Risk-Based Pricing

Risk-based pricing: Strategies for a new reality in banking

Risk-Based Pricing

While a lot has changed in Australian banking in recent years, loan pricing strategies have remained remarkably consistent — in general, not to the benefit of banks, or their customers. But a perfect storm of technology, demand and industry trends is poised to challenge long-established practices, and the early responders are ly to secure the advantage.

As it stands, the barrage of questions, calculations and credit checks that precede lending decisions has minimal impact on the prices of retail lending products (i.e., interest rates) charged to the consumer, which almost always track closely to the nearly identical rates advertised by the big four lenders.

That means there’s little connection between what the borrower pays on a mortgage or credit card, for example, and his or her personal risk profile.

Looking at home loans, where pricing varies it’s often due to determined bargaining on the part of the borrower — or for the wrong reasons, the ‘loyalty tax’ currently in the sights of the Australia Competition and Consumer Commission (ACCC), which refers to the practice of banks luring new customers with offers of discounted loans, while long-term clients are stuck paying higher rates.

 

Risk-based pricing is already the norm in the insurance industry and would seem to be a win-win alternative. Linking loan prices directly to the borrower’s risk profile and past credit behaviour would allow banks to optimise revenues from lending, and reward deserving, financially disciplined customers.

Yet despite the clear advantages this approach has so far failed to gain traction for a number of reasons, including technology limitations, concerns about the broader impacts and simple inertia.

That’s unly to be the case for much longer. The ground is shifting, and banks will essentially be forced into action.

Standard practices are facing increased scrutiny by regulators the ACCC, and emerging standards such as Basel IV demand more precise measurement of and accounting for lending risks.

Pressure will also come from consumers, who are increasingly sensitive to distortions the loyalty tax and, thanks to the rise of neobanks and fintechs, have more alternatives to choose from than ever.

The advent of open banking, as well as advances in artificial intelligence and machine learning, have brought the data and automation tools needed to support effective risk-based pricing on a mass scale within closer reach. 

Open banking simplifies the calculation of financial positions, and minimises errors from intentional or unintentional omissions. The low cost of on-demand cloud computing power means machine learning can process more data, and refine the patterns and categorisations that may signal defaults.
 

Weighing the impacts

Concerns about the negative effects of risk-based pricing are understandable, and deserve more exploration.

As industry leaders ANZ CEO Shayne Elliott have noted, the worry is that basing lending rates on risk profiles will result in relatively wealthy, stable customers getting showered with offers of low-cost loans, while less well-off borrowers with spottier track records will no longer be able to bear the costs of funding.

That could effectively choke the supply of credit to entire segments of the community.

There’s no denying risk-based pricing has the potential to make loans more expensive for certain customers. But this possibility has to be considered in context, along with the advantages.

The experience of markets the United States indicates greater availability and use of data in lending decisions boosts transparency and competition, pushing prices down overall as a result.1

The potential to draw on more data sources (such as rents and utility bills) will also encourage lenders to extend credit to new customers for whom information was previously insufficient.

Historical trends have shown a correlation between the use of credit data and greater credit availability, particularly for lower-income earners.2

We shouldn’t forget that the government and regulators can and should continue to play a role in ensuring the flow of lending to various customer groups, via targeted programs or legislation the US Equal Credit Opportunity Act, which was introduced to prevent creditors from discriminating against certain customer profiles.
 

Prepare for transformation

There is also an argument that under Australia’s current ‘one size fits all’ approach more credit-worthy customers effectively pay a premium to subsidise riskier ones — hardly a fair or desirable approach for the long term.

By forcing borrowers to confront their financial habits more directly and making the consequences of those habits more immediately apparent, risk-based pricing could encourage more responsible borrowing and lending overall, leading to a more sustainable form of economic growth than the credit-fueled booms of years past, and positive social outcomes.

Taken a step further, risk-based pricing could evolve into goal-based pricing. While today loan prices are typically locked in at origination, over time customer circumstances and the balance of risk inevitably changes. The value of the underlying security (e.g. a house) may increase; debts diminish as they are repaid; customer income and credit scores often rise.

All this reduces risk exposure for the lender, creating room to reward the customer with more favourable pricing as certain conditions are met. This could enable a virtuous circle in which customers see positive financial behaviour recognised and become even more committed to that behaviour — and the lender.

any new model, risk-based pricing will come with challenges. But the ‘push’ factors and positive implications for both banks and borrowers are simply too powerful to ignore.

The institutions who prepare for the shift now by building their data capabilities and pulling together systems to build a more holistic view of customers will be positioned to capitalise on the opportunities — while others are ly to see clients gravitate towards challengers with more dynamic pricing models. In our next article, we’ll look at how banks can build readiness for the ‘new pricing normal’ from the ground up.

1 See e.g. https://www.centerforcapitalmarkets.com/wp-content/uploads/2013/08/CCMC_RiskBasedPricing_FINAL_to_post_10_24_2014.pdf
2 See e.g. https://www.centerforcapitalmarkets.com/wp-content/uploads/2013/08/CCMC_RiskBasedPricing_FINAL_to_post_10_24_2014.pdf

data-type=insights_content>

Источник: https://www.thoughtworks.com/insights/blog/risk-based-pricing-strategies-new-reality-1

Перевод — risk-based+pricing — с английского — на русский

Risk-Based Pricing

  • 1 customer-based pricingАнгло-русский экономический словарь > customer-based pricing
  • 2 demand-based pricingАнгло-русский экономический словарь > demand-based pricing
  • 3 risk-based auditАнгло-русский экономический словарь > risk-based audit
  • 4 risk-based capital ratio . RBC ratio *коэффициент капитала на основе риска* * * *коэффициент рисковых активов, или рисковый капитальный коэффициент: отношение откорректированной капитальной базы (собственных средств) банка к активам, взвешенным в соответствии с уровнем риска (в США равен 8%); различным активам присвоены следующие веса по уровню риска: 0% — наличность, золото, государственные обязательства; 20% — срочные депозиты, чеки на инкассации, другие обязательства со сроками менее года; 50% — ипотеки, муниципальные облигации; 100% — кредиты нерезидентам, потребительские кредиты, валютные контракты, совместные предприятия, облигации, обеспеченные ипотеками; банковские холдинги с активами менее 150 млн. долл. в США не обязаны придерживаться установленного законом коэффициента рисковых активов;= .Англо-русский экономический словарь > risk-based capital ratio
  • 5 site-based pricing
    1. определение цены, исходя из числа рабочих мест

    ;определение цены, исходя из числа рабочих мест —[Л.Г.Суменко. Англо-русский словарь по информационным технологиям. М.: ГП ЦНИИС, 2003.]

Тематики

  • информационные технологии в целом

EN

Англо-русский словарь нормативно-технической терминологии > site-based pricing

  • 6 risk-based operational safety performance assessment

  • Англо-русский словарь нормативно-технической терминологии > risk-based operational safety performance assessment

  • 7 risk-based inspection guide

  • Англо-русский словарь нормативно-технической терминологии > risk-based inspection guide

  • 8 competition-based pricing

    Англо-русский экономический словарь > competition-based pricing

  • 9 cost-based pricing

    эк. затратное ценообразование, ценообразование на основе затрат

    Syn:

    markup pricing, cost-oriented pricing

    See:

    cost 1)

    * * *

    ценообразование на основе себестоимости; установление цены в зависимости от издержек; установление цены на основе издержек

    Англо-русский экономический словарь > cost-based pricing

  • 10 risk-based capital

    . RBC *капитал на основе риска*

    а) банк. )

    See:

    risk-weighted assets

    б) страх. )

    See:

    asset risk, underwriting risk, off-balance-sheet risk

    * * *

    капитал на основе риска: определение структуры капитальной базы на основе уровня риска ее различных частей; это делается для укрепления капиталов банков, стимулирования поддержания большей ликвидности и учета объема забалансовых обязательств при расчете достаточности капитала; в США с 1993 г.

    собственный капитал должен составлять 8% активов (ранее — 5,5%), в т. ч.

    4% — капитал первого уровня (обыкновенные и неаккумулируемые привилегированные акции) и 4% — капитал второго уровня (другие разновидности капитала, включая резервы против «плохих» кредитов, бессрочные привилегированные акции); Basle Committee;

    capital;

    risk assets ratio;

    Tier 1 capital;

    Tier 2.

    * * *

    резервы на покрытие потерь (в банках)

    Англо-русский экономический словарь > risk-based capital

  • 11 value-based pricing

    Англо-русский экономический словарь > value-based pricing

  • 12 Value Based Pricing

    Экономика: смотреть perceived value pricing

    Универсальный англо-русский словарь > Value Based Pricing

  • 13 COST-BASED PRICING

    Ценообразование на основе издержек
    Метод ценообразования, при котором цена на товар устанавливается на базе издержек производства, распределения и маркетинга. См. Averagecost pricing, Full-cost pricing, Marginal-cost pricing.

    Новый англо-русский словарь-справочник. Экономика. > COST-BASED PRICING

  • 14 risk-based testing

    тестирование с учётом риска (рисков)

    Англо-русский толковый словарь терминов и сокращений по ВТ, Интернету и программированию. > risk-based testing

  • 15 quantitative risk-based approach

    количественное определение риска (для АЭС)

    Большой англо-русский и русско-английский словарь > quantitative risk-based approach

  • 16 quantitative risk-based approach

    количественное определение риска )

    Англо-русский словарь технических терминов > quantitative risk-based approach

  • 17 risk-based managed care

    Англо-русский экономический словарь > risk-based managed care

  • 18 risk-based deposit insurance

    страхование депозитов с учетом риска: механизм увязки размеров платежей депозитных институтов (банков) в фонд страхования депозитов с степенью рискованности их активов; учреждения с более рискованными активами должны платить больше, т. к. вероятность банкротства и использования системы страхования депозитов выше; с другой стороны, часто сложно требовать с ослабленного банка более высоких страховых премий.

    Англо-русский экономический словарь > risk-based deposit insurance

  • 19 risk-based decision-making

    принятие решений с учетом фактора риска

    Англо-русский словарь по экологии > risk-based decision-making

  • 20 Risk based inspection

    Глоссарий компании Сахалин Энерджи: инспектирование с учётом фактора риска

    Универсальный англо-русский словарь > Risk based inspection

  • Страницы

    Источник: https://translate.academic2.ru/risk-based+pricing/en/ru/

    What Is Risk-Based Pricing?

    Risk-Based Pricing

    Risk-based pricing is a method that lenders use to determine interest rates and other loan and credit card terms the applicant's creditworthiness. Credit scores are the primary way lenders can evaluate your creditworthiness, but they may also consider other factors.

    Read on to learn more about how risk-based pricing can affect your finances and what you can do to improve your creditworthiness.

    How Risk-Based Pricing Affects Your Interest Rates

    It's not uncommon to need a loan or line of credit to help finance a large purchase or cover your everyday expenses. Mortgages, auto loans, personal loans, and credit cards can all help you leverage your finances, but that privilege comes at a price.

    While the majority of borrowers repay their debts, some don't. Banks and other lenders compensate for this risk by charging a range of interest rates on their loan and credit card products.

    Depending on the type of loan or credit card, the interest rate range can vary. For example, the average credit card interest rate is 17.56% (as of November 2018), and the average interest rate on a new auto loan is 5.11% (as of the 4th quarter of 2017).

    Regardless of the credit type, you can generally expect to score a below-average rate if you have an excellent credit history. If the lender views you as a risky borrower, you can expect to pay a higher interest rate.

    Also, lenders have varying tolerances to risk. While some may be willing to lend to borrowers with less-than-stellar credit—at a higher interest rate, of course—others may deny your application outright.

    As a result, it's important to not only know your credit scores but also what other factors lenders consider when reviewing your application.

    How Lenders Determine Your Creditworthiness

    Credit scores were designed to help lenders predict how ly you are to repay your loan or pay off your credit card. But your scores don't always show the full picture.

    As a result, lenders often take a look at several aspects of your financial profile to assess whether you're a risk or not. The actual factors lenders consider and how they weight them can vary, but here are the general elements:

    Credit Scores

    Your credit score is a three-digit number that represents a snapshot of your credit report. It generally considers your:

    • Payment history
    • How much you owe
    • Length of credit history
    • New credit
    • Credit mix

    That said, you actually have several credit scores. Not only are there a handful of different credit scoring companies—FICO® and VantageScore are the main two—but each company can offer various models the type of credit you're applying for and improvements over time.

    What's more, your credit scores can vary depending on which credit reporting agency the credit scoring model uses. Experian, Equifax, and TransUnion all gather and store data differently. Also, an error that shows up on your report with one agency may not show with the others.

    As a result, you may see a different number when you check your credit score than what a lender sees when it checks. If the discrepancy is small, there's ly no need to worry. But if it's large, there may be an issue with one of your credit reports, and you should check for errors.

    Debt-To-Income Ratio

    You don't necessarily need to have a high income to get approved for a loan. But your debt-to-income ratio must be in a reasonable range.

    Your debt-to-income ratio is calculated by dividing your total monthly debt payments by your monthly gross income. For instance, let's say you earn $60,000 per year and you have the following debt payments:

    • Student loans: $300
    • Auto loan: $350
    • Mortgage: $1,300
    • Credit card minimum payment: $50

    Your total monthly debt obligation is $2,000, and your monthly gross income is $5,000, giving you a debt-to-income ratio of 40%.

    The right debt-to-income ratio depends on the type of credit you're applying for. Double-check with the lender before you apply.

    Other Credit Report Items

    In addition to checking your credit score, a lender may also do a quick check of your credit reports to make sure there aren't any major red flags. Specifically, the lender will look at items such as:

    • Delinquencies
    • Collection and charged-off accounts
    • Bankruptcies
    • Foreclosures and short sales
    • Recent credit inquiries

    Tax liens and civil judgments used to be included in credit reports, but with recent regulatory changes, these items are no longer listed.

    If you have any of these on your credit report, it can result in a higher interest rate or a denial. But over time, new positive information can help outweigh old negative information. Even then, it's wise to get caught up with payments and pay off any outstanding collections.

    How to Improve Your Chances of Getting a Lower Interest Rate

    Risk-based pricing protects lenders from losing money on their investments, but it's not ideal for consumers without a solid credit profile.

    Even if you get approved, you could end up paying hundreds or even thousands of dollars more in interest over the life of your loan than if you scored a lower interest rate. So, it's important to know how to get a lower interest rate before you apply.

    Get a Cosigner

    If the lender you're applying with allows cosigners, consider asking someone with good credit and income to apply with you. This approach reduces the risk the lender takes on, which can result in a lower interest rate.

    Just keep in mind that your cosigner is legally responsible for paying off the debt if you default, and the loan will show up on their credit report. If you fall behind on payments or stop making them entirely, it could damage your relationship.

    Pay off Debt

    Since your debt obligations are an essential factor in your credit score and lenders also consider your debt-to-income ratio, paying down debt can make a big difference.

    If you have credit card debt, tackle that first. Lowering your balances can result in a fast uptick in your credit scores, and you'll also have the benefit of getting rid of high-interest debt. After that, focus on your other debts using either the debt snowball or debt avalanche method.

    Understand the Lender's Eligibility Requirements

    In some cases, you can avoid getting a high-interest rate offer just by knowing up front what credit profile the lender requires.

    For example, most major credit card issuers charge high-interest rates on all of their rewards credit cards despite requiring good or excellent credit to get approved. But if you go to your local credit union, you may be able to get a lower rate without having perfect credit.

    Also, while some personal loan companies prefer higher credit scores, others might be more willing to lend to you if you have poor or fair credit. Do your research before you apply to make sure you have the right lender.

    What Happens If You Get Unfavorable Terms

    If a lender gives you less favorable interest rates or other terms than other borrowers information it found in your credit report, it's required by law to provide you with one of the following notices:

    • Risk-based pricing notice: Lenders provide this notice to a borrower after the terms of the loan or credit card have been set but before the borrower accepts them. Lenders can provide it in writing, electronically, or verbally.
    • Credit score disclosure exception notice: This letter, which lenders can provide electronically or in writing, shares the borrower's credit score and the score distribution for the loan or credit card.

    These notices may also share information about how to get a copy of your credit report, as well as your credit score and the negative factors affecting your credit score.

    The Bottom Line

    The best way to get a low-interest rate on your next loan or credit card is to improve your creditworthiness. Lenders consider credit scores, income, and debt, as well as other credit report items to determine how much interest to charge you.

    If you don't get approved, you'll typically find out why when the lender sends you one of the required notices. This information can help you get your credit back on track.

    Источник: https://www.experian.com/blogs/ask-experian/what-is-risk-based-pricing/

    risk-based pricing or risk based pricing?

    Risk-Based Pricing

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    risk based pricing

    Some examples from the web:

    • Nea Proton Bank had already re
    • priced some of its loan portfolio, using risk
    • based pricing with interest rates well above the cost of funding.
    • The wording of the relevant published PBOC decisions however only encouraged
    • not required
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    • This long overdue policy shift is an important component of the Third Plenum's official elevation of market

    risk-based pricing

    Some examples from the web:

    • Nea Proton Bank had already re
    • priced some of its loan portfolio, using risk
    • based pricing with interest rates well above the cost of funding.

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