to your mortgage portfolio in the future. If you can increase the percentage of borrowers who are affluent, young renters, this will pave the way for more mortgage cross-selling in the future.
In the graph below, you haven’t changed your approval rate. However, you’ve used cash flow data and segmentation to target key populations. As such, with the same approval rate, you’re onboarding more customers in the lower risk bands, which will reduce your default risk over time. Further, the new composition lays the foundation for a healthier portfolio in the coming years.
Portfolio shaping example: The composition of who is approved shapes the portfolio
Practice, practice, practice!
With new data sources and advanced analytics, the world is your oyster. There is no need to sell yourself short with tactical goals when you can strategically build for the future.
In our simulation workshops, we explore critical cause and effect within a portfolio and the impacts on profit and loss. We also practice the ‘test and learn’ process, so that you can reach your strategic goals in a safe, data-driven manner.
Join us!
Interested in learning more about Portfolio Shaping?
