For financial institutions (FIs), managing risk is a constant challenge. New regulations, evolving fraud tactics, and changing consumer behavior all require changes in risk management strategies. However, these changes can have a dramatic impact on FIs’ bottom line. Is this new strategy going to reduce the number of delinquent accounts in your portfolio? Is it going to help you find profitable accounts within the applications you typically reject? Or is it going to expose your institution to additional, unforeseen risks?
You can’t know, until you test it.
Champion/Challenger is a well established methodology for validating the effectiveness of changes to Financial Institutions’ decisioning logic and risk policy. Champion/challenger testing always starts with a new idea- the challenger. It could be something small like a modified attribute. It could be something big like a whole new decisioning process for near-prime consumers. Once the challenger has been created, it needs to be tested against the champion (the current policy). There are two approaches for doing this.
Zoot supports the traditional champion/challenger testing approach, and has also developed a new, innovative approach for developing and testing credit risk policy that can be paired with champion/challenger testing to produce truly spectacular results.
Traditional Champion/Challenger Approach
In traditional champion/challenger testing environments, the challenger model is implemented into production right next to the champion. By implementing the challenger model into production, the FI gains a live environment where they can observe the results of their new strategy. A statistically significant subset of live applications (say 10%) is then directed through the challenger while the remaining 90% of applications are processed by the champion. The FI then waits for enough applications to be processed by the challenger and then they compare the results to the champion. If the challenger increases the number of accounts, the financial institution can see the results in the performance of these additional accounts over 3-6 months, when most defaults occur.
The problem with traditional champion/challenger testing is that it takes time. It takes time for the challenger model to process a statistically significant amount of applications when it’s only getting 10% of the volume. It takes even more time to see how the new accounts opened through the challenger perform and compare to the performance of accounts originated through the champion. If a challenger is deemed worthy enough to become the new champion, many origination solutions take 18-24 months to implement the new model. This time intensive approach is a problem if the challenger is created in response to rapidly changing market trends, because it will be out of date by the time it becomes the champion.
Credit Risk Lab
Zoot has pioneered a new approach to credit risk policy testing that fills in many of the gaps of traditional champion/challenger. By giving an FI’s business users tools to quickly develop new credit risk attributes and processes and an offline environment to evaluate those attributes and processes in, Zoot’s zEnvision credit risk lab:
- Empowers credit risk analysts to develop as many challengers as they want—everything from small changes to attributes, score cut-offs, or interest rates to major changes to decisioning logic or origination processes.
- Enables financial institutions to compare the challenger and champion using recently processed applications and historical performance data in order to calculate the actual lift that your challenger would have given your institution if it had been in place.
- Increases financial institutions’ speed to market by decreasing their credit risk policy development and testing time from weeks, months, or years to days, weeks, or months.
Test, Test, Test
In an industry in which new regulations, fraud techniques, and consumer trends are appearing faster that you can say “Zoot”, a comprehensive and efficient testing process for is a necessity for all financial institutions. Zoot’s unique testing solution—combining traditional champion/challenger testing with an offline risk policy development and testing lab—gives FIs the competitive advantage that they need.