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In Lending as in Baseball, Moneyball Is No Longer Enough

Published: October 26, 2018 by Jim Bander

In 2011, data scientists and credit risk managers finally found an appropriate analogy to explain what we do for a living. “You know Moneyball? What Paul DePodesta and Billy Beane did for the Oakland A’s, I do for XYZ Bank.” You probably remember the story: Oakland had to squeeze the most value out of its limited budget for hiring free agents, so it used analytics — the new baseball “sabermetrics” created by Bill James — to make data-driven decisions that were counterintuitive to the experienced scouts. Michael Lewis told the story in a book that was an incredible bestseller and led to a hit movie. The year after the movie was made, Harvard Business Review declared that data science was “the sexiest job of the 21st century.”

Coincidence?

The importance of data

Moneyball emphasized the recognition, through sabermetrics, that certain players’ abilities had been undervalued. In Travis Sawchik’s bestseller Big Data Baseball: Math, Miracles, and the End of a 20-Year Losing Streak, he notes that the analysis would not have been possible without the data. Early visionaries, including John Dewan, began collecting baseball data at games all over the country in a volunteer program called Project Scoresheet. Eventually they were collecting a million data points per season. In a similar fashion, credit data pioneers, such as TRW’s Simon Ramo, began systematically compiling basic credit information into credit files in the 1960s.

Recognizing that data quality is the key to insights and decision-making and responding to the demand for objective data, Dewan formed two companies — Sports Team Analysis and Tracking Systems (STATS) and Baseball Info Solutions (BIS). It seems quaint now, but those companies collected and cleaned data using a small army of video scouts with stopwatches. Now data is collected in real time using systems from Pitch F/X and the radar tracking system Statcast to provide insights that were never possible before. It’s hard to find a news article about Game 1 of this year’s World Series that doesn’t discuss the launch angle or exit velocity of Eduardo Núñez’s home run, but just a couple of years ago, neither statistic was even measured. Teams use proprietary biometric data to keep players healthy for games. Even neurological monitoring promises to provide new insights and may lead to changes in the game.

Similarly, lenders are finding that so-called “nontraditional data” can open up credit to consumers who might have been unable to borrow money in the past. This includes nontraditional Fair Credit Reporting Act (FCRA)–compliant data on recurring payments such as rent and utilities, checking and savings transactions, and payments to alternative lenders like payday and short-term loans. Newer fintech lenders are innovating constantly — using permissioned, behavioral and social data to make it easier for their customers to open accounts and borrow money. Similarly, some modern banks use techniques that go far beyond passwords and even multifactor authentication to verify their customers’ identities online. For example, identifying consumers through their mobile device can improve the user experience greatly. Some lenders are even using behavioral biometrics to improve their online and mobile customer service practices.

 

Continuously improving analytics

Bill James and his colleagues developed a statistic called wins above replacement (WAR) that summarized the value of a player as a single number. WAR was never intended to be a perfect summary of a player’s value, but it’s very convenient to have a single number to rank players.

Using the same mindset, early credit risk managers developed credit scores that summarized applicants’ risk based on their credit history at a single point in time. Just as WAR is only one measure of a player’s abilities, good credit managers understand that a traditional credit score is an imperfect summary of a borrower’s credit history. Newer scores, such as VantageScore® credit scores, are based on a broader view of applicants’ credit history, such as credit attributes that reflect how their financial situation has changed over time. More sophisticated financial institutions, though, don’t rely on a single score. They use a variety of data attributes and scores in their lending strategies.

Just a few years ago, simply using data to choose players was a novel idea. Now new measures such as defense-independent pitching statistics drive changes on the field.

Sabermetrics, once defined as the application of statistical analysis to evaluate and compare the performance of individual players, has evolved to be much more comprehensive. It now encompasses the statistical study of nearly all in-game baseball activities.

 

A wide variety of data-driven decisions

Sabermetrics began being used for recruiting players in the 1980’s. Today it’s used on the field as well as in the back office. Big Data Baseball gives the example of the “Ted Williams shift,” a defensive technique that was seldom used between 1950 and 2010. In the world after Moneyball, it has become ubiquitous. Likewise, pitchers alter their arm positions and velocity based on data — not only to throw more strikes, but also to prevent injuries.

Similarly, when credit scores were first introduced, they were used only in originations. Lenders established a credit score cutoff that was appropriate for their risk appetite and used it for approving and declining applications. Now lenders are using Experian’s advanced analytics in a variety of ways that the credit scoring pioneers might never have imagined:

  • Improving the account opening experience — for example, by reducing friction online
  • Detecting identity theft and synthetic identities
  • Anticipating bust-out activity and other first-party fraud
  • Issuing the right offer to each prescreened customer
  • Optimizing interest rates
  • Reviewing and adjusting credit lines
  • Optimizing collections

Analytics is no substitute for wisdom

Data scientists like those at Experian remind me that in banking, as in baseball, predictive analytics is never perfect. What keeps finance so interesting is the inherent unpredictability of the economy and human behavior. Likewise, the play on the field determines who wins each ball game: anything can happen. Rob Neyer’s book Power Ball: Anatomy of a Modern Baseball Game quotes the Houston Astros director of decision sciences: “Sometimes it’s just about reminding yourself that you’re not so smart.”

Related Posts

We are squarely in the holiday shopping season. From the flurry of promotional emails to the endless shopping lists, there are many to-dos and even more opportunities for financial institutions at this time of year. The holiday shopping season is not just a peak period for consumer spending; it’s also a critical time for financial institutions to strategize, innovate, and drive value. According to the National Retail Federation, U.S. holiday retail sales are projected to approach $1 trillion in 2024, , and with an ever-evolving consumer behavior landscape, financial institutions need actionable strategies to stand out, secure loyalty, and drive growth during this period of heightened spending. Download our playbook: "How to prepare for the Holiday Shopping Season" Here’s how financial institutions can capitalize on the holiday shopping season, including key insights, actionable strategies, and data-backed trends. 1. Understand the holiday shopping landscape Key stats to consider: U.S. consumers spent $210 billion online during the 2022 holiday season, according to Adobe Analytics, marking a 3.5% increase from 2021. Experian data reveals that 31% of all holiday purchases in 2022 occurred in October, highlighting the extended shopping season. Cyber Week accounted for just 8% of total holiday spending, according to Experian’s Holiday Spending Trends and Insights Report, emphasizing the importance of a broad, season-long strategy. What this means for financial institutions: Timing is crucial. Your campaigns are already underway if you get an early start, and it’s critical to sustain them through December. Focus beyond Cyber Week. Develop long-term engagement strategies to capture spending throughout the season. 2. Leverage Gen Z’s growing spending power With an estimated $360 billion in disposable income, according to Bloomberg, Gen Z is a powerful force in the holiday market​. This generation values personalized, seamless experiences and is highly active online. Strategies to capture Gen Z: Offer digital-first solutions that enhance the holiday shopping journey, such as interactive portals or AI-powered customer support. Provide loyalty incentives tailored to this demographic, like cash-back rewards or exclusive access to services. Learn more about Gen Z in our State of Gen Z Report. To learn more about all generations' projected consumer spending, read new insights from Experian here, including 45% of Gen X and 52% of Boomers expect their spending to remain consistent with last year. 3. Optimize pre-holiday strategies Portfolio Review: Assess consumer behavior trends and adjust risk models to align with changing economic conditions. Identify opportunities to engage dormant accounts or offer tailored credit lines to existing customers. Actionable tactics: Expand offerings. Position your products and services with promotional campaigns targeting high-value segments. Personalize experiences. Use advanced analytics to segment clients and craft offers that resonate with their holiday needs or anticipate their possible post-holiday needs. 4. Ensure top-of-mind awareness During the holiday shopping season, competition to be the “top of wallet” is fierce. Experian’s data shows that 58% of high spenders shop evenly across the season, while 31% of average spenders do most of their shopping in December​. Strategies for success: Early engagement: Launch educational campaigns to empower credit education and identity protection during this period of increased transactions. Loyalty programs: Offer incentives, such as discounts or rewards, that encourage repeat engagement during the season. Omnichannel presence: Utilize digital, email, and event marketing to maintain visibility across platforms. 5. Combat fraud with multi-layered strategies The holiday shopping season sees an increase in fraud, with card testing being the number one attack vector in the U.S. according to Experian’s 2024 Identity and Fraud Study. Fraudulent activity such as identity theft and synthetic IDs can also escalate​. Fight tomorrow’s fraud today: Identity verification: Use advanced fraud detection tools, like Experian’s Ascend Fraud Sandbox, to validate accounts in real-time. Monitor dormant accounts: Watch these accounts with caution and assess for potential fraud risk. Strengthen cybersecurity: Implement multi-layered strategies, including behavioral analytics and artificial intelligence (AI), to reduce vulnerabilities. 6. Post-holiday follow-up: retain and manage risk Once the holiday rush is over, the focus shifts to managing potential payment stress and fostering long-term relationships. Post-holiday strategies: Debt monitoring: Keep an eye on debt-to-income and debt-to-limit ratios to identify clients at risk of defaulting. Customer support: Offer tailored assistance programs for clients showing signs of financial stress, preserving goodwill and loyalty. Fraud checks: Watch for first-party fraud and unusual return patterns, which can spike in January. 7. Anticipate consumer trends in the New Year The aftermath of the holidays often reveals deeper insights into consumer health: Rising credit balances: January often sees an uptick in outstanding balances, highlighting the need for proactive credit management. Shifts in spending behavior: According to McKinsey, consumers are increasingly cautious post-holiday, favoring savings and value-based spending. What this means for financial institutions: Align with clients’ needs for financial flexibility. The holiday shopping season is a time that demands precise planning and execution. Financial institutions can maximize their impact during this critical period by starting early, leveraging advanced analytics, and maintaining a strong focus on fraud prevention. And remember, success in the holiday season extends beyond December. Building strong relationships and managing risk ensures a smooth transition into the new year, setting the stage for continued growth. Ready to optimize your strategy? Contact us for tailored recommendations during the holiday season and beyond. Download the Holiday Shopping Season Playbook

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