Lending Software: Applying Champion-challenger Strategy for Decision Automation

Underwriting specialists need to identify the optimal consequence of actions to maximize the profit. Through constant optimization of the loan application processing workflow, financial organizations can decrease operational costs, provide excellent customer service, improve quality of their lending portfolio, more accurately estimate risks and calculate reserve funds.

Champion-challenger deployment approach is used to test the effects of the new lending policy against the current one. In order to investigate outcomes of the different lending policies and credit rules, a new strategy can be compared with the existing one. For instance: a different score cut-off level can be set, another scorecard can be deployed, or different ratios and parameters can be used to enhance the borrower’s profile.

A set of key performance indicators is monitored and analyzed when running the two strategies. These KPI may include the parameters and characteristics described below.

Operational indicators:

  • Counts and percentages (a number and a percentage of applications, analyzed by respective strategies over the period of time);
  • Average time, minimum and maximum time of strategy runs, both for the whole strategy and for its critical parts (like time spent on certain workplaces, time spent on communication with external information sources, etc.)

Business indicators:

  • Proportion of approvals and rejects;
  • Key account and loan application characteristics;
  • Average time, minimum and maximum time of strategy runs, for the whole strategy as well as for its critical parts (like time spent on certain workplaces, time spent on communication with external information sources, etc.)

In the first stage of implementing a new lending policy, the majority of loan applications is being processed in accordance with the existing policy (this lending policy is called Champion). The rest of the loan applications are processed according to the new rules (this set of policy rules is called Challenger).

Processed results are compared. If the new lending policy allows more precise assessment of borrowers, it will be used instead of old methods (and becomes the Champion method). If needed, the new set of borrower evaluation rules is improved while it is in the Challenger mode, until an acceptable improvement in risk assessment is achieved.

When the champion strategy is identified and is selected to use for processing every application, the applications that are currently being processed, automatically migrate into the new mode. A simple wizard-based interface allows users to specify details for this migration, if desired. For example: if there are any parameters that have not been used in the old strategy, users can specify automatic calculation, re-calculation or setting certain default values for these parameters. If necessary, users can also specify the exact stage in the application processing workflow, when the application will migrate from the old processing mode to the new one. Once this is done, all applications that are being currently processed, will automatically migrate to the new processing mode.

In order to compete and evolve in today’s fierce lending market financial organizations need to maintain highest accuracy of their risk management processes. Champion-challenger approach provides the most logical, transparent and reliable way to monitor the effect of different lending strategies and policy rules.

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