Reevaluating Risk Scoring in a New Pricing Landscape

This is the second installment in our article series diving deep into the Nomis November 14 discussion on pricing challenges in a falling rate environment. In the first article, Navigating Pricing Challenges in a Falling Rate Environment: Lessons from the Past, we highlighted the need for strategic adjustments to address the current "new normal."

Rethinking Risk Scoring: The Foundation for Modern Pricing Strategies

Another central theme of the fireside chat was the reevaluation of risk scoring models. Traditional methods, often built during a decade of near-zero interest rates, are no longer sufficient to capture today’s customer dynamics.

• Legacy Models Under Scrutiny: Many institutions are discovering that older models, such as those based on FICO scores or static customer scorecards, lack relevance in today’s market.
• Comprehensive Adjustments: Nomis executives observed a growing trend among clients to undertake deep, sometimes challenging overhauls of their scoring methodologies.
• Incorporating Elasticity: Advanced price elasticity models are becoming a standard approach for evaluating customer sensitivity to rate changes across diverse portfolios, including deposits, mortgages, and auto loans.

This shift reflects the significant economic and behavioral changes over the past five years, including the pandemic’s impact and recent rate hikes, which have reshaped consumer decision-making.

The overarching takeaway is that the lessons of the past decade are increasingly irrelevant in today’s dynamic environment. Financial institutions must embrace both structural and cultural changes to remain competitive. Adjusting models is only part of the equation. In our next article, we will explore the critical role of change management in deploying new pricing strategies.

For a deeper dive into these insights, watch the recording of our November 14 Fireside Chat to hear directly from Nomis executives.