Ceská Sporitelna has successfully implemented FICO’s Optimisation Technology for pre-approved loans. As Ceská’s Zuzana Sloukova tells Douglas Blakey, the returns have been impressive, increasing profits by 26% while new sales are also up by 29% all with no increase in credit risk costs

Erste’s Czech Republic subsidiary, Ceská Sporitelna, with more than 600 branches and 5 million customers, ranks first in the country by assets and retail banking market shares in all main product areas.

In terms of consumer finance, Ceská is the country’s long-term market leader with a market share in in total outstanding business of consumer loans of more than 32%.

In response to aggressive pricing by its retail banking rivals and with its market share lead under attack, Ceská sought to increase its competitiveness without a loss in profitability.

Zuzana Sloukova, who leads the optimisation, reporting and analysis team for Retail Risk at Ceská Sporitelna tells RBI: “Optimising our strategy for pre-approved cash loans was a significant part of this campaign.”

Ceská performed analysis showing that it could increase the absolute portfolio profit (APP) of pre-approved cash loans by identifying the optimal offer price and initial credit limit for each individual borrower, based on their risk profile, loan appetite, price sensitivity and personal wealth.

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Utilising optimisation tools that form part of FICO’s Decision Management Suite, the bank was able to analyse data to arrive at the best price and credit limit.

Sloukova’s team developed a new approach using an iteration algorithm that took into consideration all the possible loan limits in order to maximise profit. The team also developed a highly sophisticated amount take-up model, which predicts the loan amount that clients will take.

Based on the successful results from a similar project for non-pre-approved loans, Ceská forecast a 5% to 10% increase in APP, and a 7% to 12% increase in new volume.

When Ceská analysts tested optimised scenarios in the FICO Decision Optimizer, they showed even better results.

Says Sloukova: “When the strategy went live, it outperformed our expectations.APP increased by 26% and new sales increased 29%, without an increase in credit risk costs.

“Currently, the strategy runs on our entire cash loan portfolio of pre-approved loans. Projecting the results across our portfolio, we forecast an annual increase of $16m in APP and $41m in new sales.

In October 2015 more advanced analytical procedures using real-time optimisation models for decisions were launched.

For this, the bank’s analysts use FICO Optimization Modeler, powered by the FICO Xpress Optimization Suite, to configure the optimisation models used for real-time decisions.

In order to react to increasing demand of debt consolidation and to deal with greater competitive pressure, it was necessary to prepare a more suitable offer of debt consolidation for each customer, taking into account customer price sensitivity and credit risk profile, etc.

?eská forecast a 15% increase in new sales compared to the prior strategy, again part of its campaign to win market share.

Sloukova says that the first generation of this optimisation, returning optimised results within one second, helped the bank to increase its market share on new bookings from a 34% average in the first three quarters of 2015 to 39% in the fourth quarter.

She adds that Ceská calculates pre-approved limits on consumer loans, overdrafts, credit cards and building society loans. From a credit risk viewpoint, there are two processes of decisions: the standard approval process (real-time decisions based on actual information available at the time, when a client applies for a loan) and calculation of pre-approved/pre-qualified limits where decision is based on proprietary information about a client.

“In cases where a client is considered completely creditworthy for a certain credit product, a ‘conditionally approved’ limit can be offered.”Implementation of the optimised strategy for pre-approved limits took the bank around one to two months. She explains that the change was not such a complicated task, due to the bank’s experience in development and implementation of optimised strategies from previous projects.

“For comparison, it took around one year from the initial idea to a launch of real-time optimisation. This included not only the development of the optimisation model, but primarily the integration of the new software (FICO Xpress Optimization Suite) into the Ceská IT family.

“The task was quite complex: it required development of more sophisticated decision process (optimised offer of loan limit and price), but also some changes in the sales process.”

For its part, FICO has spoken in glowing terms about how Ceská went about the project implementation.

Bill Waid, vice president and general manager for decision management solutions at FICO tells RBI: “Our optimisation tools are second to none in giving analysts and business teams the power they need to develop, test and deploy new strategies,
“Ceská Sporitelna has put these tools to the test, and achieved remarkable results.”

As the results of the investment have outperformed the bank’s forecasts, Sloukova says that internal feedback is very positive.

“In comparison with previous internal process setting, it is much more important to be in close contact with the business part of the bank such as distribution, product development and marketing. Good communication, cooperation and understanding of this new advanced approach by all stakeholders is critical for the success of such a project.”

Looking ahead, Sloukova summarises her team’s priorities this years as follows: “This year we would like to focus on the optimisation of overall client exposure to unsecured products. It means a shift from single-product optimisation to a comprehensive approach, which focuses more on customer’s needs. Internally, we are talking about second generation of real-time optimisation. Our goal is to help our clients to find the best possible credit options.”

Digital at the heart of ?eská sales strategy
Pre-approved or pre-qualified limits are primarily relevant for the sale of lending products via alternative distribution channels such as internet banking and mobile banking.

Explains Sloukova: ” Simple decision process and suitable/attractive offers are nowadays absolutely essential. This innovation definitely helped us to increase sales through these channels and we are still hard at work on further improvements.

“Developing sales of lending products in alternative distribution channels (including m-banking) has been included in the long-term strategy of Ceská for many years.

More and more clients are requesting the possibility to arrange a loan within minutes and above all immediately at the time, when the customer needs money (in a shop or when surfing on a website, without having to visit a bank branch.

“Mobile banking and tablets are the optimal way to satisfy these needs.”

Group wide, nearly 50% of Erste’s 2,735 branches in Austria and Central and Eastern Europe are equipped with free Wi-Fi internet) access and the bank plans to continue to increase coverage.

“The branch remains an important touch point, especially for advisory services, but at the same time we encourage our clients to manage their accounts digitally. So with this initiative we combine the benefits of personal in-branch service and mobile banking – for example our clients can get hands-on advice on how to get started online and how various features such as mobile payments work,” says Peter Bosek, chief retail officer of Erste Group Bank.

All Erste branches in Hungary and Serbia now offer Wi-Fi as do the majority of branches in the Czech Republic (80%) and Croatia (70%); around one-half of Austrian outlets are Wi-Fi enabled with plans to achieve full coverage across the branch network.

Mobile internet penetration in Central and Eastern Europe was 53% in 2014 and is expected to grow to 72% by 2017. In 2014, 72% of the “online population” accessed the internet from their mobile phone. This figure is expected to grow to 92% in 2017.

George: Erste’s digital programme for a new financial ecosystem
Then philosophy of Erste’s George digital programme is to make banking more personal. The group rolled out a uniform platform in 2015 in Austria with the aim of enabling group wide transformation from a branch-centric model to a 360 degree omnichannel bank model.

The bank says that the George project incorporates a system that ‘thinks for itself and continually grows’.

Customers have the option to build their own system by adding smart personal plug-ins.

George started on 1 January 2015. And by mid-July there were over 315,000 users onboard.

In June 2015, the offering added a personal Finance Manager option analysing cash flows and different classes. Now customers can fix appointments directly with their personal advisors via George as well the system automatically offering available diary slots in the bank advisor’s calendar.

Erste’s digital drive was kick-started with the launch in 2011 of its in-house start-up, Erste Hub.

“We decided to start innovating from inside out because we believe that this is the best way how we can change our corporate culture. With Erste Hub, we are able to substantially shorten the time-to-market of a new product, which is traditionally the biggest challenge for large banks,” explains Bosek.