Subscribe
Share
Share
Embed
Market Pulse is a monthly podcast by Equifax, in partnership with Moody’s Analytics. Equifax hosts bring you interviews with industry experts on the latest economic and credit insights that can help drive better business decisions. Whether you’re in financial, mortgage, auto or another service industry, we help make sense of the latest economic conditions that impact you. This podcast series supplements our Market Pulse webinars, which occur on the first Thursday of each month.
Welcome to the Market Pulse podcast from Equifax, where we break down the latest economic and credit insights to help you navigate today's business landscape.
Tom O'Neill:Welcome to the Market Pulse podcast. I'm your host, Tom O'Neill, and I'm a member of the risk advisory practice here at Equifax. Collectively, this team supports our clients by providing insights and guidance on how to navigate economic uncertainty and uncover hidden opportunities. My panel of experts today include the following individuals. First, we have Thomas Aliff.
Tom O'Neill:Tom is the the head of risk advisory practice here at Equifax. Aliff also runs a clandestine espionage operation out of his home office, spent on gathering intelligence on upcoming Purdue basketball opponents. Next, we have Jesse Harden. Jesse was formerly a llama handler in Peru before he discovered his true passion working with credit and macroeconomic data. Next, we have Dave Soika.
Tom O'Neill:After getting bored with the posh country club lifestyle of the Chicago streets, Dave decided to mix it up by joining corporate America, and we are the lucky recipients of that. Also, we have Maria. Maria graciously takes time out of her busy international jet set schedule each month just to join us for these podcasts. And finally, I'm Tom O'Neil. I dedicate my spare time to my goal of someday successfully merging eastern philosophy with nonlinear mathematical optimization.
Tom O'Neill:It's slow to say the least. So welcome, everyone. Happy to have you with us today.
Jesse Hardin:Hey, Tom.
Maria Urtubey:Hey, Tom. Hey.
Dave Sojka:Glad to be here.
Tom O'Neill:Today, we thought we'd go in a little bit of a different direction. We spend a lot of time in this forum and others talking about credit trends and what's going on in the economic environment. But we do so with the assumption that people listening, have a good understanding of why those things are important to our listeners, which for the most part, you know, consists of individuals working in or supporting lending institutions. And that may not be the case for everyone out there. So today, we're going to shine a light on risk professionals and others who work to protect the institutions that make credit available, as well as, you know, worked for those individuals and businesses that they serve.
Tom O'Neill:We're calling this one a day in the life of a risk professional. Yeah. Even though we're using quote, unquote, risk professional very much as a generic title, and we know that there's no possible way that we can cover all that risk professionals do in a single 20 to 30 minute session. So if you're one of those professionals, we know that there are things that we'll need to leave out. But, yeah, enjoy being the hero of this podcast in the meantime.
Tom O'Neill:But before we begin, let's kick things off with a quick economic update from David Fieldhouse, director of consumer credit analytics at Moody's Analytics. David?
David Fieldhouse:The Federal Reserve is facing a delicate task of balancing monetary policy to sustain economic growth while controlling inflation. US economy has shown a lot of resilience with annualized GDP growth just under 3% last quarter, and unemployment rate is below 4 percent. This indicates a lot of positive prospects in the near term, you know, and we hope that there's gonna be a soft landing. However, we really can't be confident of any soft landing until the Federal Reserve decides to lower interest rates. Today, the the federal funds rate is around 5.5%, and it's significantly higher than what the Federal Reserve states as the equilibrium rate, the rate that's not gonna cause the economy to accelerate or decelerate too much, which is around 2.5%.
David Fieldhouse:So a 300 basis point difference there. This discrepancy suggests that the current rates by the of the federal funds rate that is maybe unnecessarily high and and potentially restraining some type of economic growth. The Federal Reserve has been a bit reluctant to, lower rates. It's taken a very cautious approach, and it really wants to ensure that inflation returns to target. But this caution may also risk weakening the economy.
David Fieldhouse:Do you know? The Federal Reserve has made errors in the past. It is often perceived that in 2,022, it delayed raising rates off of the zero bound when the, the economy's rapid rebound from the pandemic was going on. And this delay led to surge inflation, forcing the Federal Reserve to increase rates aggressively. The Federal Reserve should try to take into account all the, factors such as employment, inflation, financial conditions when setting monetary policy to avoid such errors.
David Fieldhouse:Inflation, while it's still above the Federal Reserve's target, has been moderating and is expected to return to target by the end of the year. However, the current 2% inflation target is being questioned given lower potential growth and interest rates compared to when the target was being adopted in the mid 19 nineties. A higher inflation target such as a 3% could potentially avoid the need for a lot of quantitative easing during downturns. Despite calls for lower rates, the Federal Reserve is expected to proceed slowly and methodically, perhaps cutting a quarter point each quarter until the funds rate is close to r star, the equilibrium rate. This approach would likely stimulate the stock market and reduce long term interest rates while easing pressure on the banking system.
David Fieldhouse:Maintaining the current 5.5 percent Federal funds rate is becoming increasingly untenable for the Federal Reserve, which is getting very close to achieving its dual mandate of full employment, and low stable inflation. So we do expect a a gradual reduction in that rate over time, and hopefully that there's no substantial delay, which would increase the chances of any type of, economic downturn.
Tom O'Neill:Thank you, David. Now simply put, a risk professional's responsibility is to evaluate and mitigate risks for their institution in relation to that institution's strategy and risk tolerance. Now those last couple things are important because an institution may be very risk averse and have a very conservative approach to things like growth opportunities and and other operations, while another institution may have a high degree of risk tolerance in pursuit of greater opportunities. Most institutions have some degree of both, and and the risk professional needs to implement strategies and and continuously modify those strategies accordingly. And while it might be easy for for many of us to think about this in terms of credit lending, there are other types of risks such as regulatory risks, technical risks, even physical risks such as, branch and storage securities.
Tom O'Neill:But to help provide a view into this world of risk, we've decided to do a bit of a role play. And each of my colleagues here, will assume a different position within a typical risk organization. Jesse has the privilege of moving into the c suite today and will be the chief risk officer with the within a midsized bank. Maria is gonna be responsible for managing credit card risk as a risk manager within that same bank, while Tom is going to be a risk analyst supporting these activities. And finally, Dave is going to overseas collections, you know, within that that bank.
Tom O'Neill:And today, the key topic weighing on Jesse's mind is the rising levels of card delinquencies, both within the bank's portfolio as well as across the broader landscape. So, Jesse, let me start with you. Can you give a brief job description of your role as a chief risk officer?
Jesse Hardin:Yeah, Tom. So herding llamas is out, I guess, but I would say, in essence, risks to the business are the frontline responsibility of the chief risk officer. So CROs report to the board or, the CEO, and they include matters related to both financial and non financial risks in the organization. In my job, I'd say more than half of my time then is spent really with non financial risks, just given how the situation changes quickly with many of those types of risks. I therefore then have to rely on my frontline, risk managers, like Maria, and her teams of analysts, like Tom, to ensure that we're meeting expectations relating to growth and loss objectives, that we're adhering to all of the appropriate risk policy, and that we're managing the full lifecycle of risk mitigation, including our collection efforts led by Dave.
Jesse Hardin:So with a dynamic economy like we're in, I think there's no shortage of ways we can spend our time each day. So I really have to ensure that our, our risk function is is focused in the right areas for the organization.
Tom O'Neill:Thanks for that. And, and and you mentioned the the dynamic economy that we're in. And related to that, as we're seeing something like the the rise of delinquencies, how are you handling things like that to when changes come about?
Jesse Hardin:Yeah. So we've we've seen a rather quick run up in delinquency post pandemic, and it's not at record levels, but certainly it's elevated. Obviously, credit card, balances and delinquencies are growing. And so we see stressors in the economy, including inflation, reduced savings rates, and additional pressures with elevated interest rates, and things like the student loan resumption. We're focusing then on delinquencies in a number of ways.
Jesse Hardin:1st, I have to ensure personally that I understand my P and L deeply, and I understand what the delinquent accounts mean for my business. And then I also have to ensure that my team of risk managers, led by Maria and we have star analysts like Tom, that are focused on how we manage or mitigate risk in the environment. But then also, we we have to focus on the growth objectives of the bank. We just can't cut out one, to answer the other. And so as the delinquency rates increase and remain elevated, we know there's gonna be a need for increased collection efforts as well.
Jesse Hardin:So I wanna ensure that my collections managers are on top of the strategies, you know, that Dave's on top of of everything that he's handling for that issue. And then finally, I have to ensure that I'm seeing the big picture, and that's communicating to our leadership and our Board effectively as those economic stressors, like delinquency, continue to grow.
Tom O'Neill:Thanks for that, Jesse. And, Maria, let me let me turn the attention over to you right now. Jesse mentioned, as as setting the strategy and and and reacting to what we're seeing out there. In your role as as risk manager for cards, a, you know, what is that that role? What is the description of that?
Tom O'Neill:And then how do you you know, implement the the policies that that Jesse is referring to?
Maria Urtubey:Thank you, Tom. As as a risk manager for credit cards, I I own and over see all activities pertaining to credit risk for the credit card business. And this includes, the comprehensive risk assessment of individual applicants, creditworthiness, as well as the overall risk profile and performance of the credit card portfolio. So I manage and lead a team of risks analysts, and data scientists, including Tom Aleph, in the credit analysis and underwriting process and develop the credit policy that aligns to the organization's risk appetite and tolerance while adhering to regulatory compliance and the industry's best practices in place. Besides, of course, meeting Jesse's requirements and goals for the business.
Maria Urtubey:But joke aside, an important part of my job is to track and report our champion and challenger strategies on a monthly basis at minimum and present not just our performance results to the executive team, including our CRO CRO Jesse and senior stakeholders, but our insights as well. And, of course, address the needs that they raise for the business.
Tom O'Neill:Wow. So so it's it's not just a matter of determining what the score cutoff should be and and, you know, calling it a day. So with with all of that, you you laid out a pretty broad landscape of different activities. What is it that's that keeps you up at night, particularly now when when we're seeing things, like taking delinquencies as an example?
Maria Urtubey:Lots of questions. How can we grow the portfolio in the current delinquency environment? How does my organization compare to the industry and to our peers? How has my originated population changed over time? How are scores rank ordering?
Maria Urtubey:How frequently should I revisit credit strategies in place? What is our share of wallet among our customers? How can we increase card usage, for of profitable customers? What do customers need and how these needs might change over time? How do these needs vary by segment?
Maria Urtubey:And how can I anticipate those changing needs to retain customers?
Tom O'Neill:Wow. Thank you for that, Maria. Appreciate that. Tom, you you just heard, you know, everything that's that's on Maria's plate. As a risk analyst, you know, what what are your, you know, responsibilities and how do you support everything that Jesse and Maria just went through?
Tom Aliff:Yeah. Sure. I think I think it's important to define this in an in, I guess, you know, methodical way, you know, because that's the way that I operate in the way that I think. You know, from the standpoint when I hear when when I'm describing an analyst role, it's taking at a granular level research that can help lead to decisions. And when we divide that out, there's a lot of analysts within our teams that can be formed in the in the marketing side or the risk side.
Tom Aliff:And, you know, from from the risk standpoint then, a lot of my work in across various roles spans all the different capacities that that we described. So I have many peers that are focused and honed in on the areas that Jesse and Maria, and then we'll hear from Dave as well, will describe in terms of how we do analysis to address those risks. And those can be, you know things that can help grant a decision to make a loan. It can be, help us make a decision for increasing or decreasing credit line assignment. And you know with the the challenge that you specifically brought up, thinking about delinquencies, How can I understand like, you know, what we're currently doing and what is the potential impact to that across the across that spectrum?
Tom Aliff:And it just happens to be this, within my current role, I'm responsible for making recommendations around credit line assignments.
Tom O'Neill:On that last point that you you were just making, Tom, when when you you mentioned as as delinquencies change, it sort of pivots. How does that, you know, something like increasing delinquencies or any change in your portfolio for that matter? How does that change what you're doing and and what you prioritize?
Tom Aliff:I said, that's a really good question. We do get this a lot, especially when we work with, various partners as they're looking to help us address these questions. There are very standard ways that we hold true throughout economic cycle. And so there's about, you know, I I would say 12 to 15 key characteristics that we we analyze to understand what is the total total credit risk. And then how would I set a line assignment?
Tom Aliff:And you know you know from the from a baseline perspective, if I'm thinking about a line assignment, there's going to be a credit component and a capacity component. And you know since the the card act came out, we've we've been able to address a lot of that through, income. As well as, you know, leveraging the various credits, you know, and facilities that we've had both from a a score perspective. But then there's also some, you know, I guess I would call them essential mock outs that we, you know, we may want to, you know, include, you know, going forward as well. And so so really just depends on how do we add or subtract from our baseline, you know, to meet the goals that come down to us as an organization.
Tom Aliff:And so if we know what our, you know, what is the total exposure, that we're trying to manage to, then it gives me a goal, to be able to hone in on. And I and I guess what I would how I would define this is within the analysis standpoint is the goals and objectives that are given to me through, through our team as an organization and and leadership team. It helps me to then have a road map for where I'm going to go and make the, and, those adjustments, you know, to, to the situation. You know, think about it like I'm I'm moving on, you know, Google Maps or, you know, something like that. And I know the destination I'm going to, but along one path, there might be an obstacle I may need to take a different path or a detour.
Tom O'Neill:Thank you for that. Thank you all 3 of you, so far. And and and I am gonna come back to you because there's there's more that I wanna find out. But before I do that, I really wanna turn the attention over to Dave. Collections is is something that a lot of people have a a a strong emotional, yeah, reaction to.
Tom O'Neill:Yeah. They think about it purely in the negative, but it my understanding is it's a lot more than that. So, Davis, as chief collection officer, yeah, can you give us a description of of what your role entails?
Dave Sojka:Thanks, Tom. So, again, I oversee the collection of our outstanding debts from our customers based very basic. But along those lines to accomplish those goals, again, I'm responsible for developing and implementing effective strategies, policies and procedures to minimize losses and to maximize recoveries. I collaborate with various departments and stakeholders to improve our processes and systems. And then also, as leader of the collection side of things, my team ensures compliance with all relevant laws and regulations as we go about our day to day activities.
Tom O'Neill:So, Dave, when you're talking about those activities, how static is that? Is that something that that is pretty fluid given the different, you know, environments that we find ourselves in? What impacts your job the most? And and how does, you know, the changing landscape change what you're focused on from a day to day basis?
Dave Sojka:Yeah. With today's topic on delinquencies, I'm very busy. My people love this. This is where we earn our keep in the organization. But I have to always keep in mind, and I have to remind my people that we're seeing a small component of our overall customer base.
Dave Sojka:Maria's credit card program sits at a 5% delinquency rate. That also means 95% of those cardholders are paying us on time. If I'm looking at mortgage, it might be 50 basis points of delinquency, which means 99.5% of our mortgage holders are paying on time.
Tom O'Neill:Good point. Yeah.
Dave Sojka:And so while it's easy to get jaded on the delinquency side of thing, we also have to remember the other side of things and that there are well paying customers. The organization loves habitually delinquent customers. And what I mean by that is a 30, a customer that is habitually 30 days late earns us interest income. As long as they don't go 60, then we're not in danger of starting down the path of legal recovery or any of those types of methodologies to ensure that our debt has been repaid. And so really in these times, it's also about looking across the the organization to ensure that we're working the customer effectively across all channels and all portfolios.
Dave Sojka:So while we're focused today a little bit with Maria on the card side, I know I have to also look at and see what's going on our mortgage portfolio, what's going on in our auto portfolio. And if the customer has those relationships in addition to the one I'm collecting on, I need to work those as well to ensure that it's a one time experience with the customer. I don't have to call them again, and we're gonna we're gonna recover all delinquent accounts at the same time in the proper fashion.
Tom O'Neill:Fantastic. Thank thank you so much for that, Dave. That's it's illuminating to to hear, yeah, that that, you know, we we tend to think of collections purely in the negative, but as you rightly point out, yeah, we gotta keep a, yep, an eye on the fact that, yeah, 99.5% of all mortgage, customers are in fact paying their bills on time. And even 95, we hear about, you know, card delinquencies, you know, going to, you know, to higher and higher levels. But, gee, wouldn't you know?
Tom O'Neill:Most of the people are still paying their their bills on time. It's, you know, important to keep that in mind. Jesse, let me let me go back to you. When you were describing your role as as CRO, you you covered a lot of ground. You you talked about a lot of different things.
Tom O'Neill:Yeah. So many areas to focus on. What are some of the biggest challenges that you face on a day to day basis?
Jesse Hardin:Yeah. And I would say, Tom, you know, you're getting a good good perspective of why I have these good people working for me. You know, they're showing you the capabilities that they have. That being said, I would say the biggest challenge I face as a chief risk officer right now is just how I spend my time. So it's it's, you know, it's not very flashy of an answer.
Jesse Hardin:But, you know, I mentioned the 2 broad categories of risks that we manage. We manage first the financial risks, and I would call those the things that, the the types of risks that are directly measured in our p and l based on performance of the underlying assets. So you can think of things like credit risk exposure that Maria talked about, some of the credit quality and evaluation of current and future economic conditions. That's, you know, 1st and foremost, that's important. And, And, obviously, that's critical to the health and success of our credit portfolio.
Jesse Hardin:But what I find in my job is that the second category, which is that nonfinancial risk, it's so vast and broad. You know, think of things like technology, whether it's technology innovation or it's disruption, things in, government and compliance and regulatory, 3rd party issues, 3rd party fraud issues, reputation, etcetera. All of those, you know, take up a majority, really, of my time. And so I have to ensure that I'm balancing, my time and my group's time, appropriately and where the organization needs it. So it's critical and why I have to count on the best and brightest teams like I have, like, analysts like Tom and frontline managers like Maria and and Dave, really so that they can focus on the the tasks that we need as an organization to continue to to push forward with.
Jesse Hardin:And, you know, as we deviate from that, if we, you know, if we lose track of what's important, that's when we, we have issues. And we've seen some of that transpire last year with other organizations, you know, other banking organizations maybe taking their eye a little bit off of the the key focus and risk.
Tom O'Neill:Thank you for that, Jesse. And, speaking of the the best and brightest that you were referencing, Maria, let me go back to you. You when you were giving a description of of your role as as risk manager, you you you covered a lot. You know, not just strategy development, but also, you know, the deployment of that, the monitoring, the reporting, and so forth. What what are your go to competitive advantages that that help you with these various challenges that you face?
Maria Urtubey:Tom, data, analytics, and technology are constantly evolving, but are at are at the center of my everyday activities and those of my team. Data sources and models, including origination, behavior, collection models, for example, that Dave and his team rely on, that provide a competitive edge over what I already have or can develop in house. If I'm expanding into new markets or evaluating cross selling opportunities for my current customers, off us information on these individuals such as the depth of their credit experience or products held with other institutions, of course, current and historic delinquency trends. Another aspect would be, nontraditional credit information and access to that type of source, for these profiles, particularly for those with limited credit information. I would say, in general, levers that will enable improved, data driven decisions and platforms that facilitate as much as possible more efficient, integrated, and automated responses in in the credit life cycle.
Tom O'Neill:So so not much. So, mister Aliff, as a risk analyst, yeah, the the name kind of entails, you know, a very analytic, yeah, and quantitative focus. But how much of your job is is purely analytic and and data science driven? And how much requires a solid, understanding of the industry that you work in and and specifically your organizational, objectives?
Tom Aliff:I think it's critically important, you know, whether it's within my my own capacity or a partner capacity with other team members, because not everyone can have, like, the I guess a focus of understanding the business as well as the, the data science. I think they are both equally important though in the way that I would describe it because if we're doing analysis, when I describe the Google mass scenario, if we don't know where we're going, it's very easy to to, to determine a path that isn't aligned with the objective. And and that's a very easy way that we can go. You know, there's a lot of, talk around, you know, letting the machine drive with, you know, artificial intelligence or whatever. But it's very important to ensure that whoever is in charge of that or driving it is incorporating the things that are that we need to think about from the the current environment.
Tom Aliff:And so as delinquencies arising, I guess the ways that I would, you know, think about that is there's absolutely data driven capacities that I can incorporate and overlay to be able to set those strategies. But, you know, I I I also know that, you know, from some analysis that, that I received from Equifax that's, if, you know, someone has a delinquency on their automobile, they are 10 times more likely to go delinquent on their card the next month. And so within that population, that would that is a combined effort to know there was a massive amount of data science that went into it, and there was a business implication that I can incorporate. And I can set a strategy using that information.
Tom O'Neill:Thank you for that, Tom. Dave, don't wanna leave you out here, especially because when when you were describing your role, you, you brought up a a lot of, you know, I I think, unique perspectives that that a lot of people don't think about when, when when thinking about collections and purely the negative aspect of it. And you and you talked about balancing that with the, with that whole customer, relationship standpoint. So let me ask you. How do you do that?
Tom O'Neill:How do you balance supporting the business versus serving your customers?
Dave Sojka:Great question, and those are are are not mutually exclusive. As we as I interact with our customers, I'm also fulfilling the goals and targets of the organization. And what I mean by that is, obviously, we've got certain revenue goals. We've got certain loss goals. We've got certain NPI, net promoter, you know, NPS score, net promoter score targets that we want.
Dave Sojka:And as being the the one of this organization that actually works and talks to our customers, it's important that I manage that experience accordingly. We talked about the 95% that are paying. We talked about, you know, the 99.5% that are paying, but even within that 50 basis point mortgage or the 5% credit card, there are those customers that have been with us a long time. There are those customers that have multiple relationships with us that drive a lot of revenue through the, you know, through deposits again and various other relationships with us. Those are important to keep in mind.
Dave Sojka:And as I'm looking at recovering on their debt, I need to make sure that my strategy, my interactions with those customers meets the appropriate level of effort. And what I mean by that is there are some customers who, again, oh, they moved. They didn't get the mail in. Oh, my my payment date doesn't correspond with my, payroll, deposit. So I'm always gonna be a little bit late.
Dave Sojka:And it's understanding that those those customers will pay on time. They'll they'll they won't pay on time, but they'll pay, and I don't need to call them. I don't need to send them a letter. And then there are those bad actors who took out that loan and they have no desire to pay us. They might have the capacity, but an unwillingness to pay.
Dave Sojka:They might not they might be a a newer customer. They might be existing customer, but they're not the type of relationship that we want to maintain. And it's up to me to, you know, to end that relationship in an appropriate fashion. Going back to following rules and guidelines set, you know, set forth, by the, you know, by the various agencies that that, you know, keep track of these things. And so through that experience, making, you know, making each interaction with us as pleasant as possible.
Dave Sojka:And again, getting a call from a collector is never a pleasant response, you know, a pleasant experience. But again, if we can make it as pleasant as possible and strengthen the relationship with the customer, you know, there might be benefits down the road, which ultimately benefit the organization.
Tom O'Neill:And the customer for that matter, I would imagine. I that's that's a very refreshing take to to hear. You know, that it's not just a matter of, you know, working the queue and seeing how much, you know, dollars at risk we could we could save, you know, but it's actually working those relationships and and potentially with some of them, you know, helping those customers. And and, you know, at the the end of the day, it's actually a stronger relationship than it was, you know, going into it, which is, not something that's that many people think about when, when considering. I will call this a wrap.
Tom O'Neill:I would like to thank Maria, Thomas, Dave, and Jesse for joining me today. To our listeners, I hope you enjoyed today's topic. We were a bit different from our our normal run of things today. If you have any questions or suggestions for future podcasts, please reach out to us at riskadvisors@equifax.com. And to all of you, thank you very much for joining us and everyone have a wonderful day.
Dave Sojka:Thanks.
Jesse Hardin:Thanks, Tom. Thanks, team.
Copyright:The information and opinions provided in this podcast are intended as general guidance only and are subject to change without notice. The views presented during the podcast are those of the presenter as of the date this podcast was recorded and do not necessarily reflect official positions of Equifax. Investor analysts should direct inquiries using the contact us box on the investor relations section at equifax.com.