COMMERCIAL CREDIT
CCR
 Ensure better decision
making practices
 Intelligent risk management
 Lease accounting standards
S
ince the credit crisis started in
2007, lenders have become
more risk averse, which has
resulted in more strict regulations and
credit policies for granting credit or
commercial loans to businesses.
In this article we will discuss how
technology can help businesses to deal
with this situation; in a world where
credit is tight and, more than ever,
businesses have to focus on their
customer’s ability (and willingness)
to pay.
It seems that the world of credit, and
especially credit risk, has fundamentally
changed. If you search on Google with
the words ‘banks tighten credit’ you will
get the results shown in Table 1.
Though credit standards of banks
may not seem to get significantly tighter
than they are right now, the results of this
non-scientific Google search indicates
that credit will be tight for the near, and
probably also for the not-so-near, future.
This situation obviously has significant
impact on the way B2B companies
have to do business, as companies – in
general – can rely less on their banks
for their cash and other financing needs.
In other words, companies have to focus
more on the creditworthiness and
Table 1.
Google search string Number
‘banks’+‘tighten’+‘credit’ of hits
+‘2006’ 9,190,000
+‘2007’ 12,300,000
+‘2008’ 17,500,000
+‘2009’ 19,200,000
+‘2010’ 23,300,000
24
payment behaviour of their customers and
suppliers to ensure a reliable cashflow
and efficient use of working capital.
To put it differently, credit management,
and especially credit risk management,
will become much more important for
(B2B) companies.
Nowadays, many companies have to
deal with budget constraints due to
decreased sales and lower profit margins.
These budget constraints simply come
down to doing the same, but more
often than not more, work with less
people in the same, or sometimes even
less, amount of time. Obviously this
puts a lot of pressure on credit risk
management departments.
To enable companies to deal with this
situation, predictive analytics technology
can be a great help.
Predictive analytics
Credit risk management and predictive
analytics are typically associated with
the advanced banks, where complex
models and calculations such as
probability of default (PD), exposure at
default (EAD) and loss given default
(LGD) are common practice.
So far, in B2B corporate
environments, this is far less the
case. According to Aldo Taranto,
founder and CEO of Credience, this
is gradually about to change. “For the
last decade, the advanced banks have
enjoyed saving millions of euros from
applying advanced predictive analytics,”
he said. “This kind of high-end
technology is becoming more and
more available for other business
sectors as well.
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world
“Basically, in any business, getting,
keeping and growing profitable customer
relations is essential, but that only makes
sense if you know that your customers
are financially sound. With predictive
analytics you can actually cover both
sides of the return on investment
equation, by identifying and analysing
both risk and opportunities.
“As such, predictive analytics can help
make better and faster decisions, which
basically have a positive impact on your
bottom line results.”
During my meeting with Mr Taranto
I asked him some more detailed
questions about the role of technology
and credit risk management for B2B
corporations.
Q: What is the difference between
scorecard and business-rules-based
methods and predictive analytics?
A: Many providers claim to do
predictive analytics but only offer
scorecard/rules-based decisioning.
These are just simple ‘if...then...else’
rules created by experts (hence expert
systems) and are backward looking
rather than forward or predictive
looking.
They do not, for example, look at
transactional and behavioural patterns
in data, which means they are too
simplistic for today’s complex financial
patterns.
Q: How can predictive analytics help
B2B companies to improve the
performance of their credit risk
management? Can you give me some
practical examples?
A: Probability to default models – B2B
companies, rather than using generic
September 2010
 COMMERCIAL CREDIT
CCR
world

PREDICTIVE ANALYTICS AND

CREDIT RISK MANAGEMENT
As lenders have become more risk averse in the current
economic climate, so creditors need to implement
systems to ensure better credit decision making
By Marcel Wiedenbrugge
‘industry ratings’, can have a custom- Figure 1. Power curves measure model performance
built model for their B2B companies
and data. This involves passing their 100
company’s balance sheet and profit and
90
loss data through systems that produce
predictive models. Knowing who is 80
most likely to default is invaluable for
% defaulters detected

risk-based pricing, determining whether
to lend or not, or whether to do
business with that company or not (see
Figure 1).
Probability to pay models – whether
you are a debt purchasing company or
a debt collections company, knowing
which accounts are likely to cure and
which are not is vital in knowing which
debt to purchase, how to better price it
when purchasing it, and how to collect
on it when purchased.
Q: About those default models – how
does a predictive analytics solution deal
with a situation, when there are not
sufficient balance sheet and profit and
loss data available?
A: Most solutions apply a number of
approaches to the data to remedy
these data issues, such as low default
portfolios (LDP) – where, for example,
banks in the Middle East do not have
as many default data as many Western
banks. Other approaches include
various stratified sampling techniques,
Bayesian inference, and balance sheet
spreading models to cater for these
statistical discrepancies.
Q: Predictive analytics has a reputation
of being expensive. Do you share that
opinion?
A: Not at all. My company, for example,
has automated the building of predictive
analytics models into an extensive
system, so that you do not need
expensive analysts and expensive
vendors. This saves time and money
and the product guarantees each model
built is a very good model.
70
60
50
40
30
20
10
10 20
Q: As we know, access to credit and
commercial loans has become more
restrictive, due to more strict banking
regulations and tighter credit policies by
banks themselves. How can predictive
analytics make corporations less
dependent on bank credit?
A: By corporations running their own
data through predictive analytics
software, they can make fewer adverse
credit decisions. This in turn places less
pressure on the corporation to ask the
banks for bridging finance to ease
cashflow and liquidity issues. Risk-based
pricing can cover the corporation from
losses by charging the more riskier
accounts a higher price.
Q: What are the limitations of predictive
analytics technology?
A: Number and quality of records in
one’s database. The more records one
has, and the better the quality, then the
better the overall model. We have
overcome some limitations by allowing
the data to be processed within its
Uplift due to predictive model,
at the 30% level is ≈ five times
more accurate than scorecard/
rules-based decision
Random decision
Scorecard/rules-based decision
Predictive model
30 40 50 60 70 80 90 100
% defaulters contacted
original environment, rather than it
being exported into a proprietary
environment. Another example of the
limitations we have overcome is taking a
holistic view of features and benefits –
most vendors only look at predictive
analytics from their specialty.
Due to the changing role of the
banks towards credit, technology will
become more important for B2B
companies to better manage risk and
opportunities. By doing so, companies
will become less dependent on the
credit facilities their banks offer them.
This will ultimately
be beneficial for
all parties: the
customers, suppliers
and the banks
themselves. CCRW
Marcel
Wiedenbrugge is
the principal of WCMConsult
marcel.wiedenbrugge@wcmconsult.com

September 2010 www.CCRWorld.net 25