The last few years have been challenging for the financial sector as a whole and risk management has become a focal point for everyone. Moving forward, it is clear that the way business has been done has changed since the crisis. Investors are wary of organizations that cannot clearly demonstrate that they have risk under control and regulators are scrambling to improve the regulatory framework which has, to a large degree, proven itself to be ineffective in the previous business cycle.
The main takeaway is, however, very straightforward: financial institutions that can manage risk are, by and large, more profitable and have created more value for their investors. Simply put, building and further developing sound risk management makes clear business sense.
For telcos and utility companies, the crisis validates how risk management know-how can be successfully applied to their businesses. The topics described below, while taken from the banking industry, serve as examples of best practice which can be introduced on a broader scale.
ABC focuses on retail risk management and encompasses the entire credit cycle by dividing it into three broad areas:
- Credit underwriting
All activities related to offering a client a loan from first contact to the disbursement of funds. Typical questions that arise in this phase of the credit cycle include: What information do we need to collect from the client on the application form?; How do we verify the information?; How do we determine the creditworthiness of the client and their credit capacity? How do we price the product according to the client’s risk?; How do we assess the value of the collateral?…
- Fraud management
Policies, processes and reports focusing on deterring potential fraudsters, preventing fraud attempts, detecting fraudulent acts and investigating them. As always, our approach is very much fact driven by the fact that we believe that overall fraud strategy needs to be strongly supported by underlying monitoring and analysis which can reveal deviations from the norms which, among other things, can help identify fraud.
- Debt Collections
This is the final frontier, where monies owed to the institution need to be collected from the debtor. Often overlooked in the past, this area has come into prominence. Simple principles when correctly executed make a huge difference in terms of P/L. Standard areas of interest include segmentation of debtors, process design from early to legal collection, renegotiations and restructuring, reporting,…
These three pillars drive the profitability of retail banking, allowing executives to balance approval rates, collections and product pricing. The better your collections work, the more aggressive you can be on the underwriting side without sacrificing profit. This balance must correspond with the positioning and the bank’s risk appetite, but understanding it facilitates realistic business decisions and understanding their consequences.
ABC’s approach to credit underwriting, fraud management and debt collections is decidedly hands on. Our findings and recommendations focus on their execution and on being quickly implemented as this is where the true value lies.