frank rhode, nomis solutions
TRANSCRIPT
Property of Nomis Solutions Inc. – Confidential Material
Innovative Strategies and Technologies to Fuel Growth: Pricing Optimization Auto Finance Executive Primer
Frank RohdeChief Marketing Officer & VP Product Management
Nomis Solutions
AFSA Vehicle Finance Conference
February 7, 2008
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About Nomis Solutions
▪ Market Leader in Profit-based Pricing for Banking & Finance
▪ Most Customers and Experience
▪ Exclusive Focus on Banking & Finance
▪ Best-in-Class Technology & Science
▪ Fastest Time-to-Benefit
▪ Nomis Price Optimizer™ for:
▪ Auto Finance
▪ Home Equity Lending/Mortgages
▪ Personal Lending
▪ Deposits
Founded in 2002, Nomis Solutions is the leading provider of Profit-based Pricing
solutions for banking and finance.
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How Does Price Optimization Fit In?
What we’re hearing from auto finance execs:
1. Manage increasing loss rates
2. Achieve profit improvements by end of FY08
3. Continue to increase shareholder value despite decreased lending volume
4. Create a more favorable credit mix and understand long term impact of current credit mix on portfolio
5. Identify opportunities for growth in a volatile lending environment
How Price Optimization can help:
1. Measure and manage adverse selection
2. Price optimization is accretive in 6-8 months
3. 10-20% profitability increases without volume hits
4. Simulate and optimize tradeoffs across credit tiers and segments
5. Identify competitors’ pricing and underwriting trends and optimize response to competitors
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Pricing Practices and Processes are Flawed
Auto Finance companies use similar processes to deploy their rates.
However, the current process is flawed. Most organizations lack the tools and insights necessary to use pricing as a strategic lever to achieve performance objectives.
These shortcomings result in 10-20% losses in profits and volumes.
Pricing Strategy
No clear understanding
of profit and volume tradeoffs
Executive Pricing Committee
Rate Sheet Delivery
3-5% of rates are miscoded
Pricing Operations
Rate Sheet Creation
Pricing & Profitability Team
80% of rates are too low or too high
Performance Monitoring
No ability to understand how prices impacted performance
Pricing & Profitability Team
Rate Sheet Execution
Up to 20% profit loss due to poor
negotiation
Credit & Funding Operations
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Using a more advanced, Profit-based Pricing approach empowers auto finance companies with the tools and insights necessary to price more strategically and intelligently.
These improvements result in 10-20% increases in profits and volume.
Profit-Based Pricing Process Best Practices
Rate Sheet Delivery
Pricing Operations
Automate Rate sheet coding and
delivery
Rate Sheet Execution
Credit & Funding Operations
SmartRanges optimize
negotiation ranges
Pricing Strategy
Executive Pricing Committee
Set profit and volume tradeoffs
Performance Monitoring
Pricing & Profitability Team
Analyze forecast-to-actual variance
Recalibrate models Update reports
Rate Sheet Creation
Simulate, optimize, Communicate and
Collaborate
Pricing & Profitability Team
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Nomis Pricing Optimization & Deal Management Solution
NomisPrice Optimizer
NomisPrice Optimizer
NomisOffer Optimizer
NomisOffer Optimizer
OptimizedRate Sheets
Dealer
Apps
Credit Analyst
Profitability Analytics
Price ExecutionCredit Analyst interactively structures
the optimal deal with guidance from the Nomis Optimizer Optimizer
• Price Sensitivity Models• Profit Model• SmartRanges™• Deal-level Pricing “Controls”
Rate Sheet Development• Goals, targets & rules• Tactics / Controls• Baseline Management• Global Input Management• Cross portfolio Optimization
• Smarter Negotiation Ranges• Real-time Deal Structuring
& Calculation• Dealer Performance
& Deal History
LOS
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Where is Price Optimization in Auto Finance?
Leading to rapid adoption of Nomis technology:
Strong in-market results: 10-30% profit gains and 20-25% volume gains:
Annual growth rate (CAGR) of adoption is ~80%
$5
$18
$30
$53
$-
$10
$20
$30
$40
$50
$60
2004 2005 2006 2007
$ B
illio
n
Annual Origination Volume Optimized Using Nomis Price Optimizer
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Key Insights from Price Optimizationin Auto Finance – the numbers (on average)
▪ 40% of rates go up, 40% of rates go down, 20% stay the same
▪ Average rate change 12bps
▪ SmartRanges™ limit the most severe 20% of overrides
▪ Dealer price elasticity varies by 2-3x across dealer segments
▪ Consumer price elasticity varies by 4-5x across consumer segments
▪ 60% of benefits accrue through optimizing existing rate structure
▪ 40% of benefits accrue through “pricing expansion” – additional risk score bands, regional pricing, dealer segmentation, fee variation
▪ Average time to benefit on price optimization investment: 16 weeks
▪ Average reduction in time-to-market of pricing actions: from 2 weeks to 2 days
▪ Adverse selection can impact bad rates by up to 2x
▪ 620 FICO @ 11% = 7% Bad Rate,
▪ 620 FICO @ 15% = 12% Bad Rate
▪ Patent-pending Nomis Adverse Selection Trend Index quantifies adverse selection (credit migration due to pricing)
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Nomis Price OptimizerTM for Auto Finance
Nomis Price OptimizerTM for Auto Finance + SmartRangesTM
Nomis Price OptimizerTM for Auto Finance +
Nomis Offer OptimizerTM
• Organization focused on rate-sheet pricing
• “Overrides are ok for some deals”
• 3-20% of deals negotiated
• Negotiation is a key driver of business strategy
• “We’ll make the deal work for you”• >20% of deals
negotiated
How You Use Pricing Optimization Depends on Your Business Model
• Organization dedicated to rate- sheet pricing
• “Overrides are bad”
• Less than 3% of deals negotiated
Auto-decisioning Hybrid Approach
to Pricing Off-rate Sheet
Pricing
Consistency Flexibility
Rate Sheet optimization
Rate Sheet & negotiation range
optimization
Rate Sheet & individual deal optimization
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The Basic Improvements from Profit-based Pricing
Generate profit and volume increases by better tailoring buy rates:
Segment dealers and customers Manage price elasticity Optimize volume / profit tradeoffs
Use a consistent, repeatable and efficient pricing process:
Eliminate spreadsheets Eliminate manual coding Satisfy fair lending requirements
Evaluate responses to competitor price moves before executing rate changes:
Play “what-if” on the competition Optimize response to competitor rate changes
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Get a Deeper Understanding of Your Business
Forecast future performance based on pricing plans: Understand how rates impact future performance and identify
where to make changes in order to achieve plan.
Stress test the forecast with macroeconomic changes: Be proactive by testing how a change in vehicle sales, the unemployment rate, or auction values impact the forecast and develop a pricing plan to respond to these new in-market conditions.
Understand the impact of subvention and promotions: Avoid cannibalizing products by understanding the impact of subvention, promotions, or lease rates on the portfolio before implementing prices.
March April May
Auto Finance Portfolio 2008 Forecasting Period
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Thank YouFrank Rohde
Chief Marketing Officer and Vice President, Product Management