1to1 - Spring 2009 - (Page 48) EXPERT INSIGHT consulting advisor Gokhan Guney, Senior Analyst, Peppers & Rogers Group $ Who’s at Risk? In this uncertain economic time, companies need to understand and work with at-risk customers before they become delinquent payment defaulters. ? $ ? h ow can we secure our financial position as even our most valuable customers are at risk? In the middle of the grimmest times for the world economy in the robust predictive model. Built on these global and historical data, past decade, companies in every industry are preparing themselves for the model predicts the payment default risk in advance. The time even tougher times ahead. One of the biggest concerns both companies lag between the time of default occurrence and today gives us and their customers face is the continued ability to pay for goods and enough leeway to take proactive action. services, as well as the increasing potential for payment delinquencies. Having individual-level payment default risk scores at hand, the next This trend of payment delinquencies has some significant adverse step is to identify customer risk tiers. Along with customer value, it’s implications for both sides of the equation: Customers, both important to determine the customer default risk versus the value of a consumer and corporate, could end up with bad credit histories, customer’s outstanding debt. Identifying customer risk tiers around which would affect their future financing needs. On the other hand, these two dimensions enables organizations to prioritize customer companies are struggling to secure their cash flow, finance their groups, and then take proactive measures starting from high-debt/highinvestments, and handle the burden brought by default management risk customers and through to low-debt/low-risk customers, depending and collections administration. on time and cost limitations. But is it our destiny to watch our customers defaulting while we In addition, differentiated strategies can be developed for each suffer with unpredictable cash flow? No, it’s not. customer tier before they reach the default stage. Examples include Organizations must move beyond simply reporting payment figures assigning and adjusting the terms of credit, including line, fees, and toward creating business value by proactively managing interest rates, dynamically according to a customer’s risk customer payment default risk portfolios. This means segment. Customer data being continuously fed into the In addition to creating transparency into customer risk portfolio risk models will determine what product and terms a managing high-risk dynamics, and providing executives and risk managers customer can manage given the situation. The busicustomers proactively, the means to take quick and effective action. ness can then also carefully track trends and create differentiated strategies The transition from reactive customer payment action plans in line with segment strategies. can be developed for default management to proactive risk management Previous practices have shown that establishing each customer tier requires two capabilities: building analytical tools to early contact with risky customers and providing before they reach predict defaulters and establishing a proactive risk assistance to them is an effective means of loss mitigathe default stage. management structure. Analytical tools use various data tion. But proactive payment default risk management sources and statistical techniques to segment customers requires a special skill set. For this reason, companies should according to their characteristics and past behaviors. Utilizing variables establish and train special customer assistance teams responsible for that predict such risk as default probability will result in a risk-based early contact with high-risk customers. These teams should include a segmentation. mix of customer service and finance experts. Risk scoring models are widely used analytical tools that can enable Opportunities brought by payment risk prediction and proactive risk-based segmentation, and can be customized to predict payment management are not limited to early customer contact for loss mitigadefaulters. With such a model, it’s possible to assess the future risk of tion. Customer payment default risk scoring also enables companies to payment default of each and every customer, and then assign each a make more accurate predictions for delayed or defaulted payments, risk score that represents the probability of a specific customer to thus allowing them to manage capital more effectively and to take default within an indicated time period. Best practices show that actions necessary for securing cash flow. these analytical models enable risk management teams to identify 50 Unfortunately, individual corporations can do little to change the percent to 60 percent of their future defaulters in advance by economic environment or create the income their customers need to reviewing only 10 percent to 15 percent of the customer base. mitigate their risk. But businesses can gear up to proactively manage Payment default risk prediction models use basic data to come up these undesirable situations for their customers and themselves. with these risk scores, although the information requirements change depending on the business environment. Customer demoContact Guney at gguney@1to1.com graphics, product information (what products they currently own), and historical transactional data are must-haves for building a ** Pelin Turunc, Senior Consultant, contributed to this article 48 1to1 magazine http://www.peppersandrogersgroup.com/
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