Challenge

The client lends money in the form of business loans to its merchants using static pricing framework.

The challenge here was that this pricing model did not optimally price merchants for their risk.

Solution

EXL developed a risk based pricing strategy for the client’s commercial lending product that ensured that the pricing sufficiently covered for losses, costs of running the business and provided some margins. The following were the steps that were adopted.

  • Analyzed the P&L to understand and calculate each cost component – Cost of funds, Risk provisions, acquisition cost, servicing/operations
  • Obtained the Economic Capital calculation for each loan in the portfolio
  • Evaluated the minimum margin based on Return on Capital Employed (ROCE) thresholds set for the client
  • Created CART based segmentation logic to determine risk segments based on expected write-off rates
  • Pricing was calculated for each segment by adding non-risk costs and margins to expected losses

Benefits

The dynamic risk based pricing strategy that was developed would

  • Sufficiently cover the cost of running the business,
  • Set the most optimal price for merchant risk and
  • Provide for most accurate margins in accordance with the merchant risk

$10-$15mn

Expected increase in annual revenue by employing Risk Based Pricing Strategy

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