The banks and financial institutions have moved away from manual credit authorization and credit approval processes along back. The reasons of such migration are
- Standardisation: Adopting a standard process for all the applicants instead of local branch manager taking decision which can have certain bias and discriminations.
- Reduction of Risk: Measuring and reducing is one of the important competitive advantages for financial institutions. The centralised decision has helped in measuring and managing credit risk not only at the time of acquisition but across customer life cycle.
- Technology: Due to advancement of technology and adoption of data warehouse based systems facilitated the banks and financial services to migrate to centralised & automated credit approval process.
- Regulations: Basel and other regulation has played a role in banks and financial institutions adopting prudent approach of credit approval.
- Data Driven Intelligence: Due to regulations, technology and data availability, the financial institutions have leveraged Data Driven Intelligence for credit approval process. This intelligence is called Credit Scoring which is built using statistical and machine learning techniques.
A person loan, credit card or Mortgage loan can rejected for various reasons but one of the main reasons is Bad Credit Score.
Credit Score for a person is calculated based on applicants person characteristics (Demographic Data), Payment History and Financial Conditions (such as Debt level, # of Credit Cards etc) Data.
Increased number of Banks and Financial Institutions are employing external data such as social media and web data.
These additional sources of data help them in improving accuracy of applicant risk level. Example, job losses for employees from a company could lead to increase in risk level for the applicant from the company. The financial institution can be more prudent in underwriting credit to the applicants. The points to note is that not all applicants from the company will default and this could be one of the factor in credit approval.