How do you measure the risk of a customer? Or how do you measure a chance? And if you have determined that, how do you ensure that you can monitor it in time? These are just a few questions that you run into when you want to set up credit risk management within an organization. We want to share a few ideas about how some of our customers have solved this within MA!N.
What is credit risk management
In order to determine what features the software has to support, we will first have to determine what credit risk management is. The complexity differs greatly between organizations, branch and type of customer. For this blog we want to keep it generic and therefore we use the following assumptions:
- We want to know the creditworthiness for a customer.
- We want to use internal and third party data.
- We want to have an alert if certain values change or are exceeded.
The creditworthiness can be determined on the basis of both the third party and internal data with an optional human assessment. This means that you have different data sources, for instance:
- For third party data, various sources such as Creditsafe and Bureau Van Dijk can be consulted. MA!N can exchange data with these organizations and others through web services.
- As an organization you also have a lot of data like payment the history and sales figures.
- Depending on the type of customer, employees (eg analysts) can also add an assessment that can be included as a factor in the scoring model.
If you have other relevant information, you might also want to add it as a source.
Scoring model and calculation
So we have multiple data sources and that data has to be merged to become a rating. For example, a risk rating and/or a credit limit. We will assign weighting factors to the different components, which ultimately leads to a formula that will be set up within MA!N. With the help of a edit area you, as a user, can adjust and maintain the weighting factors, so that the model remains up-to-date.
You can also use only one source, for example third party data. In that case, a custom scoring model is not necessary.
You will decide whether MA!N determines the rating and credit limit on itself or whether this requires the review of a user. This can be done with an authorization matrix that can also be used for the approval of limits by stakeholders within the organization.
Companies will change over time and this can effect the creditworthiness too, both positive and negative. For this reason, the software must continuously follow the customer based on predefined criteria. Consider, for example, a mutation in the actual credit limit, but also something like a changing payment behavior or a strong increase in turnover. Behavioral changes are often a strong predictive indicator, even if the situation seems to be fine.
By continuously monitoring the criteria, MA!N can take, or propose, an action for a customer in case the credit worthiness changes.
With the ongoing monitoring all boxes are checked, from identifying the customer to following it through time with the goal to identify new opportunities as well as risks in time.
By supporting Credit Risk Management with software, you can increase consistency and efficiency so that people can focus on the exceptions. You almost can’t afford to skip this.