What is Customer Risk: Understanding Scores and Behaviors

Understanding customer risk is crucial for effective risk management in businesses. It helps you detect, gauge, and mitigate potential risks associated with your customers, products, and services. 

Customer risk is the likelihood of a customer causing financial harm to your company through their behaviors. As such, knowing how to handle such risk can help you make informed decisions, minimize financial exposure, and protect your reputation. 

Explore the infographic below to learn about customer risk, behaviors, and risk scores.

What is Customer Risk?

Customer risk evaluates the potential dangers customers present based on their manners, behavior, and compliance concerns. 

Understanding the risks when handling client data is critical. It helps identify high-risk customers and develop effective management strategies to minimize exposure to regulatory violations, financial losses, and reputational damage. 

The assessment involves gathering customer information from various sources, such as public databases, media reports, and potential sanctions, to create a comprehensive profile. Understanding customer risk can protect your operations and reputation, ensuring regulatory compliance.

Customer Risk Scores

Customer risk scores are numerical values that assess a customer’s risk level. Inquiro, for instance, uses credibility scores and scoring APIs to understand its customers. 

Here are some of the characteristics that affect the results:

1. Customer characteristics

Risk scores consider demographics such as age, income, and occupation when assessing customer characteristics. Younger individuals and those with lower incomes are considered at higher risk due to potential financial pressures and less financial management experience.

2. Customer products and services

The types of goods and services a customer uses can indicate their level of risk. Products like cryptocurrency or prepaid cards are often associated with illicit financial activity, leading to a higher risk score. In contrast, consumers using traditional banking products like checking or savings accounts are typically viewed as lower risk.

3. Geographical risk

Certain regions or countries may have higher rates of financial crime or corruption. 

Crime rates and levels of corruption are some of the data sets you can look at. If you have buyers from these regions, you must exercise caution, as they may be more likely to engage in illegal behaviors.

4. Customer financial behavior

Banks and financial institutions use complex algorithms and analytical tools to monitor customer behavior, aiming to identify any unusual transactions or activity patterns indicative of money laundering or fraud. 

For instance, a customer who suddenly engages in many international wire transfers, especially to countries with a questionable reputation, may be subjected to increased scrutiny. Similarly, customers who frequently deposit or withdraw large amounts of cash or often conduct transactions just below reporting thresholds raise suspicions.

5. Customer reputation

Evaluating a customer’s reputation and industry history is important to gauge their trustworthiness and potential risk. This evaluation typically encompasses analyzing media and police reports for any negative associations. 

You can consider a customer with a poor reputation or a history of involvement in crime higher risk and give them a lower score.

It’s worth noting that standing isn’t limited to negative associations. Positive links, such as a history of successful business ventures or a good credit rating, can warrant higher scores.

Customer Risk Behaviors

Customer risk behaviors refer to the patterns of actions customers display while using online services. Inquiro’s Credibility Score measures a consumer’s quality and overall demeanor, allowing you to evaluate their credibility even with limited or no financial data. You can then provide your audience access to a broader range of products.

Here are some common risk behaviors:

1. Habitual buying behavior

This behavior refers to customers who frequently purchase from the same vendor indicating potential loyalty and trust, thereby reducing their risk score. On the other hand, if a buyer exhibits habitual buying behavior for high-risk products or services, it may indicate a potential risk for fraudulent activity.

2. Complex buying behavior

Customers with complex buying behavior engage in extensive research before purchasing. This behavior reflects their intention to make informed choices, resulting in a lower risk score. However, buying expensive products or services without history may suggest money laundering or fraud.

3. Variety-pursuing buying behavior

Customers portray this behavior by showing a preference for variety, frequently changing their purchasing preferences, and exploring new products or services. In some cases, this behavior can be positive, indicating a willingness to try new things, which leads to a lower risk score. The inverse also applies, netting them a higher score if they prefer high-risk items.

Benefits of Managing Customer Risk

Managing customer risk can provide numerous advantages for your business. Here are some of the benefits:

1. Expedites business growth

You can expedite business growth by identifying and assessing possible threats and taking proactive measures to mitigate them. 

Not only do you avoid potential disruptions, but it also frees up resources you can utilize for growth opportunities. You can exploit these new opportunities, leading to increased revenue, improved profitability, and enhanced competitiveness.

2. Improves customer satisfaction

Customers expect their personal information and financial data to be secure. Failing to provide this level of security can damage trust and lead to losing loyalty. 

By implementing risk management strategies, you can ensure responsible handling of records and diminish potential security threats. These methods enhance security and increase customer satisfaction, as they feel confident that their information is handled carefully.

3. Increases focus on security measures

Handling threats involves focusing more on security measures, such as preventing data breaches and fraud, and taking proactive steps to mitigate potential risks. 

You can also protect your company and assets, creating a greater sense of security. Furthermore, risk management measures prevent costly incidents that can severely impact your bottom line and erode customer trust.

4. Ensures company efficiency

Risk management can aid you in having more efficient operations by identifying and addressing potential disruptions and losses. Thus, you can reduce system downtime, which could slow your profits. 

It can also help you develop contingency plans and disaster recovery strategies. These plans let you respond quickly and properly to unexpected events. This proactive approach minimizes the impact on operations and ensures uninterrupted service to your audience.

5. Enhances decision-making

You can gain enhanced decision-making through valuable insights and information about potential risks and their likelihood of occurring. You could start to prioritize areas for improvement and allocate resources to handle those hazards. 

Moreover, having a solid risk management culture makes your organization more adaptable and resilient during crises. Understanding risk scores enable you to quickly identify and respond to threats, minimizing damage to your reputation and company procedures. 

Managing Risk is the Key to Success

Appropriate management of customer risk is crucial for the success of your business. It enables you to avoid likely interferences, enhances decision-making, and increases your company’s efficiency. 

It also ensures the security and fairness of your customers, leading to higher satisfaction and loyalty. If you need help managing customer risk, Inquiro offers efficient data-driven solutions to help you identify and assess threats while taking proactive measures to mitigate them. 

Contact us today to discover how we can help you achieve long-term success.

FAQs

How do you evaluate a customer’s risk? 

To evaluate a customer’s risk, you must conduct a thorough assessment, which requires identifying and analyzing potential dangers associated with the customer’s identity, behavior, and purchase history. 

You can then establish the consumer’s risk level, allowing you to implement mitigation measures to reduce potential losses. Technology tools like AI and machine learning algorithms can simplify and enhance the assessment process, improving its efficiency and accuracy.

What are the key factors determining customer risk?

You need to consider several key factors that can help determine the likelihood of default or fraudulent activity. One of these elements is the customer’s credit history, which provides valuable insights into their repayment capabilities for loans and credit obligations. 

Another aspect is payment behavior, indicating whether customers pay their bills on time or have a history of late payments or defaults. Other factors may include adverse media, sanctions and watchlists, and politically exposed persons (PEPs). These aspects help assess a customer’s potential to run from payment obligations or engage in scams.

What are some examples of customer risk behaviors?

Customer risk behaviors include habitual buying behavior, complex buying behavior, variety-pursuing buying behavior, uncharacteristic activity, suspicious or fraudulent activity, frequent changes to account information, and a history of missed or late payments. 

Uncharacteristic activities involve a sudden change in buying behavior, such as a significant increase in purchase amounts or frequency, which may indicate deceptive actions, such as using stolen credit card information. 

Suspicious or fraudulent activity can range from transactions outside the customer’s usual purchasing behavior to blatantly illegal activities, such as using fake identification or stolen payment information.