How data can help you make better decisions and reduce credit risk

In the digital age, data has become a key driver of growth, with insights guiding businesses to success. The financial services sector is heavily reliant on data, with banks, insurance companies and any organisations who deal in risk seeking to bolster their modelling and reduce defaults. Channelling rich, new data into these models can provide the clarity needed for enhanced decision making—both in identifying credit risk from the outset at the application stage, and on an ongoing basis and credit risk management over time—alerting financial organisations to timely indicators that are statistically likely to impact their bottom line.

More data, richer models

Organisations that manage credit have always relied on traditional risk indicators like bankruptcies, insolvencies and court judgments from ASIC, ABR, AFSA, the Australian courts and Insolvencynotices.gov.au. While these are still a vital part of the picture, granular detail is lacking. Fortunately, this can now be enriched by real-time data showing transactions and data analytics between businesses. Information straight from accounting software (like Xero and MYOB) of small and medium-size businesses, which is refreshed by CreditorWatch every five minutes, as well as the aged trial balances of larger companies and financial institutions uploaded via the DebtorLogic product each month, can provide timely insights to help your organisation better manage credit risk.

The value of this unique data lies in its predictive abilities, and only one credit bureau has this data. It reveals how businesses are faring right now, in terms of making payments they owe to other businesses and enables organisations who manage credit to see signs of distress early. Are they paying their invoices quickly? Within thirty days? Or are payments taking two or three months? What’s their overdue invoices status? Late trade payments are a clear predictor of future defaults and credit risk, so these insights are extremely valuable, particularly when they can be easily compared to industry standards for greater context.

So why stick to purely traditional risk indicators when new digital insights can be gleaned from 11 million tradelines and 15 million monthly invoices? This brightens and sharpens the picture. More big data enriches models and enhances your ability to predict future default and credit risk; a boon for businesses seeking to avoid poor credit approval decisions and reduce costly defaults. 

Access to additional unique insights

In addition to the unique accounting software data, an epic bank of commercial data—which contains more than forty vital financial factors—can be used retrospectively, to provide insight into your customers’ behaviour over the past five years, giving a fuller account of each business’s health. These insights into their past and current behaviour can be seamlessly integrated into your existing work flows, such as your CRM system, ERP or any other third-party software, rounding out each profile to help predict the future. The data can also be channelled in new ways for specific insights of interest via a customised approach, utilising an API that enables seamless communication between constantly updated CreditorWatch data and valuation, and the insights seen by your team on their screens. 

Early warning sign alerts

The latest data can also assist with annual reviews of risk grades, complementing your current data sources to track businesses throughout the customer lifecycle and better identify credit quality deterioration early so timely action can be taken.

The importance of this cannot be understated given that we know:

• Small businesses in arrears are more of a default risk compared to those who pay on time.
  • 60+ arrears are more than 5 times the default risk
  • 30-60 arrears are approximately 3 times the default risk
• Large businesses with 60+ arrears are more than double the default risk compared to large businesses that pay within 30 days.
• Businesses that pay most invoices on time are less than half the default risk compared to the average business.
• High-trade-activity businesses are less than half the default risk compared to the average business.
• Businesses with recent B2B trade payment defaults are approximately 7 times the default risk compared to businesses with no trade payment defaults.

Algorithm transparency

Algorithms are notoriously secretive, but CreditorWatch understands how important it is for those who make informed decisions based on insights to know how these are derived. That’s why the aggregate data that contributes to a credit score an organisation receives from CreditorWatch is completely transparent and easily shared. In the field of finance—a world where numbers are of great importance—there shouldn’t be any secrets.

A new economic indicator

A new Business Risk Index (BRI) can also provide insights into the health of Australian businesses by region and industry. This economic indicator was created by CreditorWatch and launched in October 2021. A dynamic measure of stress for businesses, the BRI is driven by a powerful data set from B2B trade payments, business cashflow and geodemographic risk factors.

A plethora of data is funnelled through complex algorithms, taking advantage of the latest machine-learning technology, to reveal powerful yet simply presented BRI insights your organisation can benefit from. It gives you a dynamic measure of future insolvency risk for over 300 regions across Australia. Each region is ranked from best to worst in terms of the potential for businesses in the region to become insolvent. It’s the first-time forward-looking insolvency risk has been measured this way. In the same way a credit rating is assigned to an individual business, the BRI gives each region a credit rating, which can also be aggregated by state or to provide national insights.

How would it help us? 

James O’Donnell, the Open Analytics Managing Director, who was a Westpac senior credit decisioning specialist for fifteen years, has curated the CreditorWatch data into user-friendly insights of the greatest value to the banking and financial services sector. “In such uncertain times, having access to important, accurate, timely data is essential. Critical insights give banks, insurance companies and any organisations that work in the risk space a holistic, comprehensive picture of how sound and safe a business is—right now and over time,” says O’Donnell. “As we navigate through great economic uncertainty, that information is more important than ever.”

See exactly how the new data could enhance your ability to make informed decisions around credit and risk.

CreditorWatch can show you a proof of concept and even test your data, enabling you and your team to experience first-hand just how effective this unique data is.

About CreditorWatch

CreditorWatch started in 2010 with a mission to solve one problem: the lack of commercial bureau services for Australian small businesses. It is now the leading commercial credit reporting bureau in Australia, with:

• 55,000+ customers (SMEs and ASX-listed) who access and contribute to CreditorWatch data
• 11 million trade lines from accounting software providers and corporate ATBs
• 35,000 unique payment defaults captured annually.

Ways to enhance your insights

There are many ways CreditorWatch can help enhance your insights, including:

• Credit Reports – to assess the creditworthiness of any entity in Australia
• Payment Predictor – utilises the unique trade payment data captured from the CreditorWatch customer base
• RiskScore – unique data plus sophisticated machine learning for the most predictive credit score.