In an effort to mitigate risk and improve their account opening process, a top 50 financial institution wanted to determine if they could predict which new accounts would result in a forced closure in the first 6 to 12 months.

Introduction

Annual losses from account closures were almost $7 million. The losses were a result of accounts being overdrawn for extended periods of time, causing the institution to close those accounts for cause.

The account closures and inability to recuperate from the loss occurs when customers, who have opted-in to having the institution pay items when funds aren’t available, overdraw their accounts and fail to pay the overdraft over a period of time. The average loss institutions incur when closing accounts for cause is $200-$400 per account.

The institution submitted over 100,000 records to be run against Clarity’s proprietary non-prime consumer database to aid in identifying predictors of future account closures.

Challenges

  • High financial loss due to forced account closures.
  • The ability to properly qualify customer needs.
  • Determining privileges, funds availability, and pay or no-pay on overdraft items.

Objectives

  • Reduce the number of forced account closures.
  • Properly qualify customer needs.
  • Successfully cross sell bank services, such as funds availability, overdraft protection, etc.

Clarity Actions

The submitted records were run against the Clarity database to search for evidence that the consumer had engaged in high risk activities.

Three categories were identified which predicted early account closure. The categories were:

  • Evidence of Alternative Financing – A consumer that takes out short-term loans may have little or no back up savings in the event of a financial emergency.
  • Evidence of Check Cashing – A consumer that uses check cashing services may avoid direct deposit due to financial instability.
  • Evidence of Retail Check Writing – A consumer that writes checks in retail stores, rather than using a debit card, may have the need to use the time between the day a check is written and the day the check clears due to financial instability.

Findings

Out of over 100,000 submitted records, more than 40% had a hit in Clarity’s database. More than 50,000 had evidence of one or more high-risk categories: alternative financing, check cashing, or retail check writing.
Consumers that engaged in any one of these categories had double the risk, while consumers that engaged in two or more activities had three times the risk of early account closure.

By combining these attributes into a custom bank account opening score, Clarity was able to demonstrate:

  • By turning down nearly 2,000 of the riskiest accounts (as determined by Clarity’s custom bank account opening score), more than 600 bad accounts could have been avoided.
  • The accuracy rate of these additional turndowns would be almost 40%.
  • Losses from closed for cause accounts would drop by more than 10%.
  • The potential loss savings by adding Clarity data is more than $750,000.

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