Today is a second post from the Inaugural L2C, Inc. Advisory Council Event at the St. Regis.  Although focused on credit issues, I found it particularly insightful with respect to general marketing problems we all face.

Peter Carroll, a partner at the global consulting firm Oliver Wyman, spoke on the topic of “rethinking underwriting.”  As I reported yesterday, credit scores seemed to be good predictors of repayment from 1985-2006 but fell short under the macroeconomic conditions of subsequent years, thus making his topic rather timely.  Here are some of my general takeaways:

There is always tension between new business development and risk control.  In the case of credit extension, the financial institution needs to put money to work in order to be profitable, but the risk managers (often abetted by regulators) can easily swing the pendulum to be too conservative.  As we add customers or products to our businesses, we should think about “optimizing” our revenue generation.  We don’t necessarily want to maximize revenue by taking on all customers no matter the associated costs or downsides, yet we don’t want to leave good money on the table either.   This is an important point.

Every sale is part of a bigger picture.  From a lender’s perspective, examining just two factors, DDA (checking account) behavior and geographic location, may be very important indicators alongside a credit score.   Whatever product or service we are selling, we need to offer it in the proper context in order to price it correctly and, again, optimize our results.

We’re in tech businesses where we are accustomed to a rapid rate of change.  Mr. Carroll showed a chart of the volatility of credit scores.  Pick a sample at any starting number, and that sample will quickly show wide variations over time.  A bad credit today may be a good credit tomorrow.  Similarly, a target customer or market for us may not be right at one moment in time but may well be in the sweet spot just a short time later.  Don’t lose that lead or burn a relationship.

He introduced the notion of putting covenants in consumer loans, just as almost all commercial loans or venture investments have assorted covenants or milestones that, if violated, change the terms of the deal.  If, for example, you are delivering a SaaS product, should your contract have some qualifiers for the unexpected, like another economic downturn or some natural disaster?  If you’re selling into an industry that is affected by the price of gas, perhaps that’s another covenant.  As you make long-term commitments, you should consider the potential affects of external risks and build them into your pricing and documentation.

Mr. Carroll also talked about the value of automation in making credit decisions.  Generally the decisions are better, and they are far less costly.  If you’re trying to borrow money for your startup and are talking to a human banker, chances are that lender has already lost all the profit in your deal.  That’s why you’re seeing so many new and increased fees for bank services.  You can see the analogy between banking and your own business; there’s a certain price point where you can afford to deploy sales people; below that it’s online or bust.

The speaker concluded with a point I was glad to hear:  for financial institutions there will be very high payoffs from further investments in automation.  Sounds like a market opportunity to me.

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