Everything you need to know about Credit

Introduction

How has Credit evolved today?

The roots of credit can be found going deeper than the 13th century when the need for credit arose due to the lack of supply of metals for minting coins. The credit system was more widespread and used than the well-known barter system. Consumers and suppliers would keep tabs of who owed what, and this network spread everywhere, from within families and neighbors, to different trade groups in different geographies. For centuries, credit was a major form of transaction, even more, pervasive than coins or barter. Credit was also convenient for traveling for the common man, and more importantly, to traders, who used bill of exchange in the medieval times to keep credit information handy, as carrying heavy coins was a burden.

Credit was lent on the basis of trust, honesty, and reputation, and a person or merchant with a bad history of payment would not benefit from this. Even centuries ago, some form of research and analysis was done before offering credit. A lot of time was spent on collecting the credit that was lent, and often times, debtors failed to pay, a problem that is seen even today. And to avoid this, creditors relied on bonds, notarized records, sureties, and pledges. From the 15th to the 17th century, credit systems progressed towards banking, with the importance of credit slowly fading.

Although trade credit lost its significance, it was still used between merchants and companies, to make trading easier with them. A rise in the use of credit was seen after both World Wars, with the purpose of attracting customers and increasing trade as a way to get a financial foothold in unstable economies. With this, many insurers offered credit insurance as well, to protect companies from debts and defaults. Since then, credit has been etched to the Business to Business world, as a way to gain customers, and remain ahead of the competition.

Credit scoring became important to companies for knowing which customers were safe to do business with, and the traditional process involved contacting other companies the customer did business with, studying their business model, going through their financial records to identify payment history, and publicly available records. Credit scoring back then was difficult and very inaccurate

With the modern age and its technological advances, companies do business across oceans, with every detail of trade and transaction communicated and stored digitally. In spite of the fact that digitization may seem like a breath of fresh air that has supported the globalization of trade and made the allocation of credit easier, a lot of problems still persist. With growing business and customer needs, the impacts on companies and their consequences are increasing as well. Credit management is such a process where these effects are felt. Let’s take a look at how.

Credit Application

The very beginning of doing business with any potential customer is to get them to submit a Credit Application. It is a mandatory process that every potential customer needs to go through. Like any other application, it requires them to fill out details of their company. And this is where the first problem arises. While filling out applications, many details are left blank, due to various reasons. Maybe the person filling out the form doesn’t know the answer to the required field, or maybe it is against that company’s policy to give out that piece of information. Maybe it’s a bit of both, the person doesn’t know whether he is allowed to fill that field or not, and how much his company’s policies dictate the limit to information being given.

With this, it becomes the responsibility of your credit team to take a step ahead and approach the applicant for those details, since this could make or break the opportunity for a new customer. After correspondence with the applicant, those details are extracted and filled in the application. A simple task of submitting an application can take days, delaying the chance of doing business with a new customer. A simple solution to this problem could be an online platform to submit an application with details that are necessary, be marked as mandatory. Unless those fields aren’t filled, the application cannot be submitted.

Another problem could be the collection of financial data required for credit analysis and scoring from the customer. This could include documents like revenue details, financial records, licenses, tax documents, guarantees, etc. Not just this, some of these could be outdated or non-standardized, meaning they may be redundant to your credit team’s analysis. Credit information, reports, ratings, and scores also have to be collected from credit agencies and bureaus for additional information needed for scoring. The collection of stacks of information can be hectic, difficult, or even impossible at times. Your credit team needs to align its needs with what data is offered and has to make do with that. Integration with agencies and bureaus may seem digitized, but a lot of manual work is involved in doing just that.

The problems don’t just end there. There’s paperwork to be done. And there’s a lot of it. With hundreds of applications flowing in, the credit information gathered is immense. There’s an exponential growth in potential customers and it becomes difficult for your credit team to keep up with the applications and documents. Onboarding customers becomes a strenuous task, with papers piling up every day. Tracking applications and supporting documents is difficult, and if some papers are missing, an analyst has to gather them again, essentially starting from scratch. This could be tackled with the use of a digital means to gather and store all information from applicants and agencies, where all necessary documents can be accessed easily, without the problem of physically storing each paper. So, what are some other problems related to information gathering and storing?

Data Aggregation

There’s a lot of issues when it comes to the data part. Credit analysis is data-driven, and hence there’s a lot of information involved in scoring thousands of customers. It is necessary to have a platform in place which stores all the information. Usually, it is all in physical form, and it becomes laborious to find and collect each piece of information when required. Recently, companies are switching to digital means, to store data in cloud storage or in a central database. This makes retrieval of information easier.

But this may also lead to other problems, such as data security, storage reliability, and backup, and the level of access an analyst or manager has to the data since these are sensitive in nature. This becomes a cause for concern as this information could be seen by anyone with malicious intent. So a well secured and robust database needs to be in place, and it should offer basic features such as searching using filters, data backup, centrally accessed storage, etc.

Another problem with the aggregation of credit data from agencies and bureaus is that the information is presented in different formats. Different agencies and bureaus have different scoring and rating models, and the information provided by them might vary. This non-standardization of data causes confusion and analysts have to do extra work to find credible information. This could take weeks, considering the number of customers a company might have.

Sometimes, the data that is available with your credit team, or with the credit agencies is outdated, and an updated document or piece of information isn’t available in any of your sources. Or the data that is available is incomplete and doesn’t have all the fields of information required. In these cases, your credit team has to run the analysis based on incomplete information, and this increases the risk of a default, as the credit score allotted could be inaccurate.

Credit Scoring

Periodic Reviews

Best Practices/ Trends

Future Scope

With the current problems still existing, the future looks at ways to tackle these and make credit management easier and faster. This could mean using the latest technology in the credit space. Some new innovations that are being incorporated in credit are Artifical Intelligence, Robotic Process Automation, Mobile Applications, etc.

Taking a look at mobile applications, these could enable customers and credit teams to work away from their office. Some uses for customers could be the submission of credit applications online via the mobile app, request for a credit score review, view blocked orders, etc. For the credit teams, it could mean running an analysis while on-the-go, gathering documents while away from a desk, or even communicating with team members, other departments, and customers via the mobile application.

A very promising aspect is the use of Robotic Process Automation (RPA) and Artificial Intelligence (AI). It allows almost all manual work to be done automatically. By using RPA, certain tasks and processes can be defined by programming them, and the RPA bot does those tasks, like mimicking an analyst’s work. For processes that cannot be defined by certain rules and algorithms, and some level of decision making is involved in doing them, Artificial Intelligence is used.

Using AI, tasks such as deciding a credit score based on factors that are not necessarily bound by metrics can be done easily. It can also approve credit applications