Financial Services

Issues that could have a major impact on how telecommunications, cable and energy companies conduct business will soon be decided, as all 50 state legislatures go into session. It’s not every year that this happens, since some state legislatures only meet biannually.Two Big Issues to Watch: Breach Notification & Employment Screenings1) Breach NotificationNow that 46 states have a breach notification law on the books, lawmakers are looking at whether those standards should be expanded. So far, at least 12 state legislatures are considering proposals.At the heart of all breach notification laws is a set of conditions, or “triggers,” that have to occur before a company is required to send out a breach notification to consumers. For most states, the requirement is based on some level of harm for consumers as a result of the breach. Some states have begun to look at those triggers and conclude that all types of breach, no matter the risk, should be report to consumers. Additionally, included in some pieces of legislation is a requirement to report all breaches, no matter the size, to the state attorney general. The concern of many in the private sector is that attorney general notification opens up new liabilities for companies, as many states will post a list of breaches on a government website, even if there is no harm to a consumer.States are also examining the types of information that should be provided to consumers as a result of a breach. For example, should consumers be notified of information such as the time, location and type of information exposed during a breached. The challenge is that all of this information would be made public, possibly creating additional risk.2) Employment ScreeningsWith a weakened economy, state legislators are looking for ways to help the unemployed find new work. As a result, lawmakers are looking into placing new restrictions on the ability of employers to conduct credit checks on prospective employees. The intention driving the discussion is to help consumers who might be negatively affected by poor credit history out of concern that the information will result in an individual’s ability to be hired.Currently, only four states have statutes that regulate an employer’s use credit history data. This year, at least fourteen states are considering their own restrictions.Why Check a Job Applicant’s Credit?Misconceptions about the content of credit reports used for employment purposes have encouraged the proposals. The result, however, of such legislation would be to remove a valuable tool from employers to evaluate and compare different candidates under consideration for a job.Since employers are held responsible for the actions of their employees, it’s only natural they take steps to protect themselves. Such measures are already regulated by the Fair Credit Reporting Act. Some legislatures may also soon expand those restrictions. The result of using credit is not fewer employees being hired, but hiring the best candidates for the job.What’s Next? Stay TunedAs most state legislatures are composed of part-time lawmakers, many will be in session only through April, but these trends will likely impact discussions at the national level. For instance, the Equal Employment Opportunity Commission has already held hearings to examine employers’ use of credit checks. And Congress is contemplating a national breach law.We’ll be monitoring future regulatory developments, so check back frequently or subscribe to keep up on these issues and others affecting your industry.

Application risk management processes for deposits has remained relatively unchanged for decades. Typically, it involves credit bureau data and a secondary check of “debit bureau” data. A “debit bureau” typically gathers information regarding known fraud and compiles a fraud database of perpetrators. Every applicant who passes the credit risk strategies is checked against this database. The challenge is that this process can be very expensive. Among a new class of fraud best practices is the idea of applying fraud models/fraud analytics as a filter upstream from the debit bureau’s fraud database. This practice enables deposit institutions to still identify known fraud and minimize fraud losses on those applicants that carry the highest risk. At the same time, costs are reduced by removing low risk accounts from the debit bureau check.    In addition to reducing costs, these revised acquisition strategies help reduce fraud referral rates while ensuring that application fraud does not increase. As deposit institutions look for ways to significantly reduce costs without suffering additional application fraud, look for the continued emergence of fraud analytics among 2011’s fraud best practices.

Consumer information is at the center of our economy. It connects us to the right products and services, helps companies innovate and expand, and allows consumers to make smarter choices throughout their lives. While the use of consumer information is becoming more important to businesses and consumers, there is a growing concern among policy makers that the laws governing consumer privacy are not keeping up. Over the last year, the FTC and the Department of Commerce have been studying these issues and each released preliminary reports looking at the changing privacy landscape. Although much of the discussion has focused on online data, the reports take a broader look at the privacy practices of organizations both online and offline, offering a number of recommendations that challenge policy makers and companies to better protect consumer information. As regulatory agencies and Congress continue to examine business practices around consumer privacy, I thought it might be helpful to take a look at recent comments Experian filed with the FTC and highlight a few areas that will be important for policy makers to consider going forward. A flexible and adaptive regulatory system is essential to an innovative economy Consumer privacy expectations are continuing to evolve and, as a result, standards must not be rigid. Along with existing regulations, new challenges should be dealt with robust and evolving self-regulation – not new laws – to ensure consumers are protected now and in the future. Consumer privacy should be viewed from multiple perspectives The recent debate around commercial information sharing has centered on consumer privacy; however there are other viewpoints that should be considered. For example, how are businesses using information in a responsible manner to innovate and increase productivity or how does the overall economy benefit from consumer information that makes us more competitive in a global marketplace.   Incorporating consumer privacy into all aspects of a business is a powerful consumer benefit The FTC report recommends a “privacy by design” framework – meaning that companies incorporate privacy into every aspect of their business operations. This framework could potentially evolve into a useful tool for companies to evaluate their privacy and data security policies. In the coming months, we’ll likely see a number of Congressional hearings as federal regulators craft a final privacy report. And in future posts, we’ll explore how the new proposals impact your business.  

By: Kari Michel In January, Experian announced the inclusion of positive rental data from its RentBureau division into the traditional credit file. This is great news for an estimated 50 million underbanked consumers - everyone from college students and recent graduates to immigrants - to build credit with continuous on-time rental payments. With approximately 1/3 of Americans renting, lenders who are using VantageScore will benefit from the inclusion of RentBureau data into the score calculation.  VantageScore from Experian is able to both enhance its predictive ability for those that can already be scored as well as provide scores for those that previously could not be scored. With the inclusion of RentBureau data, 34% of thin file consumers increased their score from an ‘F’ (VantageScore 501 – 599) to a ‘D’ (VantageScore 600 – 699). For those consumers that did not have a prior credit history, 70% of them were able to be scored after the inclusion of RentBureau data into the credit repository.  As a result, fewer consumers will get a “no hit” returned to lenders during a credit inquiry. Lenders will now have a comprehensive understanding of a consumer’s total monthly obligations to assist with offering credit to emerging consumers.

I love a good analogy, and living in Southern California, lately I’ve been thinking a lot about earthquakes, and how lenders might want to start thinking like seismologists when considering the risk levels in their portfolios. Currently, scientists that study earthquakes review mountains of data around fault movement, tidal forces, even animal behavior, all in an attempt to find a concrete predictor of ‘the big one’. Small tremors are inputs, but the focus is on predicting and preparing for the large shock and impact of large earthquakes. Credit risk modeling, conversely, seems to focus on predicting the tremors, (risk scores that predict the risk of individual default) and less so the large-shock risk to the portfolio. So what are lenders doing to forecast ‘the big one’?  Lenders are building sophisticated models that contemplate the likelihood of the big event – developing risk models and econometric models that look at loan repayment, house prices, unemployment rates – all in an attempt to be ahead of the credit version of ‘the big one’.  This type of model and perspective is at a nascent stage for many lenders, but like the issues facing the people of Southern California, preparing for the big-one is an essential part of every lender’s planning in today’s economy.

Exciting research leveraging Experian’s fraud analytics and credit risk modeling are now enabling deposit institutions to understand the impacts of first party fraud and identity theft on their portfolios. Historically, deposit institutions have not considered application fraud to be a major concern and legislation regarding overdraft fees and the opt-in provision for overdraft services will reduce a deposit customer’s ability to spend the bank’s money; however, a determined thief can still: kite checks to commit first party fraud perpetrate an account takeover/identity theft   The result is that deposit institutions will continue to face losses that can be prevented using fraud best practices. The challenge for the institution is knowing whether it is facing first party fraud or identity theft. Increasingly, deposit institutions are turning to Experian to analyze customers that create losses early in the account life cycle in order to make the right modifications to their acquisitions strategies.  Using a combination of fraud analytics built to target specific types of fraud trends, deposit institutions can get a clear picture of the type of behavior that is generating their losses. This type of analysis is quickly climbing the list of fraud best-practices. Armed with the right diagnosis, deposit institutions can respond by prioritizing the right set of fraud alerts.    

We’ve written a number of posts suggesting how telecom and cable providers can use reliable consumer credit data to improve acquisition, prospecting, retention and risk mitigation, but we haven’t yet covered collections.  So here is the first in what will probably be several collections-related entries. Please let us know what you think. What’s in your data mix? As you know, the ranks of “skips” or delinquent accounts have grown considerably over the past few years. This phenomenon has compelled many telecom and cable companies to reevaluate the quality and use of their skip tracing data. What they’ve discovered is that contact data alone—current address, previous addresses, land line and cell phone numbers—may not be enough to recover lost payments. Which brings us to the missing ingredient. Reliable consumer credit data Combining fresh contact data AND reliable consumer credit data enables you to recapture more funds from more delinquent accounts. Adding credit history to the mix broadens your view of consumers’ overall financial health, allowing you easily distinguish between those who can pay and those who can’t. What the data can reveal Assuming your consumer credit data comes from a reputable, knowledgeable source, you’ll be able to immediately learn a lot about your customers’ behaviors and circumstances, including: Attempts to open a new account while they’re still overdue with you Recently declared bankruptcies Once delinquent customers who now have the ability to pay Tying in “triggers” Some communications providers use collection tools called “triggers.” When tied to a consumer credit report, triggers alert you to new information, including cell or landline number, address, employer, or changes in financial status, such as when bankcard funds become newly available. Quality credit data + tools like triggers + a reliable data partner = a surefire recipe for collections success. Collections not your focus? Check out the post on “Using Data Intelligence to Reduce Churn, Build Loyalty and Keep the Right Customers.”

By: Kristan Frend Imagine you’re on the #1 ranked relay swim team at the World Championships and you’re leading off. You finish your leg of the race with the team in first place. As your third teammate approaches the wall, your team is in first by a full body length. You’re on pace to set a new world record. Yet the anchor of your team is nowhere to be found, ultimately resulting in your team being disqualified.   If only your fourth teammate would have made it to the blocks in time…. When you take a step back and look at your fraud risk management solutions, do you ever feel like you have all of the tools and processes available yet feel like the anchor is missing? Perhaps it’s time to reexamine your internal resources. You may have an assembly of sophisticated and robust online fraud detection tools from vendors, but you may be missing a critical piece if you’re not also effectively leveraging internal data. Through our work with clients, we’re found that it is not uncommon for organizations to manage the customer relationship through different departments or silos within the organization.   All too often there is less than optimal coordination between these functional areas in taking advantage of their own internal negative data to combat application fraud. Additionally some organizations may have negative internal data but do not incorporate the check within their verification or risk based authentication tool, creating multiple steps and operational inefficiencies. One of the ways to overcome some of these issues is by incorporating internal negative data within an automated front-end check.  Once loss data is loaded into a historical database, the next time that name, phone, address, driver’s license or SSN reappears on a new application, the data element is immediately identified as one associated with a previous loss. The negative data is securely stored for only your organization’s use and is not shared with users outside of your organization.

Let’s face it – not all knowledge based authentication (KBA) is created equal. I, too, have read horror stories of consumers forced to answer questions about a deceased relative or ex-spouse, or KBA sessions that went on far too long for anyone’s benefit. I have to attribute this to vendor inexperience and a lack of consulting with clients. An experienced vendor will use a fraud best practice such as a fraud analytics model to determine that some consumers do not even need questions and then a “Progressive Question” feature, which uses consumer performance on an initial question set to determine if it is necessary for the consumer to answer additional questions. This way, the true consumer completes the process quickly, improving the customer experience. The product of choice should also use a question mix that balances three factors: ·         how easily the true consumer can answer the question; ·         the fraud separation of the question (effectively the measured delta over time between how well true consumers answer the question vs. how well fraudsters do); ·         how many consumers overall the question can be generated.  A list of hundreds of possible questions doesn’t mean much if the questions can only be generated for one quarter of one percent of the population, as is the case for something like airplane ownership or pilot’s license. Ultimately, out of wallet questions should be generated for a large part of the population, easily answered by the true consumer but difficult for a fraudster; and not offensive or what a consumer would consider “creepy” (such as their child’s birthday or name). Well designed questions will be personal but not intrusive and mindful of personal relationships that may have changed.  The purpose of a knowledge based authentication session is risk management and/or consumer authentication for fraud prevention and compliance purposes – not to cause the loss of business because the fraud tool crossed the line in the mind of your customer.

Like all companies seeking to generate new revenue, wireless providers continually strive to expand their creditworthy universe of applicants and prospects, while shrinking or eliminating risk. Compared with other industries, however, telecom tends to have a disproportionate number of no-hit and unscorable thin files—primarily young adults and immigrants, emerging consumers, and alternative-finance transactors. The main reason is that these individuals typically acquire cell phones well before credit cards, mortgages or other loan products, and thus, fly under the radar of traditional credit scoring. Micro-segmentation—a paradox with a payoff Experian has found that, despite the lack of documented credit history, these often-ignored segments contain many potentially profitable accounts. Narrowing your focus (through targeted attributes and micro-segmentation) can actually expand your universe of prospects, creating a whole new world of opportunity that enables you to: Grow your portfolio without increasing your risk Match new customers with the appropriate deposit and payment structure Build trust, loyalty and long-term value Many companies also integrate market data, dealer data or other internal records to refine micro-segmentation efforts. Others enlist credit-reporting agencies to help combine traditional and alternative data sets to predict future performance. One or both methods can yield highly favorable results. Using high-quality information from proven, reliable sources enables wireless companies to segment information in innovative and profitable ways. In fact, when providers successfully expand their creditworthy customer universe, high-quality data is usually the bright and shining star. To learn more, read a related post about the role of data quality in effective customer acquisitions.

As our newly elected officials begin to evaluate opportunities to drive economic growth in 2011, it seems to me that the role of lenders in motivating consumer activity will continue to be high on the list of both priorities and actions that will effectively move the needle of economic expansion. From where I sit, there are a number of consumer segments that each hold the potential to make a significant impact in this economy. For instance, renters with spotless credit, but have not been able or confident enough to purchase a home, could move into the real estate market, spurring growth and housing activity. Another group, and one I am specifically interested in discussing, are the so called ‘fallen angels’ - borrowers who previously had pristine track records, but have recently performed poorly enough to fall from the top tiers of consumer risk segments. I think the interesting quality of ‘fallen angels’ is not that they don’t possess the motivation needed to push economic growth, but rather the supply and opportunity for them to act does not exist. Lenders, through the use of risk scores and scoring models, have not yet determined how to easily identify the ‘fallen angel’ amongst the pool of higher-risk borrowers whose score tiers they now inhabit. This is a problem that can be solved though – through the use of credit attributes and analytic solutions, lenders can uncover these up-side segments within pools of potential borrowers – and many lenders are employing these assets today in their efforts to drive growth. I believe that as tools to identify and lend to untapped segments such as the ‘fallen angels’ develop, these consumers will inevitably turn out to be key contributors to any form of economic recovery.  

More prospects equal more profits, right? Not necessarily. But surprisingly, companies in every industry (including cable and telecom) routinely burn acquisition dollars as if it is. The reality is that only more qualified prospects can lead to more profitable campaigns, making acquisitions a clear case of quality besting quantity. But why? No substitute for quality Engaging unqualified prospects is an unprofitable exercise requiring time and resources that are better spent on those who are ready, willing and able to buy from you. Benefits of an effective acquisition strategy include greater: Resource efficiency—less time, money and energy wasted on no-payback prospects Brand loyalty and higher lifetime value—by accurately matching consumers to products they relate to and desire Profitability and less bad debt—this one is probably obvious Fishing where the (best) fish are So how should a profit-minded telecom or cable company identify highly qualified prospects and invite them into the fold? Using a credit-score threshold, where anyone possessing the target score receives an offer, is one method. The benefit is simplicity. One disadvantage is unnecessary risk, as credit score is just one factor reflecting an individual’s creditworthiness. Another possibility is analyzing your best customers’ profiles or most profitable underwriting policies and integrating profit-building criteria into your campaign. This takes a little more effort but the payback potential is higher. Tapping into available sources Many companies find public records a rich source of decisioning data. Others have discovered that adding consumer-credit information to their acquisition formula not only improves prospect quality, it also reduces on-boarding costs. Derogatory payment information, revolving debt levels or unacceptable debt-to-income ratios will all surface in the process, informing and improving your credit management decisions. (Note: using credit data to assess risk requires you to make a firm offer of credit, according to FCRA guidelines.) You’ll do a lot of prospecting in 2011, so remember: when it comes to acquiring new customers, more isn’t better. Better is better. And using reliable, high-quality data is one way to ensure the impact and return of every marketing dollar.

Experian Decision Analytics has recorded increased demand from the marketplace for service integrations with interactive voice response (IVR), a phone technology that allows for automated detection of both voice and touch–tones. In the past quarter, there has been a more than 70 percent increase in IVR interest and it continues to grow. Why is there a demand for knowledge based authentication through IVR? Besides consumer acceptance of out of wallet questions, there is a dramatic increase in the need for remote authentication and fraud analytics that are accurate, not a burden to the consumer, cost–effective for organizations and part of an overall risk based authentication approach. Consumers stay connected in a number of ways — phone, online, mobile and short message service (SMS) — and are demanding the means to remain safe without compromising convenience. Knowledge based authentication through IVR provides this safety. Organizations must consider all the tools at their disposal to keep consumer data protected while preserving and promoting a positive customer experience. Given the interactive nature of knowledge based authentication, it is quite adaptable to various customer access channels, such as IVR, and it enables full automation of both inbound and outbound authentication calls. We know from both our own experience and from working with clients that consumers are more connected, more mobile and more networked than ever before - and fraud trends demonstrate this increases risk. As consumers continue to expand online profiles and fraud artists continue to seek out victims, successful fraud prevention will become paramount to financial survival. Leveraging products already in use by combining the technology capitalizes on an existing investment and is good business.

Many compliance regulations such the Red Flags Rule, USA Patriot Act, and ESIGN require specific identity elements to be verified and specific high risk conditions to be detected. However, there is still much variance in how individual institutions reconcile referrals generated from the detection of high risk conditions and/or the absence of identity element verification. With this in mind, risk-based authentication, (defined in this context as the “holistic assessment of a consumer and transaction with the end goal of applying the right authentication and decisioning treatment at the right time") offers institutions a viable strategy for balancing the following competing forces and pressures:   Compliance – the need to ensure each transaction is approved only when compliance requirements are met;   Approval rates – the need to meet business goals in the booking of new accounts and the facilitation of existing account transactions;     Risk mitigation – the need to minimize fraud exposure at the account and transaction level. A flexibly-designed risk-based authentication strategy incorporates a robust breadth of data assets, detailed results, granular information, targeted analytics and automated decisioning. This allows an institution to strike a harmonious balance (or at least something close to that) between the needs to remain compliant, while approving the vast majority of applications or customer transactions and, oh yeah, minimizing fraud and credit risk exposure and credit risk modeling. Sole reliance on binary assessment of the presence or absence of high risk conditions and identity element verifications will, more often than not, create an operational process that is overburdened by manual referral queues. There is also an unnecessary proportion of viable consumers unable to be serviced by your business. Use of analytically sound risk assessments and objective and consistent decisioning strategies will provide opportunities to calibrate your process to meet today’s pressures and adjust to tomorrow’s as well.

By: Staci Baker There has been a lot of talk in the news about the Dodd-Frank Act lately. According to the Dodd-Frank Resource Center of the American Financial Services Association (AFSA), “The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which passed on July 21, 2010, is unprecedented in magnitude, and will impact every sector of the financial services industry.”  The aim of the Act is to put measures in place that address the issues that led to the financial crisis. This is done by setting up new regulatory bodies, and limiting the dealings of banks and other financial institutions. For the purpose of this blog, I will focus on describing the new regulatory agencies.  The Bureau of Consumer Financial Protection (CFPB), is an independent watchdog housed within the Federal Reserve. The CFPB has the authority to “regulate consumer financial products and services in compliance with federal law.”[ii] They are responsible for the accuracy of information, hidden fees and deceptive practices for consumers from within the following industries – mortgage, credit cards and other financial products. The Financial Stability Oversight Council is “charged with identifying threats to the financial stability of the United States, promoting market discipline, and responding to emerging risks to the stability of the United States financial system.”ii Through the Treasury, this council will create a new Office of Financial Research, which will be responsible for collecting and analyzing data to identify and monitor emerging risks to the economy, and publish the findings in periodic reports.  These new regulatory agencies are critical to US business processes, as they will more closely monitor business practices, create new tighter legislation, and report findings to the public. The legislation that is created will decrease risk levels posed by large, complex companies, as well as address discrepancy that has been raised throughout the financial crisis.     What are your views of the Dodd-Frank Act? Do you believe this is the legislation needed to stem future financial crisis? If not, what would help you and your business?