One action credit unions can take to gain control in an uncertain environment is to effectively use portfolio reviews. That way they can grow revenue and identify risks. By using a few portfolio review best practices, credit unions can better understand which accounts are at risk. The added insight allows them to enhance the management of accounts to both mitigate losses and deepen customer relationships. Below are the 5 best practices you can take to set up your portfolio review to assess the risk of existing accounts and find opportunities to grow revenue within existing portfolios.
1- Review monthly to prevent losses
As credit utilization and debt-to-income (DTI) ratio are rising**, quarterly or annual reviews may not be frequent enough to proactively mitigate risk. Credit unions can use portfolio reviews to ensure they recognize early warning signs of increased risk and new delinquencies. By reviewing monthly, credit unions can proactively identify accounts at risk based on changes in scores or attributes since origination.
Another benefit of this practice is the ability to screen for negative events such as changes in:
Utilization
income
DTI
or late payments that may impact delinquency risk.
Reviewing accounts more frequently with more timely data allows for better assessing customers’ overall credit picture.
2- Understand consumers’ day-to-day finances
A consumer's financial situation can significantly change with ongoing economic uncertainty. In fact 66% of workers say that inflation has outpaced any salary gains they’ve made in the past 12 months*, increasing the need to understand a consumer's day-to-day financial outlook. Portfolio reviews present an ideal time to examine income differences across risk groups, incorporate financial impact of inflation, and address regional performance differences across loan portfolios.
These types of bank transaction data can provide 7.3% lift over a benchmark score in predicting accounts that will go 90 days past due**, by providing consumer-permissioned bank transaction data. This delivers additional insight on day-to-day financial behaviors.
Credit Unions can get more out of the review process by incorporating deeper insights with the use of alternative consumer financial data, (employment,income, and pay data), when assessing portfolios. By adding alternative data credit unions can better see changes in expected cash inflow.
For example, payment data for telecom, pay TV, and utilities portfolios can show day-to-day bill pay behavior. The data shows a more realistic indicator of consumer spending habits. Further, consumer-permissioned bank transaction data can add additional insight on day-to-day financial behaviors. Factoring in payment history especially for borrowers that use specialty finance services can reveal creditworthy non-prime consumers. All these insights help grow customer relationships, increase credit lines, and mitigate fraud. When combined with custom criteria, they can generate a more effective review process.
3- Assess members’ financial durability
Assessing financial durability, based on non-FCRA metrics such as anonymized wealth, estimated income, and spending power, should be included as a standard best practice for credit union portfolio reviews. Financial durability takes into account consumers’ ability to take on new credit and meet financial commitments, especially during times of economic stress. This is especially important given certain accommodations or a healthy credit score’s ability to mask some hidden risks. Consumers today are likely to spend, save and invest in ways not revealed by credit score alone. In fact 1 in 5 consumers with a healthy credit- score of 700+ have low financial durability**, which is not seen in traditional credit data.
4- Get actionable alerts, act fast
As established in the first best practice, the traditional quarterly/annual reviews have too much lag to pick up new risks fast enough. This is due to the fact that traditional review programs lack visibility into “off brand” or "off us" activity and risks like increased delinquency or balance utilization happening with another lender. These may be driven by life events such as changes in employment and/or income which are leading indicators of risk. By instituting timely notifications as part of your portfolio review can allow credit unions to react to these changes in customers’ credit, accommodations, employment, and income.
Using actionable alerts and timely actions one Equifax customer saw consumers that received an early delinquency trigger at another firm (off-brand) were 9.4% likely to go 30 days past due at the base firm (on-brand), compared to just 1.2% of consumers that did not receive a trigger**. These actionable alerts allow credit unions to update treatment to monitor for possible delinquency, shift to higher risk groups and promote payment assistance, or each customer with a retention message.
5- Review All Account Types
It's important to review all accounts when doing a review, including:
checking
savings
loans
credit cards
This ensures that credit unions are monitoring all aspects of a member's financial situation. Having a better understanding of a member's credit history, payment behavior, and financial stability can help credit unions confidently know which members can take on more debt, such as a new loan or credit card. Then they can offer them tailored products and services that fit their financial needs
In conclusion, portfolio reviews are a critical component of credit union operations. By instituting more insights and increased frequency as best practices in these reviews, credit unions can better assess if members' accounts are in good standing. Also, credit unions can identify opportunities, risk, or issues before they become major problems. Credit unions adhering to these practices set up portfolio reviews to be a more valuable tool in discovering hidden risks and opportunities. Need more ways to grow in an uncertain economy? Find out more from our Market Pulse: Growth in an Uncertain Economy
Equifax data**
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