AI in Credit Risk Management for Large Enterprises: What It Is, How It Works, Challenges, and Solutions

29 December, 2023
3 min
Brett Johnson, AVP, Global Enablement

Table of Content

Key Takeaways
Introduction
The Traditional Approach to Manage Credit Risk
How AI is Revolutionizing Credit Risk Management?
AI-Powered Credit Risk Management: How Does It Work?
Real-World Use Cases of AI in Credit Risk Management
What Are the Challenges to Implement AI-Powered Credit Risk Management?
The Future of AI-Powered Credit Risk Management
Frequently Asked Questions

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Key Takeaways

  • Discover how AI revolutionizes credit risk management for large enterprises, offering faster and more accurate assessments, reducing financial risks, and enhancing overall decision-making efficiency.
  • Uncover the benefits, including speed, accuracy, fraud detection, and improved customer experience, that AI-powered credit risk management brings to large enterprises.
  • Gain insights from real-world examples like Mosaic and Chevron Phillips Chemical, where AI-driven credit risk solutions significantly improved decision-making, reduced credit risks, and enhanced cash flow.
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Introduction

For a global business, credit risk management extends across geographies. Enterprise credit teams have to deal with diverse portfolios in terms of various languages, currencies, and complex parent-child scenarios.

Credit risk management is crucial for large enterprises because it helps them minimize the risk of financial loss resulting from the failure of their customers or counterparties to fulfill their financial obligations. Failure to manage credit risk effectively can lead to financial distress, insolvency, and even bankruptcy.

impact of AI in credit risk management in mosaic

AI-powered credit risk management leverages the power of artificial intelligence and machine learning algorithms to analyze vast amounts of data, identify patterns, and make accurate predictions about credit risk. By automating the credit risk assessment process, AI-powered systems can provide large enterprises with faster, more accurate, and more reliable credit risk assessments than traditional methods.

In summary, AI-powered credit risk management is an important tool for large enterprises to manage credit risk effectively and efficiently. It offers a range of benefits, including improved accuracy, faster decision-making, reduced risk, and cost savings.

But wait, if we are talking about the importance of AI-powered credit risk management, let’s discuss the traditional approach of credit risk management to see what needs to be changed or upgraded here.

The Traditional Approach to Manage Credit Risk

Traditional methods of credit risk management involve a variety of manual processes, such as gathering information on potential borrowers, assessing their creditworthiness, and monitoring their credit performance over time. These processes rely heavily on human judgment and are often prone to errors, inconsistencies, and biases.

One of the main limitations of traditional methods is their reliance on limited data analysis. They often use only a small subset of available data, such as credit scores, financial statements, and payment history, to make credit decisions. This can result in a narrow view of the borrower’s creditworthiness, and lead to inaccurate or incomplete risk assessments.

Another challenge of traditional methods is subjectivity. Credit risk assessment is often based on the subjective judgment of individual underwriters or analysts, which can vary widely depending on their personal experience, biases, and risk appetite. This can lead to inconsistent or unfair credit decisions, as well as increased risk exposure for the lender.

Additionally, traditional methods can be time-consuming and costly, requiring significant resources to manage the credit risk process, including personnel, technology, and infrastructure. These challenges can limit the ability of large enterprises to make timely and accurate credit decisions, and can result in missed business opportunities, increased credit losses, and reduced profitability.

To overcome these limitations and challenges, large enterprises are turning to AI-powered credit risk management solutions. These solutions leverage advanced data analytics and machine learning algorithms to analyze vast amounts of data, identify patterns and trends, and make accurate credit decisions in real-time.

In the next section, we will discuss the benefits of AI-powered credit risk management in more detail.

How AI is Revolutionizing Credit Risk Management?

Large enterprises now leverage AI-driven solutions for credit risk management. They harness advanced algorithms with Artificial Intelligence (AI) and MachineLearning (ML) to swiftly and accurately analyze vast data sets, ensuring a comprehensive and reliable assessment of credit risk in real time.

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Let’s look at a few advantages of using AI-powered credit risk management.

Advantages of Credit Management

Advantages of AI-powered credit management

Advantages of AI-powered credit manag

  1. Speed
  2. Accuracy
  3. Fraud detection
  4. Customer experience

Speed:

One of the key advantages of using AI-powered solutions is speed. Traditional credit risk management methods often involve manual processes that can be time-consuming and prone to errors.

AI-powered solutions, on the other hand, can analyze large amounts of data in real-time, enabling enterprises to make quicker and more informed decisions.

Accuracy:

AI-powered solutions also provide more accurate risk assessments. By analyzing a wide range of data points, including historical transaction data, credit scores, and demographic data, these solutions can identify patterns and trends that may not be apparent to human analysts.

This allows enterprises to make more accurate predictions about future credit risk, reducing the likelihood of default and improving overall portfolio performance.

Fraud detection:

Another advantage of AI-powered solutions is their ability to detect fraud more effectively. By analyzing transaction data in real time, these solutions can quickly identify suspicious activity and flag it for further investigation. This helps enterprises to prevent fraudulent transactions before they occur, minimizing the risk of financial losses.

Customer experience:

Finally, AI-powered solutions can enhance the customer experience by providing more personalized credit offerings. By analyzing customer data, such as spending patterns and credit history, these solutions can tailor credit offers to each customer’s unique needs and preferences. This can improve customer satisfaction and increase customer loyalty, ultimately leading to improved financial performance for the enterprise.

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AI-Powered Credit Risk Management: How Does It Work?

1. Multi-Language Online Credit Applications for Onboarding Customers Globally

With a configurable Online Credit Application, credit teams can onboard customers faster across the globe. Online Credit Applications can be configured and translated into any required language and based on customer segments. With pre-filled credit applications from the sales team, customers don’t need to spend a lot of time filling up the credit application.

2. Consolidated View of Credit Risk Globally

Credit teams can seamlessly integrate across multiple ERPs, and business units, and review credit risk in a standard, global currency. The senior management can review the overall credit risk exposure across geographies to develop strategies to reduce bad debt. Additionally, they can drill down to a particular geography and check the credit exposure, even in the local currency.

3. Automatically Extract Credit Data from 40+ Credit Agencies and Bureaus

Automatically extract credit reports, ratings, financials, and credit insurance information from 40+ global and local agencies such as D&B, Experian, CreditSafe, Equifax, and Serasa. With HighRadius Credit Cloud, credit teams can access a one-stop repository for all credit information required for global operations.

4. Automated Credit Scoring and Approval Workflows

Automated credit scoring is the swift evaluation of an individual’s or a business’s creditworthiness using advanced algorithms and predefined criteria. It assesses financial factors to generate a numerical score, streamlining decision-making for credit teams.

Integrated with collaborative e-workflows, these credit scoring models can be configured seamlessly across business units, geographies, or diverse customer segments.

5. Real-Time Credit Risk Monitoring

In the current economy, Real-Time Credit Risk Monitoring helps credit teams to monitor customer portfolios daily on a real-time basis. Credit analysts can receive real-time alerts related to bankruptcy, dips in credit scores, and changes in payment behavior to stay on top of risks and control overall bad debt. This way they can proactively manage the credit risk.

Real-World Use Cases of AI in Credit Risk Management

The use of AI-driven credit risk management has become increasingly popular among large enterprises in recent years. Below are two examples of companies that have implemented AI-powered credit risk management solutions with HighRadius.

Mosaic’s success story

Mosaic, a Fortune 500 mining company, with over $12.35B in annual revenue, implemented an AI-powered credit risk management solution to streamline their credit decision-making process. The solution integrated data from various sources, including credit bureaus, financial statements, and customer payment histories, to provide a comprehensive view of a customer’s creditworthiness.

“We reduced dramatically the number of approved layers. This average to approve a credit limit dropped from nine to four, which is basically because we got rid of people that we didn’t go into having the approval flow.”

Santiago Tommasi,

Senior Credit Manager,

The Mosaic Company

The system used machine learning algorithms to analyze this data and generate a risk score for each customer. This allowed Mosaic to make faster and more accurate credit decisions, resulting in reduced credit risk and improved cash flow.

Chevron Phillips Chemical’s success story

Chevron Phillips Chemical, an American chemical manufacturer, also implemented an AI-powered credit risk management solution to automate their credit management processes.

“We lean on the HighRadius Credit Software to help us maximize the profit. We are 100% paperless with consistent credit reviews, and the software automatically does our credit reviews.”

Don Giallanza,

Commercial Credit Manager,

Chevron Phillips Chemical

Chevron Phillips Chemical’s success story using AI in credit risk management

The solution used machine learning algorithms to analyze customer data and identify patterns that indicated a higher risk of default. It also provided real-time alerts to the credit team when a customer’s risk profile changed. This allowed Chevron Phillips Chemical to make proactive decisions and mitigate credit risk.

Click here to read Chevron Phillips’ full case study

Overall, the use of credit risk AI management has numerous benefits, including faster and more accurate risk assessment, improved fraud detection, and enhanced customer experience. These case studies highlight the potential for AI-powered solutions to revolutionize credit risk management for large enterprises.

While we talk about the advantages and impact of AI driven credit risk management, there are a few challenges and considerations to keep in mind.

What Are the Challenges to Implement AI-Powered Credit Risk Management?

Large enterprises should be aware of the potential challenges and considerations that come with implementing AI-powered credit risk management solutions. Some of the key issues to consider include data privacy, ethical concerns, and regulatory compliance.

Data privacy:

Data privacy is a major concern, as large enterprises deal with large amounts of sensitive customer data. They need to ensure that any AI-powered solution they implement is compliant with data privacy regulations such as the General Data Protection Regulation (GDPR) and the California Consumer Privacy Act (CCPA).

Ethical concerns:

Ethical considerations are also important to keep in mind. AI-powered credit risk management solutions have the potential to automate decision-making processes, which could result in unintended biases. Enterprises should ensure that they are using AI in an ethical and responsible manner and are transparent about how their AI systems make decisions.

Regulatory compliance:

Regulatory compliance is another important consideration. Enterprises need to ensure that any AI-powered solution they implement is compliant with relevant regulations such as the Fair Credit Reporting Act (FCRA) and the Equal Credit Opportunity Act (ECOA).

In addition to these considerations, enterprises should also be aware of the potential for technical challenges when implementing AI-powered credit risk management solutions. They may need to invest in new infrastructure and systems to support these solutions, as well as ensure that they have the necessary skills and expertise in-house to implement and maintain them.

Enterprises should also ensure that their AI systems are regularly audited and updated to ensure that they remain effective and compliant.

The Future of AI-Powered Credit Risk Management

The future of credit risk management envisions autonomous systems where AI will have a greater role in making decisions without human intervention. The use of machine learning algorithms can lead to faster and more accurate decision-making, as well as the ability to analyze larger volumes of data in real-time.

One potential benefit of autonomous credit risk management is the reduction in bias and human error, which can lead to more objective and consistent decisions. Additionally, these systems can adapt and learn from new data over time, improving their accuracy and effectiveness.

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Frequently Asked Questions

1. What is the role of AI in credit risk management?

AI plays a pivotal role in credit risk management by employing advanced algorithms to swiftly analyze vast datasets. It enhances decision-making accuracy, identifies patterns, and assesses creditworthiness, ultimately providing a more comprehensive and efficient approach to managing credit risks.

2. What are the main benefits of using AI in credit risk management?

With AI-Powered Credit Management Software, credit teams can achieve 100% real-time credit risk monitoring to ensure lower bad debt by tracking changes in customer credit risk and payment behavior. AI can be leveraged to predict blocked orders based on past order volumes and payment patterns.

3. How AI is used in risk management in banks?

AI is employed in banks’ risk management by utilizing ML algorithms to analyze extensive financial data. It enhances fraud detection, assesses credit risks, and automates compliance processes. This technology improves decision-making, reduces operational risks, and strengthens risk management.

4. What is the role of AI in credit lending?

AI plays a crucial role in credit lending by automating credit scoring processes. It swiftly analyzes borrower data, assesses creditworthiness, and streamlines decision-making. This improves efficiency, reduces risks, and enables lenders to make more informed and accurate lending decisions.

5. What is credit risk monitoring?

Credit risk monitoring involves continuous assessment and surveillance of borrowers’ credit profiles. It utilizes data analysis and key indicators to track changes in creditworthiness, helping lenders identify potential risks and make informed decisions to mitigate financial losses.

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