line assignment in banking

• Mar 1, 2019

The role of AI in credit line assignment

Author | Subbu Venkataramanan

When a customer applies for a credit card, three decisions need to be taken:

1. Approve or reject the application

2. Decide how much credit line to assign if approved

3. How much APR to charge

Key driver of approve/reject decision is the credit worthiness of the applicant as measured by risk score(s). The price (APR) is pretty much determined by the market for the risk level. Therefore, it is in credit line assignment that banks have significant room for delighting the customer in providing an amount that is appropriate for her credit needs while also optimizing for bank’s risk adjusted revenue. In other words, win-win for both the customer and the lender.

There are three important considerations for architecting a credit line assignment algorithm:

1 Loss exposure

Expected monetary loss for the line assigned

2 Expected revenue

Line drives the customer’s ability to spend for interchange revenue and the revolving balance for interest revenue

3 Customer’s credit need and expectation

Highly credit worthy customers, in general, would not use the card if given too low a line, but may be more accepting for a store card. In a balance transfer scenario, line may need to cover at least the balance transfer amount.

Optimizing credit line assignment, thus requires sophisticated modelling and decision science processes and algorithms that leverage diverse set of data across channels, past and existing relationships, random line tests and performance, Credit Bureau data and alternate data.

The optimization takes the form of max(π) where π = NPV(REVt – ECLt).  Doing this for, say, the credit card application limit assignment decision requires a continuous function that maps the assigned limit onto expected loss adjusted revenue. The question being asked is, has AI evolved to the point where it can determine the REV function? Yes and here is how:

The Objective: Optimize portfolio objectives (maximize profits, increase sales, build revolving balance, control loss rates)

management constraints (total incremental exposure, hurdle rates) by scanning across customer’s relationship (on us/off us performance), analysing key dimensions of channel affinity, risk and spend.

THE DRIVERS OF A  CLI DECISION   

Linear models like regression do not predict revenue drivers of spend and finance charges well:

Low R-Squared; predicted spend and finance charges do not flatten out with increasing credit limit leading to corner solutions

More importantly, significant human expertise needed to segment data for any useful revenue prediction

Scienaptic’s Ether.Underwrite product uses advanced machine learning and AI

Captures non-linear relationships; High predictive accuracy

Leverages far more number of features without sacrificing robustness

Human expertise driven segmentation unnecessary due to natural tree ensemble structure; Several microsegments instead of few coarse segments

Ether’s proprietary methodology to impose monotonicity constraints for regulatory compliance

Feedback of performance data for auto-refit with little human intervention

Ether optimizes line assignment by factoring digital affinity across channels.

Line assigned where the expected value

[E(FC) + E(Spend) – E(Loss)] maximizes

While credit limit is mathematically real valued, in practice the optimization is done over finite number of values For example, $500 to $2500 in increments of $100

Even so, computationally heavy at real time; Ether solves for this and returns decision on live application within millisecond

It clearly demonstrates that AI can substitute for Logistic / REG of all the cash flow components; however, it does not shed light on the process for uncovering the primary effects function that maps a prospective limit onto activation, revolving balances, interchange, etc.  These are an essential input to the profit maximization process.

At Scienaptic, the models for activation, expected spend, expected revolving balance etc. are built using past data with actual limit that was assigned as being one of the independent variables along with other raw bureau and application variables. This provides the function mapping from limit assigned to the various revenue components. When these models are scored on a live application, the value for limit variable in these models is supplied by a loop iterating from lower bound to upper bound in some increment and the limit value chosen is one that maximizes the objective function. Potential drawback to this approach is that, historically, the bank would not have done a true random line assignment test. However, usually there is still sufficient variation within some bounds for the mapping to work and over time this can be improved. Also, other variables in the models would include credit limits elsewhere as seen in the bureau tradeline level data and these provide additional signals on how far our assigned limit is from what the customer got from other banks.

It does provide with the function that maps an assigned limit to the cash flow components such as revolving balance, interchange, etc.

A secondary question is whether our product manages local and global credit risk constraints.

The constraints in our optimization is currently risk policy level constraints such as, for a customer in Fico score band 690 - 720 and income between $1000 and $2000 per month the assigned limit should be greater than $300 but less than $1500. Global risk weighted exposure constraints can be set at development and results tested out with these policy constraints. If these are satisfactory then the optimization is rolled out so long as through the door population is largely stable. The policy constraints can be easily changed within Ether (literally overnight) if monitoring throws up disproportionate numbers, very low limits or very high limits or any other metric.

Now that question is assessing the ability of AI driven software to capture some non-trivial data facts that are familiar to risk managers and which are likely to have been specified for Logistic and automatically learn the important predictive features without having to hand code them.

Strategically, it would be valuable to develop clear prescriptions regarding the forms of information value best left to the AI versus the forms that will depend on a modeller’s data transformation. One such possible test now is whether to externally compute a debt ratio or to let the AI figure out what to do.

At Scienaptic, we have solved the problem of "representation learning" so that our neural network can automatically learn the important predictive features without having to hand code them, especially so for credit risk domain. In other words, we are more interested in proving deep learning (or ensemble with other methods) can indeed be the master algorithm that can learn and use features like debt to total income ratio to predict credit risk. We have had success with raw feature level transformations and choice of activation functions. What we have currently, is that we can run a suite of algorithms including GBM that can-do way better than logistic regression but is still dependent on the features that are created either manually or automatically. Our models are also non-black boxy and adverse actions can be issued out of them.

Our product also leverages thousands of features that we have authored from our experience which we collectively call customer consciousness. But, we are working on an algorithm that would do away with the need for any handmade feature. Ratios are the hardest to learn - even simple ones like loan amount to income or loan amount to total household income. We have had success around different activation functions in neural nets that can potentially surmount this difficulty. Ensemble of models especially pairing neural nets with random forests has worked.

We believe in harnessing the power of human-machine synergy in order to deliver better results than either humans or AI alone. It appears that our beliefs about AI versus human performance on traditional credit risk models is mostly compatible

Federal Deposit Insurance Corporation

Each depositor insured to at least $250,000 per insured bank.

Chapter IX. – Portfolio Management

Risk Management Account Management Guidance Account Management Scoring Minimum Payments and Negative Amortization Payment Deferral Programs Pre-Payment Programs Credit Line Management            Initial Credit Line Assignment            Credit Limit Increases            Credit Limit Decreases            Multiple Credit Lines Authorizations Renewals Customer Service            Consumer Complaints and Litigation            Closures and Retention Collections (General) Over-limit Accounts Delinquent Accounts            Partial Payments            Non-Accrual            Re-aging Re-pricing Repayment Plans            Workout Programs            Temporary Hardship Plans            Consumer Credit Counseling Service (CCCS) Plans Settlement Agreements Charge-offs Post-Mortem            Recoveries Fraud

Segmenting Dollars and Units Levels, Trends, and Performance Key Indices Projected Versus Actual Performance Peer Comparisons Ownership and Clarifying Information Common Reports

IX. Portfolio Management

Portfolio management covers the full spectrum of overseeing and administering the credit card programs, portfolios, and accounts. It encompasses risk management, account management, portfolio reporting and monitoring, and many other activities. Inappropriate portfolio management practices can create sizable risk for the bank, including credit risk, reputation risk, liquidity risk, and other risks. Portfolio management is challenging because the goal is to offer the customer efficient services and responses while internally controlling costs, appropriately managing risks and revenues, and achieving corporate and regulatory compliance.

Risk Management Risk management is considered the broadest of the portfolio management terms and involves the overall monitoring and managing of the quality and risks of the credit card portfolio. It includes, but is not limited to, evaluating underwriting standards and modifying those standards as needed to maintain an acceptable risk level in the portfolio. Account management, portfolio reporting and monitoring, consumer complaints, fraud, and other functions are also essential subsets of risk management. In all, risk management should address research, development, testing, and product roll out, to monitoring on-going performance of the products, to post-mortem analysis.

Aspects of the risk management function, such as the level of technology as well as the degree of sophistication and number of staff needed, normally depend on the size and complexity of the credit card activities and of the bank itself. Independence from those who make day-to-day marketing, underwriting, and account management decisions provides an important control. Risk management is sometimes performed by a separate risk management department. In other cases, the board might assign it to other functional areas such as loan review and/or credit administration. Regardless of where responsibility is assigned, examiners should look for evidence that management has implemented sound practices that identify risk, establish controls, and provide monitoring. In general, risk management is involved in many functions, including:

• Developing and implementing marketing initiatives to ensure that such initiatives do not create an unacceptable risk level in the portfolio.
• Confirming proper underwriting and marketing decisions.
• Assessing the integrity of scoring systems.
• Reviewing policies and procedures, including proposed revisions thereto, for adequacy, and assessing the impact of those policies and procedures on the card portfolio.
• Determining the quality of the credit card portfolio.
• Analyzing the success of specific products and marketing initiatives by assessing delinquencies and losses for each product or roll-out.
• Developing new, and assessing existing, account management strategies.
• Monitoring performance of the collections, fraud, and recovery functions, including recommending changes regarding management, staffing, or practices.

Common tools used for risk management include data warehouses, portfolio management software, credit scoring, ACS, and risk models. Data warehousing capabilities allow the storage and retrieval of pertinent data. ACS are discussed in the Scoring and Modeling chapter, but to reiterate, are decision-tree strategies used to formulate account management approaches. They bring consumer behavior and other attributes into play.

Risk management's purposes with regard to marketing and underwriting is to determine the characteristics of the responders and analyze the results of marketing programs to ascertain if they were successful in attracting the targeted populations. As a result of this process, management can adjust underwriting standards to maintain an acceptable risk level in the card portfolio. Marketing and underwriting are discussed in the Marketing and Acquisition chapter as well as the Underwriting and Loan Approval Process chapter. The remainder of this chapter largely focuses on risk management's role in the on-going servicing and monitoring of the card programs, portfolios, and accounts subsequent to marketing and underwriting. As such, account management and portfolio reporting and tracking are two key subjects of this chapter. Other risk management functions, such as loss allowances, are discussed in later chapters.

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Account Management Guidance Examinations have disclosed a wide array of risk management, account management, and loss allowance practices, many of which have been inappropriate and have substantially elevated banks' risk profiles. In response, the FDIC jointly issued the Account Management and Loss Allowance Guidance for Credit Card Lending (Account Management Guidance, or AMG) on January 8, 2003. The AMG is generally applicable to all FDIC-supervised institutions that offer credit card programs as well as to similar institutions supervised by other regulatory agencies. It generally applies regardless of where the receivables reside.

The AMG specifically speaks to credit line management, over-limit practices, minimum payments and negative amortization , workout and forbearance practices, and income and loss allowance practices. Regulatory scrutiny and risk management expectations for certain practices will be greater for higher-risk portfolios and portfolio segments, including those that are subprime. Less than full compliance with the AMG should generally be criticized. However, the Agencies do recognize that limited exceptions to the AMG may be warranted in well-managed programs. In those cases, examiners should expect that exceptions are addressed in the bank's policies and procedures, the volume of accounts granted exceptions is small and well-controlled, and management is closely monitoring the performance of those accounts.

An assessment of the overall adequacy of account management practices factors in the bank's risk profile, strength of internal controls, quality of management reporting, and adequacy of charge-off and loss allowance policies. The following sections of this chapter discuss key account management practices, including those addressed by the AMG. Subsequent sections discuss reporting and tracking associated with those functions.

Account Management Account management generally refers to any actions that the bank takes after a card account is originated and often in response to changes in cardholders' financial capacities. The changes can be brought about in several ways and may be for the better or for the worse. Account management encompasses the continual evaluation of accounts to identify and respond quickly to the changes in borrowers' financial conditions or behavioral patterns. The process is challenging because cardholders are not typically obligated to supply financial information after their accounts are opened.

Account management covers many activities and affects the amount and the length of time the bank makes credit available to the consumer. Adequately monitoring and managing account information necessitates effective strategies to handle the large volume of open-end credits and efficient information systems capable of generating reports needed to make on-going, timely credit decisions. Account management processes vary depending on the bank's size, level of automation, and staff expertise. They also vary depending on an account's status (for example, good standing versus a problem account) and on product type or cardholder attributes (for example, prime versus subprime accounts). But, no matter the program type or account status, regulators expect banks to have a means of identifying the current risk profile of portfolio(s).

Examiners' attention is warranted when banks substantially modify account management activities to accommodate affinity, co-brand, or other similar accounts. If account management practices for those types of programs diverge from the bank's typical practices, examiners normally call on management to readily support the reasonableness of such practices, including that such practices follow applicable regulatory guidance. Evidence should demonstrate that management's development and review of account management strategies includes all applicable functions, such as information technology, compliance, and finance.

The account management function can be handled with automated systems, manual systems, or a combination thereof. Most banks use automated systems which allow them to make decisions on a large number of accounts with minimal manual intervention, thereby reducing costs. Most automated systems use specific cardholder criteria established by management. For example, managers may identify borrowers within a range of credit scores that currently warrant a certain over-limit approval. Only those borrowers falling outside of the automated specifications would undergo potential manual intervention. For automated systems, examiners should evaluate management's practices for periodically validating scoring systems or other guidelines incorporated and verifying the accurateness of data entry. System settings that do not correspond to those described in the bank's policies and/or that do not provide for compliance with regulatory guidance illustrate circumstances warranting examiners' attention.

Non-automated systems require credit analysts to review the customer's risk profile and the bank's underwriting and policy guidelines for the decision-making process. While non-automated systems may be the only reasonable procedure available to many smaller banks, they can be costly. Non-automated systems call for control systems to ensure that analysts consistently follow policies and make informed decisions.

Supervisory review normally includes an assessment of the bank's account management techniques for identifying higher-risk accounts and adverse changes in account risk profiles. Identification of such matters assists management in implementing timely preventive and corrective actions. Effective account management generally includes:

• Periodically refreshing risk scores.
• Using behavior scoring and analysis to identify potential problem accounts.
• Assessing utilization rates.
• Assessing payment patterns, including borrowers who make only the minimum payments or who rely on the line to keep the account current.
• Monitoring collateral values.
• Obtaining updated collateral values when significant market factors indicate a potential decline in values or when the borrower's payment performance deteriorates, placing greater reliance on the collateral.

Concerns may appear when the frequency of these actions is not commensurate with risk in the portfolio. Further, any failures by management to fully test, analyze, and support its account management practices calls for elevated scrutiny during the examination.

Account management functions are often outsourced to third-parties. For example, customer service firms and collection firms are often used. The Third-Party Relationships chapter contains information on assessing third-party relationships.

Account management activities cover, but are not limited to, scoring, minimum payments, negative amortization, payment deferral programs, pre-payment programs , authorizations, over-limits, credit line management, renewals, collection activities, workout and forbearance programs, settlements, and re-aging.

Scoring Failure to understand the current risk profile of cardholder accounts could lead to an artificially low level of identified credit risk which could translate into under-funded allowances and stress on liquidity, earnings, and capital. Issuers normally obtain a current risk profile on cardholder accounts by re-scoring accounts. Often, this is referred to as refreshing the credit score. In the past management typically obtained refreshed credit scores semi-annually or annually. However, quarterly and monthly refreshes are now common. By refreshing an account's credit score, management is able to identify apparent trends in the consumers' financial situation in the absence of updated consumers' financial information and potentially before any financial stress may be apparent based on the cardholder's internal performance. Within the bank's information systems and databases, both the original credit score and the refreshed credit score for each account are generally maintained to facilitate more effective risk management of the account and the portfolios. For example, the scores can be used in migration analysis . More sophisticated institutions use behavior models in conjunction with credit scores. Similar to credit scores, behavior scores are refreshed on a regular basis. Due to expenses involved, smaller banks often do not use automated behavioral scoring systems. However, vendors continue to work to make these or similar systems more attainable for smaller institutions. Scoring models are discussed in the Scoring and Modeling chapter. Minimum Payments and Negative Amortization The amortization of principal balances is one of the key factors when determining whether a bank's credit card lending practices are safe and sound. As such, setting appropriate minimum payment requirements is a critical function of management. The failure of minimum payments to sufficiently amortize the debt in a reasonable timeframe not only elevates credit quality concerns and consumer protection issues but can also understate the level of delinquent accounts. Such an understatement could affect decisions made by parties interested in the financial conditions of the portfolio and the bank, including investors in securitizations of the portfolio. Competitive pressures combined with desires to sustain outstanding balances and/or customer performance had led many banks to ease minimum payment requirements over time. Such easing often delayed principal repayment, thereby increasing credit risk and masking portfolio quality. While initially attractive to many consumers, the low payments often ultimately caused those consumers to face repaying a growing balance. The liberal repayment requirements resulted in negative amortization, a phenomena in which the outstanding balance owed on the card builds even though no new charges are made. The rising balance occurs because minimum payments fall short of covering all finance charges and fees assessed. The hazards of negative amortization are magnified when subprime lending is involved. Further, programmatic, recurring over-limit fees and other charges often exacerbate the situation. In general, these types of fees are considered inappropriate when they are primarily aimed at increasing recorded income rather than at serving as a tool to enhance the borrower's performance or access to credit. Programmatic, recurring fees are typically defined as fees charged on an account as the result of the bank's fee program. These types of fee programs become problematic if they result in a cardholder's balance continuing to grow due to interest and fee assessments even if the cardholder meets subsequent minimum payment requirements. For example, if the bank has an over-limit fee program that assesses an over-limit fee every month an account is over-limit, even if the event that caused the over-limit occurred in prior billing cycles, yet the minimum payment does not require payment of the entire over-limit amount, the account balance would normally grow. Assume for this example that an account becomes over-limit by $100 and is assessed an over-limit fee of $30 at the end of the billing cycle. If the subsequent minimum payment required is not sufficient to cover the over-limit fee and the over-limit amount ($130) plus normal interest and fees, and the borrower only makes the minimum required payment (and thus, remains over-limit), the bank then assesses another $30 over-limit fee in the next billing cycle in accordance with its over-limit fee program. This type of program is clearly problematic since it results in continual fee assessments without requiring sufficient payment to cure the event that is resulting in the fee. To address the liberalized minimum payment environment and the reality that minimum payments were not keeping pace with industry changes such as elevated line assignments; increasing and complex fees; and higher interest rates (risk-based pricing); the Agencies designed the AMG to specifically speak to minimum payments and negative amortization. The AMG calls for required payments to amortize the existing balance over a reasonable period of time, consistent with the unsecured, consumer-oriented nature of the debt and the borrower's documented credit-worthiness. Safety and soundness concerns arise when prolonged negative amortization, inappropriate fees, and other practices inordinately compound or protract consumer debt or mask portfolio performance and quality. When proper minimum payment requirements are not evident, examiners are expected to voice criticism and ask management to take proper and timely action which could include augmenting allowances, revising the design of minimum payment requirements, and/or altering their courses of action for fee assessments, depending on the situation. According to the AMG, minimum payments should cover all finance charges and fees assessed during the billing cycle. Within the industry, fees included in minimum due requirements continue to vary. With the innumerable fees and ever-changing fee terminology evident in the industry, developing guidance specifically naming fees that would be consistently interpreted uniformly as well as would be comprehensive for all portfolio types would be difficult, if not impracticable. Rather, regulators generally allow management to look at the particular structures of the bank's products and set the minimum payment requirements for each product or segment in the context of those structures, as long as it amortizes the debt in a reasonable timeframe. A minimum payment method that is acceptable on one portfolio or segment might not be acceptable or reasonable for another portfolio or segment. Because a uniform minimum payment structure has not been specified, minimum payment methods continue to vary. Some banks tier the total percentage due based on the outstanding balance. Several banks have designated an "equal to the greater of" approach where the balance due is the greater of a flat percentage of the outstanding balance, a flat dollar amount, or a certain percent of the balance plus interest charges and applicable fees. Whatever minimum payment method(s) the bank uses, examiners should look for evidence that the method(s) provide for a reasonable amortization period. Interpretations of "reasonable amortization period" vary. Some banks require a one percent principal reduction per month in addition to payment of interest, late fees, and over-limit fees. Under that structure, a cardholder is generally required to demonstrate that he or she could amortize the debt in less than 10 years if he or she were to make the same dollar-level payments going forward. In reality, because the one percent principal reduction would be based on a declining principal balance (assuming no new charges are made), the amortization period is generally longer if, in subsequent months, the cardholder pays only the minimum due as requested by the bank. But, by making such payments, the cardholder proves that the ability to repay the debt in less than 10 years from that point exists. Minimum payment requirements that would not confirm a cardholder's ability to amortize the debt in less than 10 years or that are so small as to draw into question whether the borrower has the proper financial capacity likely warrant close review to determine how and whether such a payment structure meets the spirit and intent of the AMG. This is not to say that amortization periods that are greater than 10 years cannot be acceptable or that amortization periods of 10 years or less are automatically acceptable. Rather, it reflects that longer-term structures, such as those greater than 10 years, have generally shown higher propensities to increase credit risk and mask portfolio quality, and, as such, are usually considered as a starting point for examination analysis. In any case, including whether it is occurring on a small or large scale, regulators are likely to object to programmatic negative amortization. The concept of programmatic negative amortization has been introduced in previous comments of this section, and in a broad sense, may be considered to occur when the card's fee and interest structure, as prescribed by management and as programmed into the bank's systems, results in negative amortization when combined with the card's minimum payment structure and the cardholder's normal behavior pattern. These cases could involve the assessment of charges, which sometimes could be purposefully regular and methodical, to a cardholder population that normally behaves in such a manner that the assessments combined with the population's payment and other behavior patterns produce rising balances over a short timeframe, even if the cardholder is meeting the account's minimum payment requirements. Fees also usually end up representing a disproportionate share of the balance. Prior to the implementation of the AMG, many cardholders were making payments larger than the minimum due. These cardholders are likely experiencing minimal impacts from changes prompted by the AMG, and some (albeit the minority of) customers are even experiencing declines in payment required. However, some cardholders face higher minimums due and have found it a challenge to meet the higher requirements. To assist these customers and to control negative amortization, including from a programmatic standpoint, many lenders are modifying fee and interest structures. For example, some banks are decreasing interest rates and/or are waiving fees. Other banks are limiting the frequency of over-limit fees per each over-limit occurrence and are capping the number of late fees or other fees that tend to recur and, as such, often make up a disproportionate amount of the outstanding balance, especially in subprime portfolios. Examiners should evaluate how and to what degree the practices help the bank to meet the guidance, thereby assisting cardholders to reasonably amortize their debt and access credit. Examiners should pay close attention to lending decisions that do not factor in the customer's ability to repay the debt consistent with a reasonable amortization. Management practices encouraged by examiners include periodically conducting negative amortization analyses on the credit card portfolio(s) to determine the prevalence of, and trends in, negative amortization. Many banks focus on identifying negative amortization that occurs based on payments made, sometimes considering the size of the payment. Analyses that consider cardholder performance can help management identify negative amortization that exists in the portfolio at that point in time for performing cardholders. However, if not structured properly, the analyses can be misleading and might not identify the true susceptibility to negative amortization. For example, if cardholders make payments larger than the minimum due, the analysis could indicate that negative amortization does not exist or is immaterial and, thus, could falsely lead management to believe its minimum payment structure is appropriate. If minimum payments are not sufficient to reasonably amortize the debt and if cardholders would have only paid the minimum due (rather than voluntarily submitting more than required), the level of negative amortization identified would be higher. More comprehensive analyses include not only negative amortization that is occurring based on payments made but also testing negative amortization that would occur if consumers only made the minimum payment as required. This analysis is more of a "what if" scenario. Some bankers believe that late accounts should be excluded from negative amortization analysis because the lack of payment normally causes the account to negatively amortize, usually due to late payment or other assessments. However, considering late accounts in the analyses would expand the analysis pool available to determine whether or not negative amortization would have occurred if cardholders would have paid the minimum due. Further, an account could have been current and negatively amortizing and then falls delinquent during the month the analysis is conducted. In this case, delinquency could potentially be a symptom or result of negative amortization rather than a cause. If delinquent accounts are excluded, these types of accounts that are now delinquent but recently exhibited negative amortization even while current would be overlooked, depending on how the analysis is structured. Moreover, the AMG generally points to the inclusion of all fees (which would include late fees), or does not identify delinquent accounts as an exclusion to its guidelines. Regardless of whether or not payment is made and what the size of any payments made are, examiners should be concerned when the required minimum payment as prescribed by management is not designed to amortize the debt timely. In addition to verifying whether proper minimum payment requirements have been established in policies and cardholder agreements, examiners should look for evidence that the bank's systems factor in proper minimum dues. If processing systems are not set correctly and/or if minimum payments are billed incorrectly, the bank might be under-reporting past dues. While these comments are not specifically addressed to partial payments, partial payments could constitute one example of how systems could be set inappropriately. A discussion about partial payments is housed under the Delinquency section of this chapter. Payment Deferral Programs Payment deferral programs allow cardholders to defer one or more minimum monthly payments and are also known as skip payment programs or payment holiday programs . Interest continues to accrue on the balance during the deferral period. Cardholders selected for a payment deferral program are usually notified by telephone, monthly statement inserts, or separate mailings. Normally these marketing efforts occur during high purchasing periods such as holidays or peak vacation periods. Some banks allow flexibility by offering the right to skip one or more minimum payments at any time during the year. Before implementing payment deferral programs (or to continue offering payment deferral programs) management is expected to carefully weigh the customer base to determine whether these types of programs would be appropriate for the card program offered. Skip-payment programs generally should be only offered to the most credit-worthy customers, if offered at all. For example, subprime programs or small balance programs may be directed to individuals who have had trouble maintaining or who are trying to establish consistent, favorable payment performance. Payment deferral programs might not be appropriate in some of these cases. Payment deferral programs interrupt the regular payment stream, diminish management's ability to monitor performance and promptly identify problem accounts, and might be to some degree counterintuitive to the spirit and intent of the AMG, particularly if resulting in prolonged negative amortization. As such, some banks have discontinued these types of programs. However, for banks that still use such programs, evidence should substantiate whether management has established clearly defined policies and procedures for determining the credit criteria for account selection and for program parameters, such as how often a cardholder can qualify and for how many payments. Management may also consider the impact of these types of programs in any amortization analyses it conducts. Their failure to monitor the program's success, regularly review accounts for performance, and periodically evaluate eligibility requirements is normally cause for concern as are deferred payment plans that are offered to cardholders who are anticipated to abuse the privilege and create safety and soundness problems. Pre-Payment Programs Pre-payment programs, or pay-ahead programs , are similar to payment deferral programs in that they allow the cardholder to skip one or more minimum monthly payments. However, these programs are targeted to cardholders who make payments in excess of the minimum monthly payment and entail the application of excess payment amounts to the next consecutive payment(s). Pre-payment programs vary. Some allow cardholders a zero minimum payment requirement until the pre-payment amount is exhausted, while other programs have set time limits. For example, a bank might only allow a zero minimum monthly payment for one billing cycle, regardless of whether the excess paid surpasses one minimum monthly payment. Pre-payment programs in and of themselves might not be problematic, but have the potential to be counterintuitive to the spirit of the AMG. Similar to payment deferrals, they interrupt the payment stream and diminish management's ability to monitor performance and promptly identify problem accounts. Consideration of the impact of these types of programs in any amortization analyses the bank conducts may be helpful. Examiners should look for evidence that corroborates that before management implements pre-payment programs (or continues offering such programs) it carefully looks at the customer base to determine whether these types of programs are appropriate for the card program offered. Well-structured programs generally only offer the option to the most credit-worthy customers and are subject to clear guidelines, including identifying the maximum number of payments that can be skipped and monitoring the programs. Credit Line Management The AMG addresses credit line management, and in general, requires careful consideration of borrowers' repayment capacities when establishing or modifying credit lines. It also expects banks to test, analyze, and document line-assignment and line-increase criteria prior to broad implementation. In the past, many banks inappropriately used line assignments and line increase strategies to maintain asset growth and/or to mask poor portfolio performance (for example, using line increases to "cure" over-limits). Initial Credit Line Assignment: Initial credit line assignments are discussed in the Marketing and Acquisition chapter as well as the Underwriting and Loan Approval Process chapter. In summary, concerns normally arise when the initial line assigned is not commensurate with the consumer's willingness and ability to repay the credit under established, reasonable terms (which would include minimum payment and amortization configurations consistent with the AMG's guidelines). Situations where support for the line assignment does not include documentation of relevant credit decision factors or where management has not ensured that the level of available credit and card utility offered is reasonable and well-disclosed warrant close inspection. Credit Limit Increases: Similar to multiple account strategies, liberal line increase programs can increase the risk profile of a borrower quickly and can result in rapid and significant portfolio deterioration. Concerns normally arise if the bank does not have the capacity to fund the increased lines if drawn or has not carefully considered the borrower's repayment capacity, including any other accounts that the customer has with the bank. Most often, repayment capacity is determined with the use of scores and consideration of the borrower's performance history rather than income verification. Some banks charge a fee for increasing the credit line. Risks of improper management of line increases are that earnings could be unduly overstated and/or that the bank could be taking on credit risk that it cannot handle. According to the AMG, management should be testing, analyzing, and documenting line increase criteria prior to broad implementation. Credit limit increases are normally prompted with management-initiated, system-wide automated programs or through cardholder requests. Most management-initiated programs use scoring models, behavior models, or a combination of both, to screen the cardholder base and determine the pool of eligible accounts. The systemic programs also usually consider other qualifying criteria, such as the time elapsed since an account's origination and/or since prior line increases, and usually incorporate champion/challenger strategies. With automated line increase programs, the increases are granted whether or not the customer needs or wants the increase. However, consumers may ask the bank to withhold their accounts from the automated strategies. For customer-initiated line increase requests, banks process the requests as each is received. The process generally involves a credit analyst reviewing cardholder requests manually, making a determination based on prior credit history, the increase requested, and the bank's policies. Thus, in general, proper policies clearly establish approval criteria, specify the approval process, define verification steps, assign responsibility, establish lending authorities, and outline documentation requirements. Similar to management-initiated programs, scores and time elapsed since origination and/or prior line increases are usually considered. Section 112 of the FACT Act (and correspondingly, section 605A of the FCRA) provides that, for a credit line increase requested by a consumer whose credit report contains a fraud or active duty alert, the bank must use proper identification procedures regarding the identity of the person making the request. However, it is prudent to verify a consumer's identity even if no alerts are evident. Examiners should direct their attention to situations in which management is increasing credit limits on accounts that fall below the cut-off credit score and/or other underwriting standards. Because sufficient time is necessary for the cardholder to demonstrate that he/she can handle the existing line amount in a consistent, satisfactory manner, examiners expect management to normally refrain from granting line increases shortly after an account's origination or shortly after another line increase was granted. As such, notably short seasoning periods (such as six months or less) usually are subject to elevated scrutiny to determine whether they are appropriate in the particular bank's situation. In general, main components of line increase policies include identification of: The approval process and approval criteria. Verification procedures. Lending authorities. Documentation requirements. Testing expectations. Limitations on the number of line increases per account. Some type of limit (dollar or percentage or both) on the increase per line as well as seasoning (time lapse) criteria. A requirement that line increases outside of established criteria be reported on an exception list and reviewed by management on a regular basis. Credit Limit Decreases: Line decreases are generally based on evidence of adverse information, although some cardholders may request a line decrease. Credit limit decreases can be conducted manually or with an automated system. In the case of decreases prompted by adverse information, the credit lines are often reduced to the outstanding balance or to the nearest established increment above the balance at the time of the decrease (for example, to the nearest $100 above the outstanding balance). The increment method helps avoid a quick run into over-limit status when finance charge or other fee assessments occur shortly thereafter. As stated in FIL-45-2005, Home Equity Lending: Credit Risk Management Guidance, banks should refuse to extend additional credit under, or should reduce the credit limit of, a home equity line when appropriate. Regulation Z (Truth in Lending) only permits such steps in certain circumstances, including, for example, when the collateral value declines significantly, when default of a material obligation under the loan agreement is evident, or when deterioration in the borrower's financial circumstances is evident. To freeze or reduce credit lines due to deterioration in a borrower's financial circumstances, both of these conditions must be met: (1) there must be a material change in the borrower's financial circumstances, and (2) as a result of the change, the bank reasonably believes that the borrower will be unable to fulfill the plan's payment obligations. Multiple Credit Lines : The Underwriting and Loan Approval Process chapter talks about multiple account strategies. Due to added management requirements, granting multiple credit cards with smaller lines generally results in as much or more risk than granting a consumer one card with a higher line. The AMG expects banks that offer multiple credit lines to have sufficient internal controls and systems to aggregate related exposures and effectively analyze performance. Authorizations Authorization is the process of verifying that the card account has sufficient credit available to cover the amount of the transaction. The transaction's risk is assessed, and the process yields an approval, a decline, or a pending response in which the merchant must take additional steps, such as calling a toll-free authorization phone number. If the authorization is approved, the amount of the transaction is reserved on the card. In some cases, as with car rental companies and hotels, the exact amount of the transaction may not be known before the customer uses the product. In these situations, temporary holds are placed on the card accounts to provide merchants with a level of assurance that they will be paid for the services used. The authorization process is structured to prevent transactions being approved for cardholders who have not satisfactorily maintained their account or who may be over-limit (and, hence, limits credit risk) and is also designed to protect against the unauthorized use of stolen or fraudulent cards. An effective authorization system allows good customers to make transactions within preset limits while preventing other transactions that pose undue risk to the bank. In most instances, banks automatically authorize transactions unless the transaction exceeds the authorized limit tolerance (either based on percentage or dollar amount), fraud is detected, or some other type of mismanagement is evident on the account. For example, a system might be set to authorize good customers to transact purchases up to five percent over their credit limit. If the purchase would put the cardholder at six percent over the credit limit, the authorization would be declined or might be referred for manual review. Authorization criteria beyond the normal credit limit, such as when a bank sets the system to allow certain cardholders to go a certain percentage above their credit limit, are sometimes referred to as expansion criteria. Merchants process customer charges many ways, including but not necessarily limited to, a paper-based transaction , a dial-in terminal, or an electronic card reader. Clearing customer charges via paper sales drafts and dial-in terminals can be slow and costly. Speed and cost advantages prompt many merchants to use electronic card readers. The electronic networks enable virtually immediate authorization for most point-of-sale transactions. And, while most use electronic networks, the authorization process differs depending on merchant and transaction type. For example, for restaurants, an authorization might be obtained for the total check amount and a preset authorization tolerance. If the customer provides for a gratuity beyond what the preset authorization would cover, an additional authorization must be obtained. For card-not-present transactions (such as for mail or phone orders), other processes, such as address verification, are incorporated. Authorization systems vary but commonly intend to provide reasonable assurance that charges are only authorized within prescribed credit limit tolerances and that accounts are appropriately blocked to prevent future authorizations when fraud is detected. Regardless of the authorization process used, examiners normally look for evidence that: Management has adequate policies and procedures in place that reflect the bank's risk tolerances. Management regularly reviews and updates the policies and procedures as needed. Sufficient controls exist to monitor adherence to the policies. System settings are consistent with the bank's policies. Renewals General purpose credit cards have pre-set expiration dates, usually two to three years after issuance. Expiration dates have generally lengthened not only to help reduce expenses that accompany renewal but to help control fraud by limiting the volume of cards within the mail system. Although cardholder accounts are evaluated for creditworthiness periodically throughout the account relationship, the expiration date gives management the right not to renew (or reissue) the account relationship at that time (and, hence, the ability to control credit risk). In general, proper written credit and performance guidelines establish credit criteria, consider the length of the relationship, and include performance criteria such as average outstanding balance, usage rate, payment and delinquency patterns, and account profitability. Normally, the renewal process is automated, uses scoring and behavior models, and is applied to the entire portfolio. Examiners should analyze management's practices for periodic testing of the integrity of the system and evaluating the effectiveness of renewal strategies. Customer Service Customer service encompasses a wide variety of activities, including, but not limited to, activating cards, initiating balance transfers, and handling account inquiries. Customer service can be conducted through written correspondence but is more often conducted via phone and increasingly online. Consumer Complaints and Litigation: The customer service area might identify consumer complaints. Complaints can serve as an early warning signal for compliance, credit, and operational issues, including discriminatory, unfair, deceptive, abusive, and predatory practices. Concern is normally warranted when banks are not prepared to handle consumer complaints promptly, including maintaining well-defined procedures. Recognition of bank staff responsible for handling the complaints that is broadcast to all bank staff can help expedite referrals. Failure to be sensitive to complaints can ultimately result in litigation (and hence, potential financial and reputation implications) or eventually result in legislation that is broader, more rigid, and more restrictive than was the particular practice that brought the complaint. Even if legal at the time, a bank's policies and practices may prompt objections that lead to new regulations. As mentioned in the Identifying Involvement in Credit Card Activities chapter, the FDIC's Consumer Response Center is a source available to examiners to help identify the volume and types of complaints that consumers are bringing against the bank. Evidence gathered during the examination should help form an assessment as to whether or not management closely monitors complaint activity. Such evidence often involves complaint and litigation logs. The bank most likely only hears from a small proportion of its dissatisfied customers. Consequently, the impact of the potential problem may be much more far-reaching than a simple review of the volume of complaints might suggest. The type of complaint, therefore, is also very important to consider when assessing the level of risk. Closures and Retention: Many account closures occur voluntarily (the customer requests to close the account). Retention programs are critical to relationship management and in controlling attrition. With the credit card market remaining highly competitive, banks generally try to retain accounts when possible and when it would benefit the bank. If retention programs are not properly structured, adverse retention could occur. Monitoring the performance of retained accounts helps management detect adverse retention and determine whether retention practices are appropriate and effective. Account closures may also occur involuntarily, usually when the cardholder mismanages their account. For example, the account may be delinquent or over-limit when it is closed by the bank. The remainder of the Account Management section focuses on the management of these types of higher-risk accounts, which is generally referred to as collections. Collections (General) Collection activities serve to control and minimize credit card debt losses. In the past, collection activities have mainly focused on delinquent and over-limit accounts. However, more and more, management is identifying a need to spot potential warning signs for current accounts that may wind up in collections in the future. As debt-to-income ratios mount, it becomes more difficult for management to predict how a delinquent account will behave without sophisticated analytics. It is even more challenging to predict how a current account will behave. As such, sophisticated analytics capable of scoring individual accounts against specific treatment strategies and the resources available to apply those strategies are being deployed to not only address accounts already evidencing higher-risk (such as delinquent or over-limit) but also to head off delinquency or other problems for current accounts likely to become higher-risk. Early intervention on such accounts could significantly reduce the bank's costs (and, hence, impact earnings) in the future. Changes in underwriting standards, saturation of the card industry, escalation in bankruptcies, and stagnation in some geographic regions have heightened the need to carefully attend to collection practices. In addition, consumers often consider non-secured loans a low priority. Problems created by poorly-managed collection processes include, but are not limited to: Abuse of re-aging or other programs to mask delinquency and loss, which may also result in untimely, inaccurate management reports and inadequate loss allowances. Failure to maximize recoveries. Violations of laws or regulations. Reduced earnings due to increased losses, lowered recoveries, or assessed fines. Some banks have been ordered to pay large restitution and penalties for engaging in poor business practices, including deceptive or abusive collection practices. Reputation and legal risk, such as when collection activities are not consistent with regulations. The management and structure of collection activities vary depending on the bank's size as well as its available technology and expertise. Internal collection departments normally include one or more collection supervisors, and management monitors those supervisors to ensure they routinely review collectors' performances. Assessments of collector performance are usually based on a number of factors which, in general, include the number of accounts per collector, the number of contacts made, average time per contact, and dollars collected (as opposed to dollars promised). The optimum number of accounts per collector varies depending on factors such as the technology employed, type of account, and stage of delinquency. Potential negative ramifications of ineffective employee compensation programs include, but are not limited to, encouraging protracted repayment plans and aggressive account re-agings. Collections are sometimes outsourced to collection agencies. The Third-Party Relationships chapter talks about general outsourcing controls, including due diligence processes and contract provisions. Forward-flow contracts are sometimes established. They provide the third-party agencies with a set number of accounts at a determined frequency and assist management with forecasting collection placements. Concerns with outsourcing arrangements may include cases where the outside firms fund loan payments to cure delinquencies and thereby mask poor collections performance on their part or poor initial credit risk selection on the bank's part. Collection strategies are not static and are not uniform across all banks. The growing size and complexity of the credit card business, along with the labor-intensive nature of collections, makes the collections function increasingly difficult to manage. Specialized, state-of-the art technology such as complex automated dialing systems and intricate skip tracing tools is frequently used to optimize productivity and control overhead costs. The collections area also frequently uses champion/challenger strategies. Collection strategies generally attempt to direct efforts to those accounts with the greatest risk of loss and the greatest potential for collection. Ineffective strategies could result in reduced collections (and, thus, reduced earnings and liquidity). Some banks use scoring models to help predict the likelihood of collection and then employ collection practices such as phone calls, collection letters, legal letters, statement messaging, or enrollment in repayment programs, depending on the severity of the delinquency and what the score indicates. Successful subprime lenders have historically employed heightened collection efforts, such as calling delinquent borrowers more frequently, investing in highly-complex technology, and assigning more experienced collection personnel to seriously delinquent accounts. Collections for subprime lending is very labor intensive but critical to the program's success. Fee waivers are sometimes used as a collection tool. Collections personnel attempt to entice consumers to pay by surrendering or reversing certain fees. Often, the customer might be persuaded to pay more when fees are waived. Fee waivers are normally governed by policies that give clear guidelines as to acceptable limits on the level of fees waived (by dollar and/or percentage) as well as the types of fees that can be waived. The level of fees forfeited may be tied to collectors' compensation packages (with fee waivers reducing compensation to some degree). In this respect, collectors using fee waivers as a tool are not inclined to abuse such practices, where the abuse could substantially impact the institution's earnings (both due to fees lost and to potentially excessive compensation paid). Along the same lines, collection departments may focus on promises kept measurements as compared to promises to pay measurements when establishing incentive pay programs because a wide disparity sometimes exists between the volume of payments or dollars actually received from cardholders compared to the volume promised by cardholders. Collection activities encompass, but may not be limited to, over-limit accounts, delinquent accounts, charge-offs and recoveries, re-pricing, re-aging and various cure programs such as workout programs. The following sections discuss each of these areas. Over-Limit Accounts When an account is over-limit, it means that the account's balance has surpassed the account's credit limit, due to purchases or other assessments, such as fees. Over-limit authorization requests occur either by the cardholder contacting the bank or more frequently by the cardholder attempting to make a charge through the payment network. Customer-initiated requests can be routed to a credit analyst where, based on the credit analyst's lending authority and the account's history, credit score, or other criteria, the transaction is approved or denied. In many cases, over-limit approvals for purchases are automated rather than manually reviewed. Advanced systems use behavior scores, adaptive controls, and management's parameters to approve or deny over-limits without human involvement. In addition, a combination approach is sometimes used. Authorizations up to a pre-set dollar amount or percentage above the credit line (expansion criteria or buffers) might be handled by automated systems, and transactions falling outside the expansion criteria would be referred for manual review or in some cases, automatically declined. Even with reasonable authorization parameters set, certain instances can occur in which authorization is granted above the credit limit or even beyond established expansion criteria. For example, "variable amount" and "under the floor limit " charges can result in charges above an account's established credit limit or above the expansion criteria. A bank's authorization practices could be a contributing factor in causing over-limits. Failure to establish proper guidelines for when and under what conditions over-limits will be granted could result in increased credit risk. Over-limit authorizations on open-end accounts, particularly those that are subprime, should be restricted and subject to appropriate policies and controls. Examiners should direct their attention to practices whereby line increases are used to mask over-limit statuses. Further, without proper controls for handling payments returned for insufficient funds and for handling large-payment holds, these items can prematurely create available credit because only later (when the insufficient funds payment is returned) would the payment credit be reversed. In the mean time, the cardholder would have the opportunity to use the inflated available credit for purchases. Then, after reversal of the payment application, the cardholder could easily be over-limit to a degree which normally would not have been approved. Prudent over-limit practices are important for all credit card accounts, including both prime and subprime accounts. When a bank's fee assessment practices are designed to compound fees and other charges in order to trap its customers in a cycle of pyramiding over-limit debt, supervisory attention is warranted. Cases where cardholders go over-limit as a result of fees being assessed on their accounts have the potential of happening more often when the credit limits are small, such as with subprime accounts. In these cases, the account holders might go over-limit shortly after opening the account, especially when a small credit line is largely consumed by upfront fees leaving limited utility at account inception. When credit lines are small, the assessed over-limit fee(s) usually result in the over-limit balance being very high in proportion to the established credit line. No matter what size the credit lines are, fees are usually contributing factors to the level of over-limit balances. Some banks notify customers ahead of time of upcoming fee assessments, such as annual fees, such that the cardholder would have time to remit payment(s) to free up available credit to cover the upcoming assessment. Once an account is over-limit, some banks take steps to reduce the impact of fee assessments. For example, some banks do not allow a late fee to trigger an over-limit fee if the late fee is what makes the account over-limit. Other banks cap the number of over-limit and/or other fees that can be assessed or suspend over-limit and other fee assessments in certain cases, such as when an account reaches a certain past-due status. The waiving or capping of fees is intended to help control the level of the over-limit amount and, thus, hopefully help and motivate the customer to pay off the over-limit balance in a timely manner as well as retain a reasonable amortization timeframe. The AMG points out that practices that do not provide for timely repayment of over-limit amounts can significantly increase the credit-risk profile of the portfolio, and the increase is often magnified for subprime portfolios. It also notes that deficient reporting and loss allowance methods as a result of imprudent over-limit practices can understate credit risk. All banks are to carefully manage over-limit practices and focus on reasonable control and timely repayment of amounts that exceed established credit limits. In accordance with the AMG, examiners should look for proof that management's objective is to ensure that the borrower remains within prudent established credit limits that increase the likelihood of responsible credit management. The Home Equity Lending: Credit Risk Management Guidance , which would be applicable to home equity credit card lenders, declares a similar position to that of the AMG. The regulatory guidelines are written broadly to allow banks flexibility. Clearly fee structures, products, authorization strategies, and portfolio dynamics differ among banks, and absolute, un-flexible guidance would most likely not be reasonable or effective for all portfolios. Examiners should assess management's practices for ensuring over-limit accounts are repaid in a timely manner. Those practices generally include formalized (or defined) repayment programs that require cardholders to repay over-limit balances in a structured fashion. When an account goes over-limit, management might initially utilize techniques such as calling strategies and letter campaigns to attempt to get the cardholder to bring the account back within its established credit limit. Also, the cardholder's monthly payment due generally includes over-limit amounts, either in total or based on a structured pay-down that, if paid, would result in the timely repayment of the over-limit amount. In general, a bank's practices should strive to limit the dollar volume and number of chronic over-limit accounts. In some cases, chronic has been considered to be seven or more consecutive months. Failure by management to monitor the volume (dollars and number) of over-limit accounts, including appropriate segmentation to identify trends in chronic and non-chronic populations, is cause for concern. High or increasing volumes of over-limit accounts and/or balances, especially those considered chronic, suggest that the bank's over-limit controls and programs may not be effective. For the most part, the volume of over-limit receivables has declined since the AMG was issued. However, it still perpetually requires close attention and appropriate controls. Reporting of over-limit statistics is sometimes unclear or confusing. For example, reports sometimes only reflect accounts that are over-limit and current and might exclude accounts that are both over-limit and delinquent. Reports may be segmented based on the severity of over-limit amount, such as less than 10 percent over-limit, 10 to 20 percent over-limit, and so forth. This type of information provides management with further information to assess the severity of over-limit amounts and compliance with policy parameters. The examination's evaluation of over-limit practices considers both accounts that are over-limit and current as well as accounts that are over-limit and delinquent. Delinquent accounts (which might or might not be over-limit) are discussed next. Delinquent Accounts Delinquencies are a primary indicator to consider when assessing the quality of card portfolios. Delinquency rates change constantly due to fluctuation in consumer behavior patterns and changes in general economic conditions. Rising delinquencies are usually the first sign of credit deterioration. The level and trend of the delinquency rate combined with projected loan growth can give an indication of potential charge-offs which, in turn, impact earnings and capital. As such, delinquency status is often the primary segmentation tool used in credit card loss allowance methods, as discussed in the Allowances for Loan Losses chapter. For regulatory reporting purposes, banks are to report the full amount of the credit card receivables that are past due, not simply the delinquent payment amounts. Past due status should be determined in accordance with contractual repayment terms. Grace periods allowed after the loan technically has become past due but before the imposition of late charges are not to be taken into account in determining past due status. Open-end credit cards are to be reported as past due when the customer has not made the minimum payment for two or more billing cycles. Closed-end credit card loans that require scheduled monthly payments are to be reported as past due when either principal or interest (or both) is unpaid and is in arrears two or more monthly payments. However, at a bank's option, they may be reported as past due when one scheduled payment is due and unpaid for 30 days or more. The term delinquency bucket is often used when referring to delinquent accounts. Buckets are generally described as periods of about 30 days. For example, there is a current bucket, a 1 to 29 days delinquent bucket, a 30 to 59 days delinquent bucket, a 60 to 89 days delinquent bucket, and so on. Sometimes banks refer to buckets as bucket one, bucket two, and so forth. When a cardholder fails to make his or her first payment due on the credit card account, it is typically referred to as a first payment default , or first-pay default. First-pay defaults can be segmented into two categories: No-use, no-pay accounts - the cardholder has not made any purchases or cash advances and did not make the first payment due (where payment due is prompted by fees or other upfront charges assessed to the card). Use, no-pay accounts - the cardholder has used the account to make purchases or cash advances and has not made the first payment. The two categories can represent very different types of risk, but the risks of these accounts are not mutually exclusive. In the case of no-use, no-pay accounts, the consumer could be suggesting (by not remitting payment) that they did not understand the fees being assessed to the card upfront or that they no longer want the card (possibly due to its fees). Either of those scenarios might suggest compliance and/or reputation risk. Or, financial stress may be preventing the cardholder from making the first payment due. With no-use, no-pay accounts, the bank generally has not lost cash because no payment has been made to merchants. Rather, if the account never pays, the bank would have lost costs incurred in originating the account. However, in the case of use, no-pay accounts, the bank has remitted payment to merchants for the purchases, and if the cardholder does not pay, the bank will not recover the amount given to the merchant (unless the transaction is subject to charge-back). Use, no-pay accounts might be an indication of fraudulent activity. Or the lack of payment may be due to financial stress. If that is the case, it may suggest flawed underwriting criteria, particularly if the volume is substantial. Subprime portfolios usually reflect higher rates of first-payment default than do prime portfolios. Collection strategies for delinquent accounts vary, often depending on whether delinquency is considered early stage or late stage and on the type of account. Typically, accounts in earlier delinquency stages require less collection effort than those in later stages. Early-stage collection efforts often include statement messaging and letters to the cardholder. Later-stage collection efforts usually consist of frequent calls to the cardholder and may also encompass enrollment in defined repayment programs that are discussed later in this chapter. Accounts that are both over-limit and delinquent generally require strong collection efforts as do subprime accounts. The examiner's evaluation of past due loans may incorporate the Lagged Delinquency Ratio which is the ratio of credit card loans that are past due 30 days or more plus those credit card loans on non-accrual measured against total outstanding credit card loans on a three quarter lag (total outstanding loans approximately 270 days, or three quarters, prior to the current period). It is particularly helpful when a bank has experienced rapid growth. A large volume of new loans being booked can mask credit problems by artificially lowering the current delinquency ratio as new loans (which would not yet be delinquent) are added to the denominator. A relatively high ratio can be an early warning sign of weak underwriting standards and potential future delinquency problems as the loans season. The accuracy and integrity of the bank's system for reporting past due credit card loans is critical to the proper and timely identification of credit risk. The examiner's evaluation of past dues and the associated credit risk considers the bank's partial payment, non-accrual, and re-aging practices, as well as the volume and trends of delinquencies. It also considers whether minimum payments are sufficient to reasonably amortize the debt. Partial Payments: The Uniform Retail Credit Classification and Account Management Policy (Retail Classification Policy) and Call Report instructions address partial payments. A payment equivalent to 90 percent or more of the contractual payment due may be considered a full payment in computing past due status. Alternatively, the bank may aggregate payments and give credit for any partial payment received. For example, if the payment due is $40 per month and the borrower makes payments of $20 per month for a six-month period, then the loan would be $120 ($20 shortfall times six months), or three full months, past due. A bank can use either or both of the methods in its portfolio but may not use both methods simultaneously with one loan. Improper partial payment practices could mask delinquencies and losses. Non-accrual : Regulatory guidelines do not require consumer loans (including credit card loans) to be placed on non-accrual status when principal and interest remain unpaid for 90 days (nor do they require a similar loan secured by a 1-4 family residential property, such as a home equity credit card, to be put on non-accrual status). However, these loans are subject to alternative methods of evaluation to assure that the bank's net income is not materially overstated. Management's non-accrual practices are evaluated on a case-by-case basis. Proactive non-accrual policies provide a more accurate and timely reflection of actual operating performance. Examples of proactive policies include placing accounts on non-accrual status when the account becomes 90 days past due, when the cardholder enrolls in a Consumer Credit Counseling Services (CCCS) program or workout program, or when the borrower threatens to file for bankruptcy protection. These types of policies can be encouraged; but, the lack of them is not necessarily grounds for criticism. Some credit card servicing platforms do not have the capability to place individual loans on non-accrual. To the extent that a bank elects to carry loans as non-accrual on its books, the bank must also report those loans as non-accrual on its Call Report. Furthermore, when one of a borrower's loans is assigned to non-accrual status, any other loans outstanding to that borrower should be evaluated to determine whether one or more of them should also be assigned to non-accrual status. Lastly, state statues, regulations, or rules that impose more stringent standards for non-accrual of interest take precedence. Re-aging : Re-aging is technically defined as returning a delinquent, open-end account to current status without collecting the total amount of principal, interest, and fees that is contractually due. It generally refers to the removal of a delinquent account from normal collection activity after the borrower has demonstrated over a specified period of time and through some degree of performance that he or she is capable of fulfilling contractual obligations without the intervention of the collection department. It is viewed as one method of helping borrowers overcome temporary financial difficulties, such as job loss, medical emergency, or change in family circumstances, and is meant to be used for borrowers who have the capacity to satisfactorily service their debt, but are unable to catch-up on prior delinquency. Re-aging is often referred to as curing or rolling-back an account and is intended to prevent the account from remaining perpetually delinquent. A few banks continue to re-age on an exception basis, and some banks re-age manually. However, most banks re-age as a regular practice and use automated systems to complete the re-ages. While re-aging practices are usually reviewed during the examination, cases where re-agings total a sizable percentage of accounts (such as more than five percent) or have unexplained spikes should be even more carefully looked into. Overly lenient practices can cloud the true performance and delinquency status of accounts and, potentially, of the card portfolio as a whole. Improperly managed re-aging practices can result in understated charge-offs and can impede accurate analysis of loss allowances. As such, establishing clearly defined policy guidelines and parameters for re-aging is critical, as are ensuring the reasonableness of those guidelines and monitoring their effectiveness. Other important practices for management include monitoring both the number and dollar amount of re-aged accounts, collecting and analyzing data to assess the performance of re-aged accounts, and determining the impact of re-aging practices on past due ratios. The Retail Classification Policy governs re-aging. According to its provisions, an open-end account can be considered for re-aging if: The debtor has demonstrated a renewed willingness and ability to repay the loan, The account has existed for at least nine months, and The borrower has made at least three consecutive minimum monthly payments or the equivalent cumulative amount. (Funds may not be advanced by the bank for this purpose.) This requirement may be satisfied in any one of three ways: Receipt of three consecutive monthly payments. For example, if the minimum due is $20, the cardholder would have paid $20 in month 1, $20 in month 2, and $20 in month 3. Receipt of a cumulative amount equating to three minimum monthly payments within the three month period, regardless of the size or timing of the payments. For example, if the minimum due is $20, the cardholder could have paid $15 in month 1, nothing in month 2, and $45 in month 3. Receipt of one lump sum equal to or exceeding three minimum monthly payments. For example, if the minimum due is $20, the cardholder would have paid a lump sum of $60. For an over-limit account, all of these conditions must be met: The account meets the other re-aging criteria. It is re-aged at its outstanding balance. No new credit is extended to the cardholder until the balance falls below the pre-delinquency credit limit. Adequate information systems should identify and document any account that is re-aged, including the number of times such action has been taken. The Retail Classification Policy states that an open-end account should not be re-aged more than once within any 12-month period and no more than twice within any five-year period. In addition to the one time per year/two times per five year rule, a bank may re-age an account after it enters a workout program. Re-aging for workout purposes may only occur after receipt of three minimum consecutive minimum payments, or the equivalent cumulative amount, as agreed upon under the workout program. Re-aging for workout purposes is limited to once in a five year period. Banks may also adopt re-aging standards more conservative than those identified in the Retail Classification Policy. The decision to re-age, like any other modification to the contractual terms, should be well-supported. Documentation should normally show that the bank's personnel communicated with the borrower, the borrower agreed to pay the loan in full, and the bank personnel confirmed that the borrower has the ability to repay the loan. However, with the use of auto-re-aging, the borrower's willingness is usually less clearly documented. In general, meeting the three payment requirement has been considered adequate to demonstrate both the ability and willingness to repay. While this practice may be considered acceptable, it also emphasizes the need to segregate the auto-re-aged population from the manually re-aged population for the purpose of being able to monitor performance of the two populations independent of one another. Management can also take other actions to augment and support the auto-re-aging process. For example, as a good faith effort, some banks send a letter to the cardholder in an attempt to ensure ability and willingness and to provide for contact should the cardholder wish to discuss the transaction. Some banks also review current credit reports and behavior scores to assess a borrower's capacity. If the quality of the auto-re-aged population shows continued deterioration, the practice of auto-re-aging may be considered to be imprudent and cited as such by examiners. For example, if a high percentage of auto-re-aged accounts return to delinquent status and/or go to charge-off, management's policy and procedures may be overly liberal and ineffective. The same holds true for the performance of manually re-aged accounts. Examiners should review management's re-aging practices and the volume of accounts and receivables re-aged. In doing so, they may consider the Dollar Volume of Re-aged Accounts to Total Credit Card Loans on a Three Quarter Lag Ratio. Combined with delinquency and loss rates, it indicates the level of accounts that have experienced difficulty meeting minimum payment requirements. If relatively high, this could indicate management's aversion to recognizing losses. Re-Pricing Re-pricing is the process by which finance charges and/or fees (most often finance charges) are adjusted to reflect perceived changes in the risk-profile of the account. Re-pricing initiatives can include bureau-based, performance-based, or other initiatives. Re-pricing is often used to adjust pricing upward as a collection strategy and is frequently referred to as penalty pricing . Penalty pricing generally is used to offset collection costs (as compared to other fees which may be primarily intended to help the institution invest in technology, expand Automated Teller Machine ( ATM) networks, or address other initiatives). Bureau-based re-pricing refers to finance charge changes made to accounts based on changes in borrower credit-worthiness identified through shifts in credit bureau scores or other credit bureau information. As such, it is tied to the customer's performance with all creditors. While the technique can be used to adjust the pricing down or up, it is most often used to increase pricing. Performance-based re-pricing refers to finance charge changes made in response to borrower performance on the account with the issuing creditor. The strategy typically relies on internal behavior scores and delinquency patterns, but may also incorporate a number of factors including line utilization and bureau score. Like bureau-based analysis, performance-based analysis can be used to increase or decrease charges, but is most frequently associated with default price increases. When employed for delinquent accounts, there is often a provision to return to a lower finance charge following a specified period of sustained on-time payments. Increasingly, banks are running periodic analysis of their portfolios and changing the terms of individual loans based on the results. For example, some banks have determined that certain yields have not been sufficient to offset risk, so they have implemented aggressive up-pricing campaigns. Universal default provisions have also become popular and subject consumers to upward pricing for various reasons. For example, a declining credit score can cause default pricing to kick-in. In addition, paying other credit obligations late or one of many other factors can also cause default-pricing to kick in. In some cases, these re-pricing practices may drive away good customers, leading to a concentration of higher-risk accounts. Examiners should determine if re-pricing initiatives received thorough and controlled testing before full implementation and how the re-pricing initiatives impact the portfolio and the bank's performance. Not all re-pricing occurs as a result of adverse trends in the consumers' profile. For example, some institutions offer graduation programs that reward sustained successful performance of higher-risk borrowers by moving them from a subprime-type account (typically a low credit limit with a high price) to a more traditional or mainstream product that would have a lower interest rate, lower overall fees, and/or a higher credit limit. Examiners should assess management's internal controls and on-going monitoring of re-pricing initiatives. Provisions of re-pricing policies and procedures generally include: When re-pricing initiatives can be instituted. The length of time an account will stay re-priced before being re-evaluated for additional price changes (either upward or downward). Remedies for cardholders who remain delinquent despite being penalized. Any other additional requirements of the cardholder. Examiners may encounter accounts that are subject to the Soldiers' and Sailors' Civil Relief Act of 1940 (SSCRA). The SSCRA addresses service members' credit obligations that were incurred prior to active military duty and that service members are unable to meet due either to their absence from home or from the financial consequences of significantly lower military pay in comparison to pay received for their normal (civilian) employment. The SSCRA does not apply to any obligation entered into by a borrower after their military service has commenced. Some key provisions of the SSCRA include: Applies to all persons on active duty in military service of the United States as well as to certain dependents of those service members and certain other liable individuals. Requires no specific form of notice to creditors, but sufficient proof of entry to military service is to be retained in creditors' records. Provides for re-pricing, limited to a six percent interest rate cap, effective upon commencement of active duty regardless of when the creditor is notified. Interest charges in excess of the limit are to be forgiven and may not be collected after the customer is released from active duty. Burden of proof is on the bank to show that the borrower has not sustained a material impact from active duty status (and thus may not be subject to the rate cap). The SSCRA is discussed in FIL-134-2002. Management normally consults with legal counsel about the SSCRA and with its external accountants about applying the provisions of the SSCRA. Repayment Plans Banks have instituted various repayment plans such as workout plans, temporary hardship programs, and Consumer Credit Counseling Services (CCCS) programs. The object of these programs is to collect the amount due and improve the borrower's subsequent performance. Banks are encouraged to work with borrowers on a case-by-case basis keeping in mind that use of these types of repayment programs to defer losses or to mask poor initial credit risk selection practices is improper. Workout Programs: A former open-end credit card account upon which credit availability is closed and the balance owed is placed on a fixed (dollar or percentage) repayment schedule in accordance with modified, concessionary terms and conditions is considered a workout credit. Generally, the repayment terms require amortization of the balance owed over a defined period. These arrangements are typically used when a customer is either unwilling or unable to repay the account in accordance with its original terms but shows the willingness and ability to repay the account in accordance with modified terms and conditions. Workout programs are generally directed at cardholders with longer-term moderate to severe credit problems. Temporary hardship programs which are intended to help borrowers overcome short-term financial difficulties are not considered workout programs unless the program's duration is longer than 12 months (including renewals). Characteristics of improperly managed workout programs include liberal repayment terms with extended amortizations, high charge-off rates (although loss rates on workout programs are normally higher than loss rates on the remainder of the credit card portfolio because of the cardholders' weakened financial conditions), moving accounts from one workout program to another, multiple re-agings, and poor reporting of program performance. Repayment terms for workout accounts vary widely and sometimes have not included sufficient reduction of interest rates to facilitate timely repayment and assist borrowers in extinguishing the debt. In some cases, reduced minimum payment requirements coupled with the continued assessment of fees and interest extended repayment well beyond reasonable timeframes. To address these problems, the AMG set workout program parameters. Per the AMG, the design of workout programs should maximize principal reduction and generally strive to have borrowers repay debt within 60 months. To meet these guidelines, banks might have to substantially reduce or eliminate interest rates and fees such that more of the payment is applied to reducing the principal. In addition to clearly documenting any exceptions to the AMG's guidelines, including compelling, supporting evidence that eased terms and conditions are warranted, management should have policies and procedures specifying: When workout programs can be used. Terms of the agreement. Remedies for cardholders who do not fulfill the agreed upon payment obligations. When and if accounts can be re-aged. And any additional requirements of the cardholder. Examiners will also confirm whether management has instituted strong internal controls and on-going monitoring for determining if the programs are effective and beneficial. The Dollar Volume of Workout Credits measured against Total Credit Card Loans on a Three Quarter Lag may be considered during the examination. Combined with delinquency, loss, and re-aging rates, the ratio indicates the level of accounts which have experienced difficulty meeting minimum payment requirements. If relatively high, this could indicate management's aversion to recognizing losses. Where workout programs are not managed properly, examiners should criticize management and require appropriate corrective action, which may include increasing loss allowances, accelerating charge-offs to an appropriate timeframe, and revising the design of the bank's workout programs for future entrants. Temporary Hardship Plans: Temporary hardship programs are designed for borrowers with specific, short-term difficulties and who are expected to return to satisfactory performance in a relatively short time. As mentioned, most temporary hardship plans are not considered workout programs for purposes of the AMG. Accounts are adjusted back to the original repayment terms when the agreed-upon term is completed or when the account is dropped from the program due to missed payment. Consumer Credit Counseling Service (CCCS) Plans: CCCS is a third-party, nonprofit organization designed to assist consumers who have on-going delinquency problems. A consumer's acceptance into the program is based on a CCCS counselor's determination that the consumer's financial situation is salvageable. Under the direction of the CCCS counselor, the cardholder is required to establish and adhere to a budget as well as make debt payments. Debt payments are remitted to CCCS which then submits the payments to the bank according to the negotiated terms. The negotiated terms can vary from full payment to significant reduction in payments of principal and interest. When a consumer is accepted into CCCS, collection procedures cease. The bank may elect to waive late charges or any other fees. The account may also be re-aged (if it meets the appropriate criteria) and/or may be put on non-accrual. If a cardholder fails to pay as agreed under the program, the agreed-upon terms revert back to the account's contracted terms and collection procedures resume. Examiners normally determine whether management has established policies and procedures to monitor and evaluate accounts in the CCCS program and has accurately reported and sufficiently accounted for CCCS accounts in allowance calculations. Settlement Agreements In lieu of repayment plans, banks sometimes negotiate settlement agreements with borrowers who are unable to service their unsecured open-end credit. Settlements are also known as debt forgiveness programs. In a settlement arrangement, the bank agrees to forgive a portion of the amount owed, and the borrower agrees to pay the remaining balance with a lump-sum payment or with defined payments over a specific short period. Well thought out policies, in general, limit the amount (dollar or percentage) forgiven and establish guidelines for repayment timeframes. Further, they provide for the establishment and maintenance of adequate allowances for accounts subject to settlement arrangements. Actual credit losses on individual consumer loans should be recorded when the bank becomes aware of the loss and, in general, the amount of the debt forgiven in a settlement arrangement should be charged-off immediately. However, immediate charge-off may not always be practical. In those cases, banks may treat amounts forgiven as specific allowances, and upon receipt of the final settlement payment, charge-off deficiency balances within 30 days. Generally, if a cardholder who is settling an account has more than one account at the bank, all of the customer's accounts should be considered for settlement. Clearly, the inability of the customer to perform under the contracted terms of one account suggests the potential inability to perform on the other accounts as well. Charge-Offs Loss rates are a reflection of credit underwriting and marketing efforts. They also reflect economic conditions and other external factors. Common drivers of credit loss include rapid growth or poor origination strategies that have resulted in adverse selection. High levels of subprime lending also drive loss rates up. Credit card loans are charged-off when they are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. Charge-off does not mean that the credit card loan has absolutely no recovery or salvage value but, rather, that it is not practical or desirable to defer writing off this basically worthless asset even though partial or full recovery may eventually occur. While credit card losses for individual credit should be recorded when the bank becomes aware of the loss, in no case should charge-off exceed the timeframes stated in the Retail Classification Policy: For open-end accounts, when the account becomes past due 180 cumulative days from the contractual due date. For closed-end accounts, when the account becomes past due 120 cumulative days from the contractual due date. Open-end accounts that are placed on a fixed repayment schedule are subject to this timeframe. For operational purposes, charge-off should be taken no later than the end of the month in which the applicable period elapses. Any full payment received after the applicable period but before month-end charge-off may be considered in determining whether charge-off remains appropriate. Loss timeframes specific to accounts of bankrupt or deceased customers are also articulated in the Retail Classification Policy: For loans in bankruptcy, the shorter of (i) the normal timeframes specified in the guidance or (ii) within 60 days of receipt of notification of filing from the bankruptcy court, unless the bank clearly demonstrates and documents that repayment on the account is likely to occur. For loans of deceased customers, the shorter of (i) the normal timeframes specified in the guidance or (ii) when the loss is determined. Loss practices for fraudulent loans are discussed in the Fraud section of this chapter. The Retail Classification Policy does not preclude the adoption of more stringent internal charge-off policies. Further, when a portfolio's history reflects high losses and low recoveries, accelerated charge-off timeframes are normally appropriate and necessary. Some banks have instated, at their own will or at the prompting of regulators, policies that accelerate charge-offs. If a cardholder has more than one account with the bank and one of the accounts is charged-off, appropriate actions for the consumer's other accounts at the bank need to be determined. Depending on the situation, appropriate action might include charging-off or closing the account and/or increasing allowances. At the time of charge-off, most credit card banks only charge a portion of the gross loss to the ALLL. Rather, they attempt to only charge the loan's principal balance to the ALLL. The remainder of the balance (fee and interest losses) is charged back directly against the income statement. This process of splitting principal losses from fee and interest losses is known as purification . The Allowances for Loan Losses chapter discusses principal losses versus fee and interest losses in more detail. In lieu of charging-off the entire loan balance, loans with non-real estate collateral (for example, deposits) may be written down to the value of the collateral, less cost to sell, if repossession of collateral is assured and in process. Guidelines for loans secured by real estate are detailed in the Retail Classification Policy. Business cards, such as travel and entertainment cards, are evaluated on a case-by-case basis. Under no circumstances should the formula approach be used to charge-off large business type loans serviced by the bank's installment department. Examiners should review charge-off rates and volumes. They may consider the Lag Ratio, which is the ratio of net credit card losses for the last three quarters measured against total delinquent credit card receivables as of three quarters ago (delinquent loans include loans past due 30 to 89 days plus total non-current loans). The lag ratio provides an estimate of the percentage of delinquent loans which subsequently are charged off. Examiners should review system settings for charge-offs to verify that the parameters correspond to those described in the bank's policies and comply with the Retail Classification Policy. Examiners should also review cases where credit card loans have not charged-off at the shorter of the timeframes within the banks' policies or within the Retail Classification Policy. When reviewing the banks' charge-off data and reports, examiners should be careful to factor in any changes made in the bank's charge-off timing and practices that may be impacting charge-off volumes and should also understand how the bank's purification processes are impacting the reported volumes. Post-Mortem Once an account charges-off, the bank normally is still not done managing the account. The need and desire for post-mortem (or post-charge-off) portfolio grooming continues to grow. Customized models that can project potential cash flow from charged-off portfolios have been developed and help the bank determine the value of keeping or selling the accounts. In addition, post-mortem analysis can help to identify weak points in portfolio management that may have influenced the breakdown of the program or account. By identifying the weak points, management can then take appropriate action to ensure the weaknesses are corrected and to address any remaining risks from existing actions of the same or similar nature. Recoveries: As part of post-mortem practices, the bank manages recoveries. Recoveries represent the money (collected payments) received on an account after it is charged-off and can consist of principal, interest, and fees. The amount recovered is dependent on several factors, including policies for collections and charge-offs, systems for internal control, supervision over the collection department, experience of the collection staff, and collection efforts during the various delinquency stages. A high level of recoveries compared to charge-off volume may indicate a conservative charge off policy. Or, it may indicate inadequate collection efforts prior to charge-off, a poorly trained collection staff, or inadequate management supervision. A low level of recoveries compared to charge-off volume may indicate a lax charge off policy, inadequate collection efforts, a poorly trained collection staff, or inadequate management supervision. Recovery efforts may be in-house or outsourced to collection agencies. In addition, charged-off accounts can be sold to third-party entities. Most often, banks maintain charged-off accounts in-house for several months before turning them over to collection agencies or selling the accounts. The collection agencies normally agree to collect the accounts based on a fee that depends on the degree of complexity of the collection. The basis for sales of charged-off accounts is usually a certain percentage of the dollar amount of the charged-off account. Banks are expected to properly report recoveries, as set forth in many instructional materials including, but not limited to, the AMG, accounting guidance, and Call Report instructions. Usually some or all of the recoveries are reported as recoveries to the ALLL. However, if the amount that the bank credits to the ALLL is in excess of the amount previously charged against the ALLL for that loan (which may have been limited to principal), the bank's net charge-off experience will be understated. Rather, any recovery amounts collected in excess of the amount charged against the ALLL for a loan should be recognized as income. Also, the rebooking of charged-off assets is an improper practice. Fraud Fraud is a continuing problem for banks that engage in credit card activities. As a result, banks, the Networks, and other vendors have strengthened systems and controls to reduce fraudulent activities. Advances in fraud detection have resulted in fraud losses, measured as a percentage of total sales volume, decreasing over time for many banks. Entities can curb the amount of fraud losses by tracking fraudulent activities according to type and by designing control systems that detect fraudulent activities in a timely manner. Some activities banks have instituted to reduce fraud include: Improved application review, including verification procedures. Call-to-activate requirements for new cards and re-issued cards. Pattern recognition programs and systems. Increased level of payment review. Authorization improvements. Increased training of employees in fraud detection practices. Many banks have dedicated fraud staffs that oversee the many activities required when potential fraud is identified. When a cardholder alleges fraudulent activity on their account, an investigation is undertaken and, if delinquent, the account's delinquency status is either rolled-back or frozen. If the investigation negates the fraud allegation, proper actions include returning the account to its previous delinquency status and immediately reinstating collection efforts. For accounts that do constitute fraud, the fraudulent loan should be charged-off within the shorter of (i) 90 days of discovery or (ii) the general delinquency timeframes specified in the Retail Classification Policy (and discussed in the Charge-off section of this chapter). The charge-off should be taken by the end of the month in which the applicable time period elapses. Fraud losses are reported as a miscellaneous expense and are not applied against the ALLL.

Reporting and Tracking Tracking and monitoring the credit card portfolio is one of the most critical risk management functions performed and is one of the best defenses against an economic downturn. The quality of accounts, reflected in credit scores or other indicators, is constantly changing through attrition, new solicitations, and/or demographic shifts. Delinquency and loss rates also change constantly because of fluctuation in consumer behavior patterns and changes in general economic conditions. If management is not aware of these changing conditions, it cannot quickly react to adverse trends and build upon past successes. Reports are prepared at various intervals (daily, weekly, monthly, quarterly), depending on the report's intended usage. In addition, the complexity and sophistication of reports varies depending on the size and complexity of the programs as well as of the bank itself.

Because credit card portfolios generally consist of a large number of relatively small-balance accounts (as compared to other types of loans), identifying the changing conditions and evaluating the quality of the credit card portfolio on a loan-by-loan basis is inefficient and burdensome. Rather, reporting and tracking of the portfolio and its various segments provides the most efficient method of identifying changes and evaluating portfolio dimensions, composition, and performance. Effective reporting and tracking promote early and accurate identification of existing or potential problems (operational or otherwise) and promptly identify needed policy and procedure revisions. Successful reporting and tracking informs and arms management with the tools to understand the risk characteristics of the portfolio, which can be quite varied in nature. Review of management reports should be undertaken during the on-site examination to ascertain the comprehensiveness and accuracy of the information provided therein. In the absence of sufficient reporting, examiners may need to request that management develop additional reports or the examiner may need to calculate certain data (such as utilization rates, average outstanding balance per account, delinquency ratio, charge off rates, or other items of interest) with whatever information may be available. If sufficient reporting is not evident, management should be appropriately criticized.

Many well-run companies have highly evolved analytics and reporting systems. Effective reports provide management with the tools to assess whether operations remain consistent with strategic objectives and within established risk, return, and credit performance tolerances. They also aid management in identifying developing trends, making strategic decisions, detecting potential problems, managing vendor relationships, and responding to changes in economic, industry, and regulatory environments.

Segmenting To maximize the effectiveness of portfolio tracking, management uses segmentation, which was introduced in the Marketing and Acquisition chapter. The various sub-populations comprising the credit card portfolio may have vastly different performance patterns and levels of risk. These differences might be masked if receivables are only analyzed on a total portfolio basis. Management can segment a portfolio many ways. The use of multiple approaches is common and encouraged. Each segmentation method provides different perspectives and insights. With more information, management is better able to analyze and understand their customers, pinpoint the cause of asset quality problems, eliminate unsuccessful strategies, and further refine successful strategies. Common segmentation methods include, but are not limited to: Product line. Geographic location. Vintage. Time-on-book. Marketing channel or acquisition method. Credit bureau score. Delinquency stage. Behavior or other risk score. Utilization rate or bands. Owned (on-book) portfolios, securitized portfolios, and other off-book portfolios (potentially such as portfolios associated with Rent-a-BIN programs). Dollars and Units Management reporting often includes insight both on a dollar basis and on a number of accounts (or unit) basis because trends might be more distinct or may arise earlier in one type of reporting as compared to the other. Levels, Trends, and Performance Effective reporting provides for an analysis of levels and trends to determine the bank's condition from a strictly analytical viewpoint. Concerns may arise if reports merely depict data and do not clearly evidence analysis of performance results and trends. For example, credit line increase reports should not only identify the number and volume of credit line increases granted but should also depict the performance of those accounts after they receive the line increase so that management can assess whether its line increase practices are effective. Key Indices Management reports should identify various key indices because such indices can be beneficial in determining the quality of the credit card portfolio. Key indices should generally be tracked for each portfolio segment to gauge performance within that segment or to the managed portfolio. Calculations of ratios can vary from bank to bank, and as such, the examiner will need to ensure that they understand each particular bank's reporting and measurement methods. Projected Versus Actual Performance Effective portfolio management clearly communicates portfolio objectives such as growth targets, utilization expectations, rate of return hurdles, and default and loss expectations. Management normally has a variety of reports that monitor actual performance as compared to projected performance for these types of objectives. For example, management may review variances between actual and projected performance of a certain portfolio to enhance or modify future marketing campaigns. Peer Comparisons Management often tracks performance and data on its peers. While this can be a valuable tool, peer data for comparative purposes may be distorted due to niche marketing, specialized card products, or extensive affiliate support. When using peer comparisons, consideration must be given to the ways the peers' programs are similar to the bank's programs as well as how the programs differ and how those differences may impact ratios and data reviewed. Ownership and Clarifying Information Although not required, the most effective reports identify the report's preparer (if not system generated) and include clarifying information, such as definitions of various items in the reports, when helpful. For example, the definition of active account can vary from bank to bank and even within a bank. The inclusion of such items helps to ensure that the reader is able to fully understand the report and accurately draw conclusions from the reported information. Common reports The following types of reports are common, although segmentation methods within the reports vary widely. The list is merely illustrative, not exhaustive. Report Type Description and/or Common Contents Application Distribution Reports These reports show the disposition of applications over time. The volume of applications received; approval, rejection, and override rates; and the distribution of scores are usually detailed. Delinquency Distribution Reports These reports show delinquency by credit bureau score over time. Consequently, they help validate the bank’s scoring system by demonstrating whether delinquent accounts are rank-ordered by score. A decrease in the differentiation between scores and delinquency rates over time may indicate an erosion of the scoring system. Chronology Logs These reports detail significant events, both internal and external. Items recorded might include, but would not be limited to: major solicitation campaigns, change in cutoff scores or other underwriting criteria, economic recessions, policy changes, and regulatory changes. These logs can assist management in explaining changes in portfolio performance. Over-Limit Reports These reports usually detail the type, number, and dollar volume of over-limit accounts. They are often segmented into “over-limit and current” population and the “over-limit and delinquent” population. Performance of over-limit accounts is also tracked. Over-limit reports should correlate with delinquencies, charge-offs, and fraud losses to assist management in determining whether its over-limit parameters adequately control losses or need refinement. Tracking manual over-limit authorizations by credit analyst helps to ensure accountability and to assess the individual analyst’s decision-making skills. Utilization Reports These reports depict utilization, usually by band or range (for example, in 10 percent increments). Since they extend beyond 100 percent utilization when needed, these reports sometimes overlap with over-limit reports. The reports can include a variety of data, including dollar volumes, units, and available credit. Purchase volumes and fee and interest assessment volumes may be split out. The reports also can track performance of accounts by utilization range. Cure Program Reports These reports depict volume (unit and balance), loss performance, and performance of the accounts at specified intervals after entering the cure programs. They are generally segmented by program and compare performance of those accounts in the particular cure program to those accounts in the general population. Concentration Reports These reports depict geographic, customer base, card type, or other types of concentrations and may include data such as the dollar volume, unit volume, and performance data (delinquency, payment rates, loss information, and so forth) for the accounts in the concentration population. Re-aging Reports These reports track re-aged accounts against total accounts and dollar amounts outstanding to evaluate the effect re-aging procedures have on overall delinquency and charge-off ratios. The reports also track performance of the re-aged population, usually by month, after the account has been re-aged and usually by type (manual or automated). Tracking manually re-aged accounts by credit analyst or approving officer and identifying the reason for re-age helps to establish accountability. Credit Line Increase Reports These reports usually identify the dollar volume and number of credit line increases as well as performance of the accounts after the increase. They might also depict average line increases. Loss Reports These reports usually measure the dollar volume and number of accounts charged-off. They often also include the average balance of charged-off accounts and recovery information. A break-out between principal and fees and interest is frequently included. Roll-Rate Reports / Migration-to-Loss Reports These reports identify the migration (or movement) of dollar balances and/or units through the delinquency stages and charge-off. These reports are discussed in detail in the Allowances for Loan Losses chapter. General Collections Reports These reports identify data on various collection department functions. For example, they might include productivity information (call penetration, right-party contacts, promises made, promises kept, dollars collected, and staffing summaries). They may also identify special handling queue information or a variety of other information. Payment Reports These reports generally depict payment volumes and numbers (usually by month), insufficient funds volumes and items, payment rates, and average payment size. Exception and Override Reports These reports identify instances where practices have been outside of established policy guidelines or where credit decisions are contrary to those suggested by the scoring system. Information included will vary depending upon what type of exception or override is being tracked. Customer Service Reports These reports identify various statistics for the customer service department. They might depict the volume of calls answered by automated systems, the volume of calls handled by customer service representatives, the average speed of answer, the average length of a customer service call, customer service mail volume handled, length of time to respond to mail inquiries, and so forth. Ad Hoc or Special Study Reports These reports are completed on a case-by-case basis when management wants or needs to know about something that is not normally tracked on a regular basis. For example, many banks developed such reports when the AMG was first issued (to determine the impact of the guidance) and when Hurricane Katrina occurred. Other Types of Reports There are many other reports, some of which cover fraud, settlements, and vendors. Examiners should ask for the main reports that management uses (such as reports contained in board packets and reports reviewed regularly by department managers).

Summary of Examination Goals – Portfolio Management Overall goals when reviewing portfolio management are to assess the effectiveness of activities and strategies used to enhance performance and increase profitability of existing portfolios and to determine the implications of those activities and strategies have on the quality of the portfolio and the quantity and direction of risk within the portfolio. Furthermore, examiners should assess whether the bank's strategies comply with applicable regulatory guidance, such as the AMG and the Retail Classification Policy. A few summary concepts of examination guidance provided throughout the chapter include:

• Identify the departments or individuals responsible for portfolio management activities.
• Review policies, procedures, and analytical techniques for portfolio management to ensure they are comprehensive and thorough.
• Evaluate account management practices and the corresponding policies and procedures for adequacy, considering the individual bank's circumstances.
• Assess the tools, systems, and available MIS to ensure that management is provided with necessary and timely information.
• Determine whether management's segmentation strategies for the card portfolio and its analysis of the performance of the segments are sufficient. For example, do they allow management to effectively monitor credit card receivables, identify trends, and proactively address developing problems.
• Review segmentation criteria, and assess its usefulness for portfolio analysis, including adverse classifications (as outlined in the Adverse Classifications chapter).
• Assess systems and practices for authorizing transactions.
• Assess systems and practices for managing credit lines and determine whether the practices conform to regulatory requirements.
• Review over-limit policies and practices and determine whether the bank's management of over-limit accounts satisfies regulatory requirements.
• Determine fee assessment practices and fee waiver practices as well as the resulting impacts on the portfolio and earnings.
• Review minimum payment structures and the volume and trends of negative amortization within the portfolio(s), and determine whether the bank's practices in these areas satisfactorily address regulatory requirements.
• Review payment deferral and prepayment programs, and determine to what degree these programs impair management's ability to evaluate asset quality or significantly increase credit risk. Review management's process to establish these types of programs, and determine how management monitors the performance of and impacts from these types of programs.
• Evaluate the effectiveness of collection policy guidelines and procedures.
• Assess the organization and staffing of the collections function.
• Determine whether re-aging, workout, and/or other programs are used constructively or if they delay the recognition of delinquency and loss.
• Evaluate the bank's charge-off policies and practices. Determine if accelerated charge-off timeframes are warranted.
• Assess recovery practices and volumes on charged-off accounts.
• Evaluate fraud detection and prevention programs, consider the impact of fraud losses on earnings, and verify that such losses are promptly charged-off and properly reported.
• Assess the organization and staffing of the customer service function, and determine how management monitors the successfulness of services provided.
• Determine the extent that management relies on third-party vendors in the portfolio management process and how management monitors the third-party vendors.

The following items might signal current or future elevated risk and warrant follow-up:

• Very high or low recovery rates or significantly fluctuating recovery rates.
• High or increasing volumes of accounts/receivables in cure-type programs.
• High or increasing re-aging volumes.
• Changes in charge-off timeframe practices.
• High or increasing volumes of over-limit accounts/receivables, including those that are considered chronic.
• High volumes of credit line increases for the portfolio, or frequent credit line increases per account.
• Lack of sufficient segmentation strategies.
• Lack of sufficient management reports.
• High volumes of negative amortization, especially if prolonged.
• Lax authorization strategies.
• Unusual fee waiver activity or excessive fee assessment practices.
• High or increasing volume of consumer complaints, or consumer complaints of a significant nature (for example, accusation of unfair or deceptive practices).
• Lack of appropriate controls over third-party relationships.
• High or rising fraud volumes.

Loan Participation Vs Assignment

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Sub-participation

Sub-participation is a form of loan participation in which a lender shares its risk with a second party. This type of loan participation does not change the documentation of the loan. This type of loan participation can also include future amounts for loans that have not yet been fully disbursed, such as a revolving credit facility.

The legality of sub-participation is dependent on the conditions of the loan agreement. In general, a loan participant cannot enforce the loan or proceed against the collateral on their own. Furthermore, the borrower may not even be aware that the loan participant is involved. However, the seller of the participation retains the right to enforce or compromise the loan, as well as to amend it without the consent of the participant.

As for drafting sub-participation agreements, there are many ways to do so. But it is important to include at least the following provisions: The term of the agreement, the rate of interest, and the repurchase provisions. These provisions should be included in the sub-participation or assignment agreement.

Assignment and sub-participation are standard terms in inter-bank transactions. We will examine the purposes of the loan participation and assignment agreements, as well as the terms of the transaction. While they are essentially interchangeable, they are fundamentally different.

Loan participation and assignment are both ways to transfer ownership of a loan. Assigning a loan to a third party or sub-assigning it to yourself is a common way to transfer the loan.

The terms “loan participation” and “assignment” are often used in the banking industry. Both terms refer to the transfer of a loan’s rights and payments between two financial institutions. We’ll look at what each term means and how they differ from each other.

Loan participation has long been a common form of loan transfer. Its advantages over other loan transfer methods include the ability to diversify a portfolio and limit risk. It also eliminates the need for loan servicing. However, this option can be problematic when it differs from underlying loans. For this reason, it’s important to structure loan participation carefully.

Whether a loan is a participation or an assignment depends on a variety of factors. The percentage of loan ownership, relationship with the other financial institution, and confidence in the other party are all important considerations. However, the basic difference between participation and assignment is that the former involves the original lender continuing to manage the loan while the latter takes on the responsibility of doing so.

As a rule, loan participation is a good option if the original lender does not want to keep the title of the loan. It allows the borrower to avoid the costs associated with the loan and is more attractive for borrowers. In addition, loan participation arrangements can be more flexible than outright assignments. However, it’s important to make sure that the arrangement you enter into is formal. This will prevent any confusion or conflict down the road.

Syndication

Understanding the differences between loan participation and syndication is important for lenders. Understanding these two options can help them find the best solutions for their lending needs. Syndication is a common type of lending program where lenders pool their loans together to reduce the risks of defaults. Loan participation programs can be more complex and require due diligence to be effective.

Syndicated lending allows lenders to access the expertise and business relationships of their fellow lenders while maximizing their exposure to deal flow. However, lenders who join a syndicated lending arrangement often give up some of their independence and flexibility to take unilateral action. In addition, these arrangements often involve the involvement of legal counsel, which can also be important.

A loan participation arrangement is a group of lenders coming together to fund a large loan. A lead bank underwrites the loan and sells portions of it to other financial institutions. Loan syndication, on the other hand, is an arrangement whereby multiple financial institutions pool their money together and make one large loan. In this type of arrangement, the original lender transfers the rights and obligations to the purchasing financial institution. The risk is then shared among the participating lenders, allowing them to share in the interest and the risks of the loan’s default.

A syndication contract can be structured in as many tranches as necessary to meet the borrowing needs of a customer. The underlying contract will contain a commitment contract that specifies the ratio of participation among the participants. Each tranche will have a borrower, which will be a common participant or may be different. The contract will require that each participant fulfill their commitments before the scheduled due dates.

Loan participation and assignment are standard transactions between banks. They are similar in some respects but have different purposes. 

There are many types of loan participation agreements. Some involve a full assignment, while others are a sub-participation. If you are involved in loan participation or assignment, you need to understand which type of agreement applies to your situation. There are several types of loan participation agreements, including sub-participation agreements, undisclosed agencies, and assignments.

Sub-participation agreements are typically used to assign part of the loan amount to a new lender, and the loan documentation remains unchanged. In addition, these types of agreements include future amounts, which may be provided as part of a revolving credit facility or a portion of a loan that hasn’t been fully disbursed.

Loan participation is a popular option for lenders to limit their exposure to borrowers. Lenders may sell a portion of the loan to an investor or sell a portion of their interest to another party. While the transfer of a loan portion does not always require the consent of the transferor, lenders must consider participating interest guidelines and the applicable rules.

How Do Variables Affect Bank Loan Sales?

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All Insights Case Study Axtria Designed Acquisition And Initial Line Assignment Strategy For A Leading US Credit Card Issuer

Axtria Designed Acquisition And Initial Line Assignment Strategy For A Leading US Credit Card Issuer

Initial line assignment strategy.

Axtria built a predictive model to modify the acquisition strategy and create an initial line assignment strategy.

Client was experiencing high delinquency rates on its New to Bank Credit Card bookings. 

• Collected approved accounts data for last 24 Months
• Collected Bureau data
• Collected Application data
• Created data dictionary to identify missing rates and reason for missing values
• Outlier identification
• Created definition of default as 6M 60 DPD rate
• Independent variable creation: bureau score, bureau variables, application variables
• Missing value imputation
• Outlier treatment
• Variable reduction using various techniques: − CART − One step logistic − Bivariate plots
• Created segmentation to identify various segments of accounts
• Identification of segments:   − Red: Default  rate>20%   − Amber: Default rate 10-20%   − Green: Default rate<5%
• Computed 12M EBIT for each segment thus created
• Swap out sets identified with 12M EBIT as negative
• Validation of segmentation on OOT samples
• Average 12 M Utilization look up tables created by credit limit
• For each segment sensitivity of EBIT computed for various combinations of credit limit – utilization
• Created as segmentation for identifying swap out sets
• Positive EBIT impact on Swap Out
• Created a line assignment strategy
• New Strategy resulted in $15 Mn savings in NCL

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Banking operations for a customer-centric world

Supports leading financial institutions on strategy, sales and distribution, risk management, and operations effectiveness. Brings deep expertise in branch sales productivity, collections, and next-generation operating models for banks

Helps transform banks and non-banks across a broad range of topics to sustainably drive revenue growth and to enhance efficiency.

June 20, 2019 Today, deep within the headquarters and regional offices of banks, people do jobs that no customer ever sees but without which a bank could not function. Thousands of people handle the closing and fulfillment of loans, the processing of payments, and the resolution of customer disputes. They figure out when exceptions can be made for customer approvals and help the bank comply with money laundering rules, to name but a few.

In ten years, back-office operations will look starkly different. For starters, far fewer people will be needed. McKinsey estimates that 75 to 80 percent of transactional operations (e.g., general accounting operations, payments processing) and up to 40 percent of more strategic activities (e.g., financial controlling and reporting, financial planning and analysis, treasury) can be automated. Operations staff will have a very different set of tasks and thus will need different skills. Instead of processing transactions or compiling data, they will use technology to advise clients on the best financial options and products, do creative problem solving, and develop new products and services to enhance the customer experience. Banks, in other words, will look and feel a whole lot more like tech companies.

Features of transformed banking operations

Financial institutions need to do big picture, board-level thinking about how to prepare for the revolutionary impact digital technology will have on banking operations. With operations consuming 15 to 20 percent of a bank’s annual budget (Exhibit), transforming these functions will lead to significant improvements in profitability and return more capital to shareholders. It can also boost revenues by enabling banks to provide better products and services to customers .

Today, many bank processes are anchored to how banks have always done business—and often serve the needs of the bank more than the customer. Banks need to reverse this dynamic and make customer experience the starting point for process design. To do so, they need to understand what customers want, and how and when they want it. Instead of a major cost center, operations of the future will be a driver of innovation and customer experience.

Based on our work with major financial institutions around the world and from McKinsey Global Institute research on automation and the future of work, we see six defining characteristics of future banking operations.

Distinctive, personalized products and services

Today, banks offer standardized products hardcoded with specific benefits, parameters, and rules–30-year mortgages, travel rewards credit cards, savings accounts with minimum balances. A variety of operational roles are charged with supporting these products and managing the rules governing them. In future, these activities will be automated, and employee roles will shift toward product development. Instead of evaluating credit risks and deciding on mortgage approvals, operations staff will work with automated systems to enable a bank to offer its customers flexible and customized mortgages.

Imagine, for instance, a bank launching a new credit card in which the card member gets to define the rewards points they can obtain–perhaps 30 percent of rewards going to an airline, 30 percent as cash back, and 40 percent at a specific retailer. Or maybe a bank decides to offer loans that allow customers to specify their repayment plan and due dates. Today, these scenarios would be a nightmare for banks to orchestrate—each card or loan would almost require its own operations team. But soon, operations will use their knowledge of bank processes and systems to first develop customized products and then leverage technology to manage and deliver them.

Extensive use of automation and new technologies that empower the customer

Automation and artificial intelligence, already an important part of consumer banking, will penetrate operations far more deeply in the coming years, delivering benefits not only for a bank’s cost structure, but for its customers. Digitizing the loan-closing and fulfillment experience, for instance, will speed the process and give customers the flexibility and freedom to view and sign documents online or with their mobile app. Typically, US consumers have to wait at least a month to get approval for a mortgage—digitizing this process and automating approvals and processing would shrink wait time from days to minutes.

Same for call centers. Instead of waiting on hold or being pinballed between different representatives, customers could get instant, efficient automated customer service powered by advanced AI.

AI and advanced analytics could also improve dispute resolution. Customers can contact their bank any time through internet, mobile, or email channels and receive quick, real-time decisions. On the back end, systems would perform almost instant data evaluation about the dispute, surveying the customer’s history with the bank and leveraging historical dispute patterns to resolve the issue.

Seamless processes and consistent quality

Today, many operations employees perform dozens or even hundreds of similar tasks every day–reviewing customer disputes on credit or debit cards, processing or approving loans, making sure payments are processed properly, and so on. It’s not surprising errors happen. At some US banks, we have seen up to five to ten percent of all debit card disputes processed with errors.

Automating these and other processes will reduce human bias in decision-making and lower errors to almost zero. This will give operations employees time to help customers with complex, large, or sensitive issues that can’t be addressed through automation. And these employees will have the decision-making authority and skills quickly resolve customer issues.

Analytics-driven proactive management

The use of predictive analytics can dramatically improve the management of operations in several ways. First, it enables operations leaders to be more precise and accurate in their predictions. Instead of using simple arithmetic based on a limited number of variables to predict demand, demand predictions for specific products and services can be made based on granular profiles of customer segments and customer behavior using dozens or hundreds of variables. Banks can build detailed profiles from a multitude of data sets–including online interactions, geographic information from cell-phone usage, and aggregated payments behavior–and then apply analytics to predict the needs and desires of their customers—down to the level of a single individual in some cases.

Comprehensive data sets will also enable managers to set more KPIs. For example, instead of tracking just average handle times and customer satisfaction at a call center, banks could drill down to see how much time millennials or residents of a particular state spend on the phone with reps. If they spend longer than average, banks can determine why and, if needed, change how they communicate with these customers or adjust products or services to better serve them.

Finally, applying analytics to large amounts of customer data can transform issue resolution, bringing it to a deeply granular level and making it proactive not reactive. Instead of a bank addressing an error or customer problem only when it reaches a certain scale or frequency, software can find errors that happen to even just one customer, such as a fee that’s been miscalculated or a double payment to a credit card. The customer can then be alerted about the mistake and informed that it has already been corrected; this kind of preemptive outreach can dramatically boost customer satisfaction. Banks could also proactively reach out to customers whom predictive modeling indicates are likely to call with questions or issues. For instance, if a bank notices that its older customers have a tendency to call within the first week of opening an account or getting a new credit card, an AI customer service rep could reach out to check in.

Eliminating siloes for a simpler organization

Banks have always functioned with an organizational trinity: front offices (branches), middle offices (call centers), and back offices (operations). In the next ten years, this trinity will evolve dramatically. As we’ve already noted, back offices will slim down. Call centers will all but disappear due to AI bots and automation, and branches will be scaled down in number and transformed in function. As more customer transactions move to digital channels, front-line branch employees will operate as skilled personal advisors, helping customers get answers to complex questions that can’t be addressed digitally, giving advice about bank products and features, and generally serving as a one-stop-shop for customers in need across journeys. This is a new paradigm in which customers will receive personalized advice, relying on a simpler organization.

Talent as a differentiator: Going beyond the call of duty

Today’s operations employees are unlikely to recognize their future counterparts. Roles that previously toiled in obscurity and without interaction with customers will now be intensely focused on customer needs, doing critical outreach. They will also have tech, data, and user-experience backgrounds, and will include digital designers, customer service and experience experts, engineers, and data scientists. These highly paid individuals will focus on innovation and on developing technological approaches to improving in customer experience. They will also have deep knowledge of a bank’s systems and possess the empathy and communication skills needed to manage exceptions and offer “white glove” service to customers with complex problems.

Starting the transformation

To thrive in a world where once-siloed roles like loan closing and fulfillment, compliance, and risk management become an integral part of product development, product management, and customer experience, banks will need to make major organizational changes. They will need to rethink how the people who make the bank run are going to function. This calls for three major efforts:

Develop a plan to migrate to a journey-based organization : Today, functions such as call centers, payments processing, and risk underwriting are organized by product or segment. As banks increasingly focus on personalized interactions, a journey-based operating model will be required. With a journey-based model, banks will ensure operations resources own the customer inquiry or problem until it is solved. A journey-based model will integrate resources with different capabilities and knowledge and will cut across the currently established siloes. To do this, banks will need to re-think how they staff, measure, and track performance, and ultimately deliver to customers.

Design and implement a new talent model: Operations employees in 2030 will need to know how to code, develop products, and understand data, but they will also need the personal warmth and insight to manage exceptions and deal with complex customer problems. To attract this kind of talent, banks will need to expand their geographic footprints and identify talent pools with the required skills and attributes. They will need a new hiring approach to assess and hire talent for operations with different skills from those required today. Finally, banks will need training approaches to develop not only technical skills, but also empathy and the ability to impress customers in every single interaction.

Build a roadmap to accelerate digitization: Banks need to act now to develop an aggressive tactical roadmap that outlines the plan for digitization and automation. Banks that lack a clear long-term automation plan—one that will result in a fully digital operation a decade from now—will struggle to meet customer expectations.

The future will look very different for banks and their customers in 2030. Banks have a unique opportunity to lay the groundwork now to provide personalized, distinctive, and advice-focused value to customers.

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• What Is an LOC?
• Understanding LOCs
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Line of Credit (LOC) Definition, Types, and Examples

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

What Is a Line of Credit (LOC)?

A line of credit (LOC) is a preset borrowing limit offered by banks and financial institutions to their personal and business customers. Lines of credit can be used at any time until the limit is reached. The limit is set by the issuer based on the borrower's creditworthiness . As money is repaid, it can be borrowed again in the case of an open line of credit. The borrower can access funds from the LOC at any time as long as they do not exceed the maximum amount (or credit limit ) set in the agreement.

Key Takeaways

• A line of credit is a preset borrowing limit that a borrower can draw on at any time that the line of credit is open.
• Types of credit lines include personal, business, and home equity, among others.
• The built-in flexibility of a line of credit is its main advantage.
• Potential downsides include high interest rates, late payments penalties, and the potential to overspend.

Investopedia / Julie Bang

Understanding Lines of Credit (LOCs)

A line of credit is a credit product that banks and other financial institutions offer their customers. They are available for both personal customers and business clients. Like other credit products, customers must qualify to be approved for a line of credit. Customers may apply for or be pre-approved for a credit line. The limit on the LOC is based on the borrower's creditworthiness.

All LOCs consist of a set amount of money that can be borrowed as needed, paid back, and borrowed again. The amount of interest, size of payments, and other rules are set by the lender. Some LOCs allow you to write checks, while others issue a debit card that can be used to access the available credit. A line of credit can be secured or unsecured . Secured LOCs come with lower rates as they are backed by collateral while unsecured LOCs typically come with higher rates.

The LOC is highly flexibility, which is its main advantage. Borrowers can request a certain amount, but they do not have to use it all. Rather, they can tailor their spending from the LOC to their needs and owe interest only on the amount that they draw, not on the entire credit line. In addition, borrowers can adjust their repayment amounts as needed based on their budget or cash flow. They can repay, for example, the entire outstanding balance all at once or just make the minimum monthly payments.

There are different types of LOCs that financial institutions offer. Some of the most common types of LOCs include personal, business, and home equity lines of credit (HELOCs) . We explore these in more detail below.

Unsecured vs. Secured Lines of Credit (LOCs)

Most LOCs are unsecured loans . This means that the borrower does not promise the lender any collateral to back the LOC. One notable exception is a home equity line of credit (HELOC) , which is secured by the equity in the borrower’s home . From the lender’s perspective, secured LOCs are attractive because they provide a way to recoup the advanced funds in the event of nonpayment.

For individuals or business owners, secured LOCs are attractive because they typically come with a higher maximum credit limit and significantly lower interest rates than unsecured LOCs. Unsecured LOCs are also more difficult to obtain and often require a higher credit score or credit rating .

Lenders attempt to compensate for the increased risk by limiting how much can be borrowed and by charging higher interest rates. That is one reason why the  annual percentage rate (APR)  on credit cards is so high.

Credit cards are technically unsecured LOCs, with the credit limit—how much you can charge on the card—representing its parameters. But you do not pledge any assets when you open the card. If you start missing payments, there’s nothing that the credit card issuer can seize in compensation.

An LOC can have a major impact on your credit score. In general, if you use more than 30% of the borrowing limit, your credit score will drop.

Revolving vs. Non-Revolving Lines of Credit (LOCs)

An LOC is often considered to be a type of revolving account, also known as an open-end credit account. This arrangement allows borrowers to spend the money, repay it, and spend it again in a virtually never-ending, revolving cycle. Revolving accounts such as LOCs and credit cards are different from installment loans such as mortgages and car loans.

With installment loans , consumers borrow a set amount of money and repay it in equal monthly installments until the loan is paid off. Once an installment loan has been paid off, consumers cannot spend the funds again unless they apply for a new loan.

Non-revolving LOCs have the same features as revolving credit (or a revolving LOC). A credit limit is established, funds can be used for a variety of purposes, interest is charged normally, and payments may be made at any time. There is one major exception: The pool of available credit does not replenish after payments are made. Once you pay off the LOC in full, the account is closed and cannot be used again.

As an example, personal LOCs are sometimes offered by banks in the form of an overdraft protection plan. A banking customer can sign up to have an overdraft plan linked to their checking account. If the customer goes over the amount available in checking, the overdraft keeps them from bouncing a check or having a purchase denied. Like any LOC, an overdraft must be paid back, with interest.

Types of Lines of Credit (LOCs)

LOCs come in a variety of forms, with each falling into either the secured or unsecured category. Beyond that, each type of LOC has its own characteristics.

Personal Line of Credit (LOC)

This provides access to unsecured funds that can be borrowed, repaid, and borrowed again. Opening a personal LOC usually requires a credit history of no defaults, a credit score of 670 or higher, and reliable income.

Having savings helps, as does collateral in the form of stocks or certificates of deposit (CDs) , though collateral is not required for a personal LOC. Personal LOCs are used for emergencies, weddings, overdraft protection , travel, and entertainment, and to help smooth out bumps for those with irregular income.

Home Equity Line of Credit (HELOC)

HELOCs are the most common type of secured LOC. A HELOC is secured by the market value of the home minus the amount owed, which becomes the basis for determining the size of the LOC. Typically, the credit limit is equal to 75% or 80% of the market value of the home, minus the balance owed on the mortgage.

HELOCs often come with a draw period (usually 10 years) during which the borrower can access available funds, repay them, and borrow again. After the draw period, the balance is due, or a loan is extended to pay off the balance over time. HELOCs typically have closing costs, including the cost of an appraisal on the property used as collateral.

Since the Tax Cuts and Jobs Act (TCJA) of 2017, interest paid on a HELOC is only deductible if the funds are used to “buy, build or substantially improve” the property that serves as collateral for the HELOC.

Business Line of Credit

Businesses use these to borrow on an as-needed basis instead of taking out a fixed loan. The financial institution extending the LOC evaluates the market value, profitability, and risk taken on by the business and extends an LOC based on that evaluation. The LOC may be unsecured or secured, depending on the size of the LOC requested and the evaluation results. As with almost all LOCs, the interest rate is variable .

Demand Line of Credit (LOC)

This type can be either secured or unsecured but is rarely used. With a demand LOC, the lender can call the amount borrowed due at any time. Payback (until the loan is called) can be interest only or interest plus principal , depending on the terms of the LOC. The borrower can spend up to the credit limit at any time.

Securities-Backed Line of Credit (SBLOC)

This is a special secured-demand LOC, in which collateral is provided by the borrower’s securities . Typically, an SBLOC lets the investor borrow anywhere from 50% to 95% of the value of assets in their account. SBLOCs are non-purpose loans, meaning that the borrower may not use the money to buy or trade securities. Almost any other type of expenditure is allowed.

SBLOCs require the borrower to make monthly, interest-only payments until the loan is repaid in full or the brokerage or bank demands payment, which can happen if the value of the investor’s portfolio falls below the level of the LOC.

Limitations of Lines of Credit (LOC)

The main advantage of an LOC is the ability to borrow only the amount needed and avoid paying interest on a large loan. That said, borrowers need to be aware of potential problems when taking out an LOC.

• Unsecured LOCs have higher interest rates and credit requirements than those secured by collateral.
• Interest rates for LOCs are almost always variable and vary widely from one lender to another.
• LOCs do not provide the same regulatory protection as credit cards. Penalties for late payments and going over the LOC limit can be severe.
• An open LOC can invite overspending, leading to an inability to make payments.
• Misuse of an LOC can hurt a borrower’s credit score. Depending on the severity, the services of a top credit repair company might be worth considering.

What Are Common Types of Lines of Credit?

The most common types of lines of credit are personal, business, and home equity. In general, personal LOCs are typically unsecured, while business LOCs can be secured or unsecured. HELOCs are secured and backed by the market value of your home.

How Can I Use a Line of Credit?

You can use an LOC for many purposes. Examples include paying for a wedding, a vacation, or an unexpected financial emergency.

How Does an LOC Affect My Credit Score?

Lenders conduct a credit check when you apply for an LOC. This results in a hard inquiry on your credit report, which lowers your credit score in the short term. Your credit score will also drop if you tap into more than 30% of the borrowing limit.

Consumers and businesses rely on credit to make large purchases, keep their operations going, or make investments in their growth. A line of credit is one type of product offered to consumers to help them achieve these goals. To qualify for a line of credit, a borrower must first qualify and be approved by a lender. Credit lines can be used by borrowers more than once up to their credit limit as long as they make the minimum payment.

Federal Trade Commission, Consumer Advice. “ Home Equity Loans and Home Equity Lines of Credit .”

Experian. “ What Is a Line of Credit? ”

Consumer Financial Protection Bureau. “ My Lender Offered Me a Home Equity Line of Credit (HELOC). What Is a HELOC? ”

Internal Revenue Service. “ Interest on Home Equity Loans Often Still Deductible Under New Law .”

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What is Bank Assignment?

Assignment means transferring any existing or future right, property, or debt by one person to another person.

The person who assigns the property is called the ‘assignor,’ and the person to whom it is transferred is called the ‘assignee.’

Usually, assignments are made of actionable claims such as book debts, insurance claims, etc.

In the banking business , a borrower may assign to the banker;

• the book debts,
• money due from a government department,
• insurance policies.

Assignments may be of two types:

Legal Assignment

A legal assignment is an absolute transfer of an actionable claim. It must be in writing signed by the assignor, and the assignor informs his debtor in writing, intimating the assignee’s names and address. The assignee also gives notice to the debtor and seeks confirmation of the balance due.

Equitable Assignment

An equitable assignment does not fulfill all the above requirements. In case of legal assignment, the assignee can sue in his own name. A legal assignee can also give a good discharge for l lie debt without the concurrence of the assignor.

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Assignment in banking

Assignment in Banking

In the context of banking, an assignment refers to the transfer of a financial asset, such as a loan, mortgage, or receivable, from one party (the assignor) to another (the assignee). This transfer of ownership and associated rights is often done for various purposes, including risk management, liquidity management, and optimizing the use of capital. Here are the key points to understand assignment in banking:

1. Assignment Process:

• Identification of Asset: The first step in the assignment process is identifying the financial asset to be assigned. It could be a loan, lease, mortgage, or any other receivable.
• Assignment Agreement: The assignor (usually a bank or financial institution) and the assignee (another bank or investor) enter into an assignment agreement that outlines the terms and conditions of the transfer.
• Notice to Borrower: In most cases, the borrower or debtor is notified about the assignment, informing them that the ownership of the loan or debt has changed, and they should make future payments to the assignee.

2. Types of Assignment:

• Loan Assignment: Banks may assign individual loans or a portfolio of loans to another institution or investor. This is common in cases where the bank wants to manage its credit risk exposure or free up capital for new lending.
• Mortgage Assignment: In the case of mortgage loans, the assignment involves transferring the ownership and servicing rights of the mortgage to another party.
• Receivable Assignment: Banks can assign accounts receivables or trade receivables to other entities, often to improve cash flow and working capital management.

3. Benefits of Assignment in Banking:

• Risk Mitigation: Assignment allows banks to transfer credit risk to other parties, reducing their exposure to default and non-payment.
• Liquidity Management: By selling or assigning assets, banks can improve their liquidity position, which helps them meet short-term obligations or fund new lending activities.
• Capital Optimization: Assignment frees up capital that would otherwise be tied up in illiquid assets, enabling banks to utilize it for other profitable purposes.
• Diversification of Funding: By assigning loans or receivables to investors, banks can diversify their funding sources and access alternative forms of capital.

4. Considerations and Challenges:

• Legal and Regulatory Compliance: Banks must comply with applicable laws and regulations when transferring financial assets through assignment.
• Notification to Borrowers: Proper notification to borrowers or debtors is essential to inform them about the change in ownership and payment instructions.
• Valuation and Pricing: Assigning financial assets involves determining their fair value and negotiating an appropriate price with the assignee.
• Creditworthiness of Assignee: Banks need to assess the creditworthiness of the assignee to ensure that the transfer is done to a reliable and financially stable entity.

5. Impact on Borrowers:

• The transfer of an asset through assignment generally does not alter the terms and conditions of the loan or debt for the borrower.
• Borrowers continue to make payments as agreed, but to the new owner (assignee) of the loan or debt.

In conclusion, assignment in banking is a process that allows banks to transfer financial assets to other parties, thereby managing risks, optimizing capital, and improving liquidity. It is an essential tool for banks to diversify funding sources and efficiently manage their balance sheets. Proper legal compliance and communication with borrowers are crucial aspects of the assignment process to ensure smooth and transparent transactions.

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10 Applied Strategies to Improve Customer Service In Banking With Examples

• Updated Nov 13, 2023
• Estimated Reading Time: 0

There is a new baseline for the customer experience in banking. 

People expect more channels, and faster and personalized responses without long wait times. Banking customers want their financial institutions to provide more than just basic service – they want insights, guidance, and relevant recommendations. 

Hence, improving customer service in banking is crucial. 

A study by Accenture shows that 48% of bank customers demand preferential treatment and rewards in exchange for their loyalty to your bank.

In the banking industry, where technology continues to evolve the way we handle personal and business finances, quality customer care includes keeping pace with both live and digital options for handling simple to complex transactions.

What is Good Customer Service in Banking?

Customer service in the banking sector depends on efficient and prompt customer service. Customer service is the most important duty of the banking operations. Prompt and efficient service will develop good public relations, reduce complaints and increase business.

Providing quality customer service is important in the banking industry because it makes customers feel valued, helps you meet their needs more effectively and improves your overall customer retention in banking as well.

Key Importance of Customer Service in Banking

Financial institutions have amongst the highest customer acquisition costs in the industry today. Acquiring new customers can cost five times more than retaining existing ones. Hence, it is essential to adopt the right strategies to improve customer service in banking.

Customer service means different things in different industries, but it always boils down to the same basic element – providing superior levels of service to your customers. 

• Changing customer expectations – Customers today are more demanding and more sophisticated than he or she was thirty years ago.
• Increased importance of customer service – With changing customer expectations, competitors are seeing customer service as a competitive weapon with which they differentiate their products and services.
• Need for a relationship strategy – To ensure that a customer service strategy that will create a value proposition for customers should be formulated, implemented and controlled. It is necessary to give it a central role and not one that is subsumed in the various elements of the marketing mix.

10 Practical Strategies to Improve Customer Service in Banking

Today’s customer expects personal, relevant, accessible-anywhere experiences when they interact with businesses — and modern finance is no exception. With new post-pandemic norms setting in, digital-first service keeps customers connected to your offerings anywhere they need them.

• Monitor end-to-end customer journeys to create 360° view 
• Provide Real Time Support
• Deliver Personalized Experience
• Leverage a Banking Chatbot
• Develop an Omnichannel Experience
• Conduct Training on Intrapersonal Skills
• Create Knowledge Base for Self Help
• Solicit Customer Feedback
• Revitalize Digital Experience
• Make Use of Contextual Data 

Let us dive in to understand how each strategy can deliver exceptional customer experience in banking.

1. Monitor end-to-end customer journeys to create 360° view 

Mapping out your customer journeys is crucial to deliver the exact service that customers are expecting. 

First things first! You have to identify all touchpoints across all channels where you engage with customers. A common banking customer journey may include:

• A business professional checking account balance online
• Depositing a paycheck in-branch
• Verifying the deposited funds on a smartphone. 

You should have feedback experiences in place at all three touchpoints. Then by identifying target customers, create customer personas and focus towards your customer experience program.

Secondly, outline the journey for how customers engage with your institution. Start your journey map with the first point of contact and each next step and all potential steps until the journey is complete.

Finally, identify at-risk customers and proactively engage on a personal level to improve the relationship.

Note: If financial institutions can learn to identify at-risk customers, proactively engage on a personal level, and identify what is causing the customer’s behavior, companies have a much higher chance of keeping a customer loyal, maybe even for life.

The goal is to use experience management to move from reactive to predictive, and eventually, to a state of delivering exceptional experiences across all touchpoints.

2. Provide Real Time Support

People want to organize their finances on the go and find answers quickly online and the best option is live chat. 

Citibank reported that 90% of live chat users complete their home-equity application.

Live chat is a powerful tool to counter the bureaucratic and impersonal feel of banking institutions. It provides your customers with personal human support that’s easy to reach.

American Airlines Federal Credit Union recognized the advantages of live chat and empowered their service reps to engage customers in real time . The biggest German institutions like Hypovereinsbank and Targobank also use live chat as their main customer service tool.

How can live chat improve customer service in the banking industry?

• Increase sales conversions – Live chat can address customer queries instantly and help in faster decision making leading to more sales. It can also approach customers proactively – if they are stuck at some page/point you can trigger for a chat window to automatically open with an invite to chat.
• Sending files securely – Implementing a GDPR adhered complaint based live chat solution makes live chat suitable for directly sending files to your customers.
• Address customer concerns instantly – Live chat provides instant solutions for banking and financial queries with the help of digital engagement tools like video chat, co-browsing in order to deliver better customer service.
• Reduce customer support costs – With canned responses, you can handle multiple chats and offer faster responses. Live chat increases the efficiency of service reps by automated routing and delivers better banking support.

3. Deliver Personalized Experience

Personalized experience in any industry always pays off well. In the banking sector video chat is a wonderful tool that can have a positive impact on various aspects.

Video chat in customer service for banks has witnessed a whopping 70% growth . Its value even grows further when used in combination with other tools for customer engagement.

When the situations are complex where visual cues hold huge importance, a video chat platform emerges as the only option to ensure the best personal support.  

Benefits of video chat for customer service in banking

• Live customer engagement – Video chat helps businesses interact directly with customers on the website or mobile apps and improve the level of engagement manifold.
• Deliver personalized experience – When you combine a video chat platform with other customer engagement tools like live chat and chatbots, it’s always easy to provide personalized experiences at any time through the different stages of the journey. 
• Faster resolution of issues – By using co-browsing and video chat together, it becomes easy to collaborate with customers in real-time and fix issues faster. 
• Offer proactive support – The use of cross-platform video chat proves very handy in offering proactive support and effective engagement once you have gained insights about your customer journey. 

4. Leverage a Banking Chatbot

AI in banking customer service is gradually gaining wide acceptance. They are not only simplifying the processes for businesses but also enabling quick access to services that were formerly confined to apps.

Banks need to improve the quality of their customer service without sacrificing time to redundant user queries . 

Subsequently, banks now understand the importance of automation and 24×7 services that are not only convenient to them but to their customers. It means seamlessly providing scalable 24×7 customer support on multiple channels and languages.

AI Chatbots in banking customer service can help streamline transactions like money transfers and account balance checks via a conversational interface so that customers are constantly guided through their actions

How deploying an AI chatbot helps to deliver better customer service?

• Engage consumers 24×7 – A banking chatbot can be deployed on the website or on browsing pages to start conversations. It helps them analyze user behavior or interests, or introduce to them banking products.
• Deliver great conversational experience – AI bots respond accurately to the inputs of customers  and provide conversational experiences at each step of the journey. They route complex chats to the right human rep to ensure a humanized support.
• Offer personalized services – With the help of chatbot analytics (that captures user  behavior, trends and patterns) you can deliver relevant and personalized services and offers to customers.
• Automated support for FAQs – Bots are available 24×7 and banks can deploy them to solve customer problems any time without requiring human intervention. AI bots with advanced algorithms and machine learning ability can answer complex queries.

5. Develop an Omnichannel Experience

Nowadays, basic transactions in banks are speedily migrating from the physical to the digital channels. According to Reuters, 60% of customers would still prefer to open a new checking account at a bank branch rather than through digital channels

A majority of banks have adopted the omnichannel approach at the core of their strategies. 

It’s because banks have understood that ease, innovation, simplicity, and accessibility of platforms provided by FinTech companies can influence the customer behaviors quite strongly.

An omnichannel customer service strategy allows you to use all available marketing channels to achieve an integrated and seamless customer experience. 

The customer, on the other hand, is able to move from your app to the website to push notifications to social media, experiencing the same branding and messaging throughout in a synchronized way. 

How can an omnichannel approach benefit customer service in banking?

• Faster resolution rate – Omnichannel banks are capable of handling customer requests faster by using digital tools and strategies which increases the resolution rate as well as customer satisfaction.
• Improved customer experience – When banks engage across all online and offline customer service channels and deliver consistent support, there is a boost in customer experience.
• Streamline customer journey for better insights – Banks can easily understand the customer lifecycle better with conversation history and deliver personalized real time support.
• Reduce customer churn –  Customers expect instant response and when they are entertained across their preferred channels in real time, there is a significant reduction in the customer churn rate .

Note: However, banks should amalgamate traditional and digital components in order to create an omnichannel customer experience.

6. Conduct Training on Intrapersonal Skills

Financial matters are very critical to handle, so having frontline employees with exceptional interpersonal skills is an asset for any financial institution.

For example – There might be circumstances where you may find yourself in situations where you need to explain to a customer why their loan application has been denied or why a mortgage cannot be processed.

While it is important to be clear and transparent in explaining the options, one must display empathy and maintain the utmost composure. It will certainly go a long way in helping customers feel reassured.

So banks and financial service providers must invest in customer service training for employees to have them ready to navigate all possible scenarios. 

At times it may appear like these are additional costs that impact the bank’s bottom line, but at the same time will be made good by clients who stick with you because of good customer service.

7. Create Knowledge Base for Self Help

As banks face new and evolving challenges, including digitization, virtualization of the workplace, government regulations, and growing security concerns, they can gain a competitive advantage with knowledge management.

74% of customers report that they use a self-service support portal to resolve issues on their own before contacting a live service representative.

Creating knowledge base in the banking sector allows financial services organizations to more efficiently store and organize knowledge, which enables bank managers and employees to collaborate and stay aligned on short- and long-term initiatives. 

How to improve customer service in the banking industry with knowledge base?

• Ensure bank customers receive consistent information at any branch –  A centralized knowledge management system ensures that all employees have access to the same information, so they can then provide standardized answers to customers.
• Create a consistent brand experience, both digitally and in person – With a comprehensive knowledge base, you can ensure that you present a unified experience, no matter how a customer interacts.
• Provide all bank employees with up-to-date regulatory updates – A knowledge base system ensures that all employees receive updates about regulatory changes and understand how they impact the bank and its customers.  
• Offer a holistic view of market research and customer insights – By using a knowledge management platform to centralize all research and give all internal stakeholders access to the insights they need to make informed decisions.
• Enhance overall customer satisfaction and the CX –  When banks are equipped with a knowledge management system, employees can quickly search for the information they need to provide comprehensive solutions to client issues.

8. Solicit Customer Feedback

Customers are the ones who can anticipate their needs better than anybody else. 

After all, your customer data from your CRM and helpdesk tool can only tell you a part of the story. The other part lies with the customer. And no form of technology can magically help you read it.

It only makes sense to dive into this rich pool of information from your customer base by acquiring their feedback after every customer interaction. 

By doing this, you can gain insight into whether their needs are being sufficiently met, what financial products or services they’re interested in, their financial goals for the future, how their customer experience can be improved, and more.

For example, if a customer were to contact your bank’s call center with a service request, the representative responsible for processing that request might close out the call by asking whether the customer had any additional questions and whether they were satisfied with the service they received. 

9. Revitalize Digital Experience

Every customer engagement platform needs a digital-friendly service experience that gets customers what they need regardless of the device they use.

For example, customers can be easily frustrated if they try to open a new credit card from a mobile device, only to be redirected to a full-size desktop webpage. In the worst cases, customers are forced to physically sign documents or come into a branch to even begin the process. 

Mobile-first banks are prepared against shifts in device preference with the flexibility to meet their customers wherever they are.  Mobile users have already exceeded those of traditional online banking.

A dynamic interface design and full-featured portals on any platform feel more approachable, ultimately keeping customers loyal.

Providing an end-to-end digital facelift can also involve no manual processes. Managing documents via electronic signatures and other tools can streamline your backend to improve customer service. 

Even when leaving room for customers who prefer paper, digitizing behind the scenes will help you keep all their information at your team’s fingertips. 

10. Make Use of Contextual Data 

Leveraging contextual data is an excellent way for banks and financial institutions to survive and thrive in the long run. 

In a nutshell, contextual data refers to any form of information that provides valuable context about a person/organization and an event.

In banks and financial institutions, contextual data can be used to identify behavioral patterns and gauge customer loyalty, which they can then use to improve customer relationships. 

The data collected can also be used to create bespoke financial solutions specifically tailored to meet the needs of every customer. For banks and financial institutions, their most valuable sources of contextual customer data are their help desks and CRM (customer relationship management) tool.

While banks can use CRMs to track contact details, location, social media activity, and purchasing preferences of the customer, helpdesks or customer service software can be used to track their post-purchase interactions and their support requests.

Many help desk tools come with built-in analytics suites that can help you keep track of all your customer service KPIs without having to invest in another tool to track them. Every information can then be used to piece together a 360-degree view of the customer.

Furthermore, these customer profiles can help you tailor your financial products, upsell, cross-sell, create targeted marketing campaigns, and even design loyalty programs/provide preferential customer service.

3 Examples of Excellent Customer Service in Banking

Technology is rapidly changing the way we work, communicate, and bank. Those who are steering the ship understand the importance of not only better meeting consumers where they are today, but also planning ahead to proactively address new needs in the future. 

The below mentioned financial service leaders are freeing up members of the team to deliver higher levels of service and tailor offers to make banking more personal. 

1. Navy Federal Credit Union – Delivering effective omnichannel experiences

Virginia-based Navy Federal Credit Union exclusively serves the military, veterans, and their families — a segment to which it promises “once a member, always a member.” 

Great customer service is important in delivering on this promise, the Navy Federal Union realized that. 

“As a lender, it’s really important for us to be consistent in the member service experience” explained Prabha KC, a mortgage loan officer at the company. “If the members are overseas they can still access their loan information.” 

Offering self-service channels was one way the company sought to improve its service delivery, not only facilitating 24/7 support but also freeing up its member service representatives to do more added value work on behalf of their members. 

As a result of the implementation, the number of self-service applications doubled and the time taken to submit an application decreased by 40% .

2. BOK Financial – Making banking more personal

Investing in personalization empowers banks to deliver the white glove service that customers are looking for. In fact, the majority 72% of customers say that personalization is highly important in financial services today. 

Oklahoma-based BOK Financial adopted strategies to help it meet consumer demand for an intuitive and personalized banking experience.

By running consumer loans and mortgage applications, the company is delivering a tailored experience and, as a result, has seen completion rates more than triple. Moreover, the majority of volume now comes through digital channels — in stark contrast to the previous 15%. 

3. Amarillo National Bank – Adapting and responding to new needs

When banking teams prioritize their customers’ needs and preferences, they can deliver better service, and they can achieve more impactful customer relationships as a result.

During the global pandemic, many lenders, including Texas-based Amarillo National Bank (ANB), searched for ways to continue closing loans remotely. The value of hybrid and electronic closing methods quickly became clear. 

“We knew we had to move forward with the hybrid closings so that our customers didn’t have to go into the title companies to close their loans,” Debbie Bigelow, senior vice president, recalled. They will continue to adopt innovations that allow them to succeed in a rapidly changing operating environment.

Wrapping Up: Customer Service is Banking is Paramount

The financial services landscape is in constant flux, with new trends and regulatory measures emerging almost every day. To ensure that your financial institution delivers the best customer experience possible, you need to keep your finger on the pulse of the industry and keep exploring the strategies to improve customer service in banking.

It is recommended that banks must open for change and constantly  look for ways to improve and embrace new technology. By listening to your customers and making smart investments in digital customer engagement tools, you can guarantee exceptional customer service at your bank or financial institute.

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Snigdha Patel

Snigdha Patel is a customer experience researcher, author, and blogger. As part of REVE Chat, she focuses on helping organizations maximize customer experience using omnichannel messaging and conversational AI.

She creates contextual, insightful, and conversational content for business audiences across a broad range of industries and categories like Customer Service, Customer Experience (CX), Chatbots, and more.

Serving as the lead content strategist, Snigdha helps the customer service teams to leverage the right technology along with AI to deliver exceptional and memorable customer experiences.

Being a customer service adherent, her goal is to show that organizations can use customer experience as a competitive advantage and win customer loyalty.

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CFPB Report Identifies Financial and Privacy Risks to Consumers in Video Gaming Marketplaces

Growth in banking options and payments in gaming leaves consumers’ assets and personal data at risk

WASHINGTON, D.C. – Today, the Consumer Financial Protection Bureau (CFPB) issued a report examining the growth of financial transactions in online video games and virtual worlds. These platforms increasingly resemble traditional banking and payment systems that facilitate the storage and exchange of billions of dollars in assets, including virtual currencies. However, consumers report being harmed by scams or theft on gaming platforms and not receiving the protections they would expect under federal law. The CFPB will be monitoring markets where financial products and services are offered, including video games and virtual worlds, to ensure compliance with federal consumer financial protection laws.

“Americans of all ages are converting billions of dollars into currencies used on virtual reality and gaming platforms,” said CFPB Director Rohit Chopra. “As more banking and payments activity takes place in video games and virtual worlds, the CFPB is looking at ways to protect consumers from fraud and scams.”

The report, Banking in Video Games and Virtual Worlds , looks at the growing use and scale of these assets across the gaming industry, the associated risks to consumers, and the evolution of games and virtual worlds into online marketplaces. American consumers spent nearly $57 billion on gaming in 2023, including on hardware, software, and in-game transactions such as converting dollars to virtual currencies or other gaming assets. These assets are often bought, sold, or traded in virtual markets that allow gaming companies to replicate everyday activities online, including financial payments.

The report identifies a number of trends and risks associated with gaming assets, including:

• Gaming products and services resemble conventional financial products: Games and virtual worlds enable players to store and transfer valuable assets, including in-game currencies and virtual items such as cosmetic skins or collectibles. For example, the largest reported sale of a cosmetic skin was for $500,000. Games and virtual worlds act as a real-world marketplace that enables players to store and transfer valuable assets. To leverage that value, gaming companies have begun incorporating financial products and services such as proprietary payment processors and money transmitters.
• Gaming companies provide little customer support when consumers experience financial harm : The increased value of in-game assets has fueled a rise in scams, phishing attempts, and account thefts. Attackers use phishing tactics or compromised user credentials to break into accounts and access game currency or virtual items, and then sell these assets off the platform for other currency. Consumers report having little recourse with gaming companies when they suffer losses, and game publishers claim to have no obligation to compensate the players for financial losses, including when service to a game is suspended or a consumer’s account is closed.
• Gaming companies are assembling gamers’ personal and behavioral data : Publishers are collecting large amounts of data on players, including behavioral details such as financial data, purchasing history and spending thresholds. Gaming platforms can also track players’ location data, which can generate an accurate portrait of a player’s daily routines, such as their home address, places of employment or worship, and health and medical status. And with the advent of virtual- and mixed-reality gaming, the information gathered by headsets may include biometric data such as iris scans, eye movement, pupil response, and gait analysis, which may pose medical privacy risks.

The CFPB has received consumer complaints about hacking attempts, account theft, and lost access to gaming assets. In the complaints, most consumers report receiving limited support from the gaming companies, such as reimbursements or security improvements. Existing consumer protection laws apply to banking and payment systems that facilitate the storage and exchange of valuable assets. The CFPB is monitoring markets where financial products and services may be offered, including video games and virtual worlds.

Read the report, Banking in video games and virtual worlds .

Read Director Chopra’s statement on the report .

Consumers can submit complaints about financial products or services by visiting the CFPB’s website or by calling (855) 411-CFPB (2372) .

Employees of companies who they believe their company has violated federal consumer financial laws are encouraged to send information about what they know to [email protected] .

The Consumer Financial Protection Bureau is a 21st century agency that implements and enforces Federal consumer financial law and ensures that markets for consumer financial products are fair, transparent, and competitive. For more information, visit www.consumerfinance.gov .

Essay on Internet Banking

In this essay we will discuss about Internet Banking. After reading this essay you will learn about: 1. Meaning of Internet Banking 2. Objectives and Drivers of Internet Banking 3. Trends in India 4. Facilities Available 5. Emerging Challenges 6. Main Concerns 7. Strategies to be Adopted by Indian Banks.

• Essay on the Strategies to be Adopted by Indian Banks for Introducing Internet Banking 

Essay # 1. Meaning of Internet Banking :

With the growth of internet and wireless communication technologies, telecommunications etc. in recent years, the structure and nature of banking and financial services have gone for a sea change. Internet banking or e-banking is the latest in this series of technological wonders in the recent past which involves use of internet for delivery of banking products and services.

Even the Morgan Stanley Dean Witter Internet Research emphasised that web is more important for retail financial services than that for many other industries. Internet banking or e-banking is changing the banking and its structure and is having major effects on banking relationships.

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Banking activity is now no longer confined to the branches where a customer has to approach the branch in person, for withdrawing cash or deposit a cheque or request for a statement of Accounts.

In accessing a true internet banking, any inquiry or transaction is processed online without any reference to the branch (anywhere banking) at any time. Thus providing Internet banking is gradually becoming a “need to have” than a “nice to have” service.

The net banking is, therefore, more of a norm rather than an exception in many developed countries because it is the cheapest way of providing banking services. Under this system, online banking is possible where every bank customer is provided with a personal identification number (PIN) for making online transactions with the bank through internet connections.

Internet banking or e-banking falls into four main categories, from Level 1—minimum functionality sites that offer only access to deposit account data—to level 4 sites highly sophisticated offering, enabling integrated sales of additional products and access to other financial services—such as investment and insurance.

In other works, a successful internet banking solution offers:

1. Exceptional rates on savings, CDs and IRAs.

2. Checking Account with no monthly fee, free bill payment and rebates on ATM surcharges.

3. Credit card facilities with low rates.

4. Easy online applications for all accounts including personal loans and mortgages.

5. 24-hour account access.

6. Quality customary service with personal attention.

Essay # 2. Objectives and Drivers of Internet Banking :

The internet has developed level playing field and thereby afforded open access to customers in the global market-place. Internet banking is a cost-effective delivery channel for the modernized financial institutions.

In this system, consumers are embracing many benefits of e-banking. To have access to one’s accounts at any time and from any location through world wide web (www) is a convenient practice, which was unknown a short time ago.

Thus, a bank’s internet presence transforms from ‘brochure/ware’ status to ‘internet banking’ status once the bank goes through a technology integration effort so as to enable its customer to access information about his or her specific account details.

Following are the six primary objectives or drivers of internet banking:

1. To improve customer access.

2. To facilitate the offering of more services.

3. To increase customer loyalty.

4. To attract large number of customers.

5. To provide cost-effective services offered by competitors.

6. To reduce customer attrition.

Keeping objectives in mind, the internet banking facilities has been progressing at a rapid pace throughout the world.

Essay # 3. Trends of Internet Banking in India :

In India, initially a beginning was made in internet banking only in some big cities which was just in rudimentary stage. After getting initial success, the internet banking facility is gradually being expanded in all cities and towns to make the system popular.

The banking industry in India is also facing unprecedented competition from non-traditional banking institutions which are now a day’s offering banking and financial services over the Internet. The deregulation of the banking industry along with emergence of new technologies are enabling the new competitors in the banking sector to enter the financial services market quite efficiently and quickly.

Core or Anywhere Banking:

In order to support internet banking facilities another new concept of banking i.e., core or anywhere banking is introduced. Initially introduced by the foreign banks, the same concept in new increasingly adopted by public sector banks and also the private sector banks.

Under this concept of banking, bank customers who have an account with any select branch can easily operate his account from different designated branches on the bank spread throughout the country.

Under this system, a customer can avail cash withdrawal, cash deposit, transfer of funds, inter-city and intra-city transactions, collection of draft and cheques etc. facilities from any of such designated branches conveniently irrespective of its locations.

Core banking concept has improved the standard of the banking services with the help of modern technology. In present times, most of the public sector banks have already adopted this concept and started extending these facilities to its customers gradually by including more and more of its important branches under this category.

Progress of Internet Banking:

In India, internet banking is gradually being developed throughout the country.

As per the recent study it is observed that:

(a) A number of banks have already adopted internet banking and are offering varied kind of services through it,

(b) These internet sites generally offer only most of the basic services. Only 50 per cent are known as ‘entry level’ sites offering little more than company information’s and basic marketing materials and 10 per cent are offering ‘advanced transactions’ such as online funds transfer, transactions and cash management services etc.; and

(c) Most of the foreign and private banks in India are much advanced in terms of the number of sites and their level of development in terms of rendering advanced technology linked services to its customers. Recently, an authority of ICICI Bank observed, “Our Internet banking base has been growing at an exponential pace over the last few years. Currently around 78 per cent of the bank’s customer base is registered for Internet banking.”

Security Precautions :

In order to make their bank account safe, one should follow certain security precautions. Customer should never share personal information like PIN number, passwords etc. with anyone, including employees of the bank. It is important that documents that contain confidential information are safeguarded. PIN or password should be changed immediately and memorized before destroying the mailers.

Customers are also advised not to provide sensitive account-related information over unsecured e-mails or over the phone. He must take simple precautions like changing the ATM, PIN and online login and transaction passwords on a regular basis. It is also important to ensure that the logged in session is properly signed out.

Essay # 4. Facilities Available Under Internet Banking in India:

Following facilities are made available for customers under internet banking in India:

(i) Bill Payment Service:

Bill payment service is a utility service of internet banking. Accordingly, each bank has tie-ups with various utility companies, service providers, insurance companies across the country. Such tie-ups can facilitate online payment of bills of electricity, telephone, mobile phone, credit card, insurance premium bills etc.

In order to make online payment of bills, a simple one-time registration for each bills has to be made and a standing instruction has to be made to make online payment of recurring bills automatically. Most interestingly, the bank usually does not charge customers for such online bill payment.

(ii) Fund Transfer:

Internet banking has made provision for transfer of any amount of fund from one account to another of the same or any other bank. Accordingly, customers can send money anywhere in India. Once a customer logs in his account, he needs to mention the payee’s account number, his bank and the branch. The transfer will take place in a day or so, whereas in a traditional method it takes about three to four working days. ICICI Bank recently reported that its online bill payment and fund transfer facility have been most popular online services.

(iii) Credit Card Customers:

Internet banking provides the facility of credit card to its customers. With internet banking, customers can not only pay their credit card bills online but also gets a loan on their cards. Not just this, they can also apply for an additional card, request a credit line increase and in case the card is lost, one can report lost card online.

(iv) Railway Pass and Online Booking:

Through Internet banking facility to issue Railway pass is also available. Indian Railways has tied up with ICICI bank for this purpose and one can now make railway pass for local trains online. The pass can be delivered to the customer at his doorstep. Initially, the facility was limited to Mumbai, Thane, Nashik, Surat and Pune. The bank would just charge Rs 10 + 12.24 per cent of service tax. Moreover, online booking of e-tickets of Railways, Airlines etc. can also be made with some arrangement with banks through Internet banking.

(v) Investing through Internet Banking:

Through Internet banking, opening a fixed deposit account has become easier. A customer can now open an FD account online through funds transfer. Online banking can also be a great friend for lazy investors. Moreover, investors with interlinked de-mat account and bank account can easily trade in the stock market and the amount will be automatically debited from their respective bank accounts and the shares will be credited in their de-mat account.

Besides, some banks provide its customers the facility to purchase mutual funds directly from the online banking system. Nowadays, most leading banks offer both online banking and de-mat account facilities. However, if a customer is having his de-mat account with independent share brokers, then he needs to sign a special form, which will link his two accounts.

(vi) Recharging Prepaid Phone:

Through Internet banking, recharging of prepaid phone has also become possible. It is no longer needed to rush to the vendor to recharge prepaid phones as and when talk time runs out. Here the customer just tops-up his prepaid mobile cards by logging in to Internet banking. By just selecting operator’s name, entering mobile number and the amount of recharge, the prepared phone of the customer is again back in action within few minutes.

(vii) Shopping at Fingertips:

Internet banking provides facility of shopping at fingertips. Leading banks have tied-up with various shopping websites. With a range of all kind of products. One can shop online and the payment is also made conveniently through his account. One can also buy railway and air tickets through Internet banking.

Essay # 5. Emerging Challenges of Internet Banking in India :

In India, a large sophisticated and highly competitive Internet Banking Market is gradually being developed with market pressure and is subjected to the following emerging challenges:

1. Demand side pressure due to increasing access to low cost electronic services.

2. Emergence of open standards for banking functionally.

3. Growing customer awareness and need for transparency.

4. Global players in the fray.

5. Close integration of bank services with web based E-commerce or even disintermediation of service through direct electronic payments (E-cash).

6. More convenient international transactions due to the fact that the Internet along the general deregulation trends, eliminate geographic boundaries.

7. Move from one stop shopping to ‘Banking Portfolio’, i.e., unbundled product purchases.

The Internet and its underlying technologies have been changing and transforming not just banking but all aspects of finance and commerce. It usually represents much more than a new distribution opportunity. Internet banking will also enable nimble players to leverage their traditional brick and mortar presence for improving customer satisfaction and gain share.  

Essay # 6. Main Concerns in Internet Banking :

Internet banking in India has its areas of concern. In the mean time, a number of cases related to fraud and cheating of banks and customers by unscrupulous persons have already been lodged in India with this type of banking facilities. Irrespective of that attempts have been made by the RBI and the banking authorities for promoting safety and soundness of online and e-banking facilities in the country by issuing necessary guidelines.

In a recent survey conducted by the Online Banking Association, member institutions rated security as the most important issue of online banking. Thus there is a dual requirement to protect customers privacy and product against fraud.

Banking Securely:

Online Banking provides an overview of Internet Commerce and how one company can handle secure banking practices for its financial institution clients and their customers. Moreover, some basic information on the transmission of confidential data is presented in Security and Encryption on the web. In this respect, PC Magazine Online also offers a primer as to how encryption works.

Besides, a multi-layered security architecture comprising firewalls, filtering routers, encryption and digital certification ensures that customers account information is protected fully from un-authorised access in the following manner:

(i) Firewalls and filtering routers ensure that only the legitimate Internet users are usually allowed to access the system.

(ii) Encryption techniques used by the bank (including the sophisticated public key encryption) would ensure that privacy of data flowing between the browser and the Infinity system is protected.

(iii) Digital certification procedures provide the assurance that the data a customer receive is from the infinity system.

Essay # 7. Strategies to be Adopted by Indian Banks for Introducing Internet Banking :

In present times, Internet banking has no alternatives. Indian banking is gradually getting more and more access of Internet banking. Thus, Internet banking would drive us into an age of creative destruction due to non-physical exchange; complete transparency is also giving rise to perfectly electronic market place and customer supremacy.

At this moment, the question may be asked “what the Indian Banks should do under the present circumstances?” Whatever is the strategy chosen and options adopted, certain key parameters would largely determine the success of banks on web.

In order to attain long term success, in respect of Internet banking, a bank may follow:

(i) Adopting a webs mindset.

(ii) Catching on the first mover’s advantage.

(iii) Recognising the core competencies.

(iv) Enabling handling multiplicity with simplicity.

(v) Initiating senior management to transform the organisation from inward to outward looking.

(vi) Aligning roles and value propositions with customers segments.

(vii) Redesigning optimal channel port-folio.

(viii) Acquiring new capabilities through strategic alliances.

However, the above mentioned steps can be implemented by following four steps mentioned below:

(i) In the first phase, the customer be familiarized to new environment by demo version of software on banks, website. This will enable users to give suggestions for improvements, which can be incorporated in its later versions wherever possible.

(ii) The second phase provides various services such as account information and balances, statement of account, transaction tracking, mail box, check book issue, stop payment, financial and customized information.

(iii) The third phase may include additional multi-utility services like fund transfers, DD issue, standing instructions, opening fixed deposits and intimation of loss of ATM cards.

(iv) The final phase should include advanced corporate banking services like third party payments, utility bill payments, establishment of L/Cs, Cash Management Services etc. Enhanced plan for the customers in future may include requests for demand drafts and pay orders and many more to bring in the ultimate in banking convenience.

Thus by following the above mentioned strategies, it will help banks to translate their traditional business model into a Internet banking one, falling into the following three main categories:

(i) One-stop shop.

(ii) Virtual one stop shop.

(iii) Best of Breed Supplier.

Thus by following the above steps, the Indian bankers can pave the way for the successful introduction and popularizing the new concept of Internet banking on a large scale.

Related Articles:

• Essentials of a Sound Banking System
• Top 12 Functions of the Central Bank | Banking
• Financial Inclusion in Banking in India
• Essay on Indian Postal Services

Shohei Ohtani's former interpreter accused of stealing $16M from the MLB star

The former interpreter for Los Angeles Dodgers sensation Shohei Ohtani was federally charged with bank fraud Thursday, accused of stealing more than $16 million from one of Major League Baseball's biggest stars.

Ippei Mizuhara met Ohtani, who did not know English, in 2013 and helped him set up a bank account shortly after he arrived in the U.S. in 2018, and has since acted as his de facto manager, Martin Estrada, the U.S. attorney for the Central District of California, told reporters at an afternoon news conference.

Mizuhara, 39, of Newport Beach, California, who had an "insatiable appetite for illegal sports gambling," accessed Ohtani's bank account online and shut out Ohtani's agent, accountant and financial adviser from the account, allowing him to commit "fraud on a massive scale," Estrada said.

“I want to emphasize this point: Mr. Ohtani is considered a victim in this case. There is no evidence to indicate that Mr. Ohtani authorized the over $16 million of transfers from his account to the bookmakers,” he said.

Estrada added: “Mr. Ohtani has cooperated fully and completely in this investigation. He’s not only spoken to investigators; he’s provided access to his digital devices, to his personal information, to ensure that justice was done.”

Mizuhara’s attorney and representatives for Ohtani and the Dodgers declined to comment Thursday.

Mizuhara has agreed to surrender to federal authorities Friday. He will appear in federal district court that afternoon.

19,000 bets in two years

Mizuhara, who did not bet on baseball, is "linked to an illegal gambling operation," Estrada said.

From November 2021 to January 2024, Mizuhara wired more than $16 million in unauthorized transfers from a checking account belonging to Ohtani, according to an affidavit filed with a criminal complaint. The transfers from the bank account were made from devices and IP addresses associated with Mizuhara, federal prosecutors said in a statement.

In September 2021, Mizuhara began gambling with an illegal sports book and, months later, started losing large sums of money, prosecutors said.

Mizuhara is accused of making 19,000 bets that ranged in value from $10 to $160,000 per bet from December 2021 to January 2024, the affidavit said.

Mizuhara's winning bets totaled more than $142,256,000 and losing bets of about $182,935,000. His total losses amounted to more than $40,679,000, the affidavit said.

More on the betting scandal

• Shohei Ohtani says his interpreter stole money from his account and 'told lies'
• Who is Shohei Ohtani’s interpreter, Ippei Mizuhara? Everything we know
• How Shohei Ohtani's interpreter scandal could affeact the Dodgers star — and MLB
• MLB opens investigation after allegations that Shohei Ohtani's interpreter was involved in gambling scandal

During this time, the contact information on Ohtani’s bank account allegedly was changed to link the account to Mizuhara’s phone number and to an anonymous email address connected to Mizuhara, prosecutors said.

He also called the bank and identified himself as Ohtani to fool employees into authorizing wire transfers from the account to people linked to the illegal gambling operation, prosecutors said.

The maximum penalty for being convicted of bank fraud is 30 years in prison.

Probe has led to charges or convictions for 12 others

A person identified only as "Bookmaker 1" in the affidavit, who oversaw an illegal sports book Mizuhara used to gamble, is a target of the investigation, the affidavit said.

A source in Bookmaker 1’s organization is cooperating with investigators, the affidavit said, and has provided evidence of Mizuhara’s gambling history.

The probe into illegal gambling has led to charges or criminal convictions of 12 defendants and a money service business and nonprosecution agreements with two Las Vegas casinos. The investigation is ongoing, the affidavit said.

The Dodgers fired Mizuhara on March 21 after Ohtani’s attorneys alleged “massive theft” from him tied to sports gambling.

Major League Baseball opened an investigation. Ohtani, in his first public comments in the matter , said on March 25 that he had been betrayed and lied to, and he denied any involvement in sports betting.

Mizuhara was not only Ohtani’s interpreter but also a close friend and constant presence beside him.

“I’m very saddened and shocked that someone who I trusted has done this,” Ohtani said at a news conference in Los Angeles last month.

“Ippei has been stealing money from my account and has told lies,” he said in Japanese with the help of a different interpreter.

The scandal came to light after reports by  the Los Angeles Times  and  ESPN .

The allegations against Mizuhara centered specifically on wire transfers from Ohtani’s account — totaling at least $4.5 million, made in at least nine payments of $500,000 — to a bookmaking operation in Southern California that is under federal investigation, a person familiar with Ohtani and Mizuhara’s interactions has told NBC News.

Attorneys for Ohtani at the law firm Berk Brettler LLP said in a statement at the time the allegations came to light: “In the course of responding to recent media inquiries, we discovered that Shohei has been the victim of a massive theft and we are turning the matter over to the authorities.”

Ohtani, 29, came to the U.S. in 2018 to play for the Los Angeles Angels in Anaheim. In December he went to the Dodgers in a $700 million, 10-year deal .

Andrew Blankstein is an investigative reporter for NBC News. He covers the Western U.S., specializing in crime, courts and homeland security. 

Diana Dasrath is entertainment producer and senior reporter for NBC News covering all platforms.

Antonio Planas is a breaking news reporter for NBC News Digital. 

Phil Helsel is a reporter for NBC News.

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Japanese-Language Translator Charged in Complaint with Illegally Transferring More Than $16 Million from Baseball Player’s Account

LOS ANGELES – A Japanese-language translator was charged today via federal criminal complaint with unlawfully transferring more than $16 million from a Major League Baseball (MLB) player’s bank account – without the player’s knowledge or permission – to pay off his own substantial gambling debts incurred with an illegal bookmaking operation.

Ippei Mizuhara, 39, of Newport Beach, is charged with bank fraud, a felony offense that carries a statutory maximum sentence of 30 years in federal prison.

Mizuhara is expected to appear in United States District Court in downtown Los Angeles for his initial appearance in the near future.

According to an affidavit filed with the complaint, from November 2021 to January 2024, Mizuhara wired more than $16 million in unauthorized transfers from a checking account belong to an MLB player identified in the affidavit as “Victim A,” who in fact is MLB star Shohei Ohtani. The transfers from this bank account allegedly were made from devices and IP addresses associated with Mizuhara, who served as Ohtani’s translator and de facto manager.

In 2018, Mizuhara accompanied Ohtani, who didn’t speak English, to a bank branch in Arizona to assist Ohtani in opening the account and translated for Ohtani when setting up the account details. Ohtani’s salary from playing professional baseball was deposited into this account and he never gave Mizuhara control of this or any of his other financial accounts, according to the affidavit. Mizuhara allegedly told Ohtani’s U.S.-based financial professionals, none of whom spoke Japanese, that Ohtani denied them access to the account.

In September 2021, Mizuhara began gambling with an illegal sports book and, several months later, started losing substantial sums of money, the affidavit states. During this time, the contact information on Ohtani’s bank account allegedly was changed to link the account to Mizuhara’s phone number and to an anonymous email address connected to Mizuhara.

Mizuhara allegedly also telephoned the bank and falsely identified himself as Ohtani to trick bank employees into authorizing wire transfers from Ohtani’s bank account to associates of the illegal gambling operation.

From January 2024 to March 2024, he also allegedly used this same account to purchase via eBay and Whatnot approximately 1,000 baseball cards – at a cost of approximately $325,000 – and had them mailed to Mizuhara under an alias, “Jay Min,” and mailed to the clubhouse for Ohtani’s current MLB team.

In an interview last week with law enforcement, Ohtani denied authorizing Mizuhara’s wire transfers. Ohtani provided his cellphone to law enforcement, who determined that there was no evidence to suggest that Ohtani was aware of, or involved in, Mizuhara’s illegal gambling activity or payment of those debts.

A criminal complaint is merely an allegation, and the defendant is presumed innocent unless and until proven guilty beyond a reasonable doubt in a court of law.

IRS Criminal Investigation and Homeland Security Investigations are investigating this matter.

Assistant United States Attorneys Jeff Mitchell of the Major Frauds Section, Dan Boyle of the Environmental Crimes and Consumer Protection Section, and Rachel N. Agress of the International Narcotics, Money Laundering, and Racketeering Section are prosecuting this case.

Ciaran McEvoy Public Information Officer [email protected] (213) 894-4465

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Ram navami bank holiday 2024: banks will be closed in these states on april 17, wednesday for ram navami; check state-wise bank holiday list.

Ram Navami bank holiday: Banks in a few states in India will be closed on account of Ram Navami on April 17, 2024. Here is a look at the state-wise bank holiday list for Ram Navami.

Ram Navami: States where banks are closed

Other holidays in april 15, 2024.

• April 19: Lok Sabha General Elections 2024- Uttarakhand, Rajasthan, Meghalaya, Tamil Nadu
• April 20 ( third Saturday)- Garia Puja: Banks are closed in Tripura.
• April 26: Election in Bangalore

Elections 2024 bank holidays

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