Credit Lending

If rumors hold true, Apple Pay will launch in a week. Five of my last six posts had covered Apple’s likely and actual strategy in payments & commerce, and the rich tapestry of control, convenience, user experience, security and applied cryptography that constitutes as the backdrop. What follows is a summation of my views – with a couple of observations from having seen the Apple Pay payment experience up close. About three years ago – I published a similar commentary on Google Wallet that for kicks, you can find here. I hope what follows is a balanced perspective, as I try to cut through some FUD, provide some commentary on the payment experience, and offer up some predictions that are worth the price you pay to read my blog. Source: Bloomua / Shutterstock.com First the criticism. Apple Pay doesn’t go far enough: Fair. But you seem to misunderstand Apple’s intentions here. Apple did not set out to make a mobile wallet. Apple Pay sits within Passbook – which in itself is a wrapper of rewards and loyalty cards issued by third parties. Similarly – Apple Pay is a wrapper of payments cards issued by third parties. Even the branding disappears once you provision your cards – when you are at the point-of-sale and your iPhone6 is in proximity to the reader (or enters the magnetic field created by the reader) – the screen turns on and your default payment card is displayed. One does not need to launch an app or fiddle around with Apple Pay. And for that matter, it’s even more limited than you think. Apple’s choice to leave the Passbook driven Apple Pay experience as threadbare as possible seems an intentional choice to force consumers to interact more with their bank apps vs Passbook for all and any rich interaction. Infact the transaction detail displayed on the back of the payment card you use is limited – but you can launch the bank app to view and do a lot more. Similarly – the bank app can prompt a transaction alert that the consumer can select to view more detail as well. Counter to what has been publicized – Apple can – if they choose to – view transaction detail including consumer info, but only retains anonymized info on their servers. The contrast is apparent with Google – where (during early Google Wallet days) issuers dangled the same anonymized transaction info to appease Google – in return for participation in the wallet. If your tap don’t work – will you blame Apple? Some claim that any transaction failures – such as a non-working reader – will cause consumers to blame Apple. This does not hold water simply because – Apple does not get in between the consumer, his chosen card and the merchant during payment. It provides the framework to trigger and communicate a payment credential – and then quietly gets out of the way. This is where Google stumbled – by wanting to become the perennial fly on the wall. And so if for whatever reason the transaction fails, the consumer sees no Apple branding for them to direct their blame. (I draw a contrast later on below with Samsung and LoopPay) Apple Pay is not secure: Laughable and pure FUD. This article references an UBS note talking how Apple Pay is insecure compared to – a pure cloud based solution such as the yet-to-be-launched MCX. This is due to a total misunderstanding of not just Apple Pay – but the hardware/software platform it sits within (and I am not just talking about the benefits of a TouchID, Network Tokenization, Issuer Cryptogram, Secure Element based approach) including, the full weight of security measures that has been baked in to iOS and the underlying hardware that comes together to offer the best container for payments. And against all that backdrop of applied cryptography, Apple still sought to overlay its payments approach over an existing framework. So that, when it comes to risk – it leans away from the consumer and towards a bank that understands how to manage risk. That’s the biggest disparity between these two approaches – Apple Pay and MCX – that, Apple built a secure wrapper around an existing payments hierarchy and the latter seeks to disrupt that status quo. Let the games begin: Consumers should get ready for an ad blitz from each of the launch partners of Apple Pay over the next few weeks. I expect we will also see these efforts concentrated around pockets of activation – because setting up Apple Pay is the next step to entering your Apple ID during activation. And for that reason – each of those launch partners understand the importance of reminding consumers why their card should be top of mind. There is also a subtle but important difference between top of wallet card (or default card) for payment in Apple Pay and it’s predecessors (Google Wallet for example). Changing your default card was an easy task – and wholly encapsulated – within the Google Wallet app. Where as in Apple Pay – changing your default card – is buried under Settings, and I doubt once you choose your default card – you are more likely to not bother with it. And here’s how quick the payment interaction is within Apple Pay (takes under 3 seconds) :- Bring your phone in to proximity of the reader. Screen turns on. Passbook is triggered and your default card is displayed. You place your finger and authenticate using TouchID. A beep notes the transaction is completed. You can flip the card to view a limited transaction detail. Yes – you could swipe down and choose another card to pay. But unlikely. I remember how LevelUp used very much the same strategy to signup banks – stating that over 90% of it’s customers never change their default card inside LevelUp. This will be a blatant land grab over the next few months – as tens of millions of new iPhones are activated. According to what Apple has told it’s launch partners – they do expect over 95% of activations to add at least one card. What does this mean to banks who won’t be ready in 2014 or haven’t yet signed up? As I said before – there will be a long tail of reduced utility – as we get in to community banks and credit unions. The risk is amplified because Apple Pay is the only way to enable payments in iOS that uses Apple’s secure infrastructure – and using NFC. For those still debating whether it was a shotgun wedding, Apple’s approach had five main highlights that appealed to a Bank – Utilizing an approach that was bank friendly (and to status quo) : NFC Securing the transaction beyond the prerequisites of EMV contactless – via network tokenization & TouchID Apple’s preference to stay entirely as an enabler – facilitating a secure container infrastructure to host bank issued credentials. Compressing the stack: further shortening the payment authorization required of the consumer by removing the need for PIN entry, and not introducing any new parties in to the transaction flow that could have introduced delays, costs or complexity in the roundtrip. Clear description of costs to participate – Free is ambiguous. Free leads to much angst as to what the true cost of participation really is(Remember Google Wallet?). Banks prefer clarity here – even if it means 15bps in credit. As I wrote above, Apple opting to strictly coloring inside the lines – forces the banks to shoulder much of the responsibility in dealing with the ‘before’ and ‘after’ of payment. Most of the bank partners will be updating or activating parts of their mobile app to start interacting with Passbook/Apple Pay. Much of that interaction will use existing hooks in to Passbook – and provide richer transaction detail and context within the app. This is an area of differentiation for the future – because those banks who lack the investment, talent and commitment to build a redeeming mobile services approach will struggle to differentiate on retail footprint alone. And as smarter banks build entirely digital products for an entirely digital audience – the generic approaches will struggle and I expect at some point – that this will drive bank consolidation at the low end. On the other hand – if you are an issuer, the ‘before’ and ‘after’ of payments that you are able to control and the richer story you are able to weave, along with offline incentives – can aid in recapture. The conspicuous and continued absence of Google: So whither Android? Uniformity in payments for Android is as fragmented as the ecosystem itself. Android must now look at Apple for lessons in consistency. For example, how Apple uses the same payment credential that is stored in the Secure Element for both in-person retail transactions as well as in-app payments. It may look trivial – but when you consider that Apple came dangerously close (and justified as well) in its attempt to obtain parity between those two payment scenarios from a rate economics point of view from issuers – Android flailing around without a coherent strategy is inexcusable. I will say this again: Google Wallet requires a reboot. And word from within Google is that a reboot may not imply a singular or even a cohesive approach. Google needs to swallow its pride and look to converge the Android payments and commerce experience across channels similar to iOS. Any delay or inaction risks a growing apathy from merchants who must decide what platform is worth building or focusing for. Risk vs Reward is already skewed in favor of iOS: Even if Apple was not convincing enough in its attempt to ask for Card Present rates for its in-app transactions – it may have managed to shift liability to the issuer similar to 3DS and VBV – that in itself poses an imbalance in favor of iOS. For a retail app in iOS – there is now an incentive to utilize Apple Pay and iOS instead of all the other competing payment providers (Paypal for example, or Google Wallet) because transactional risk shifts to the issuer if my consumer authenticates via TouchID and uses a card stored in Apple Pay. I have now both an incentive to prefer iOS over Android as well as an opportunity to compress my funnel – much of my imperative to collect data during the purchase was an attempt to quantify for fraud risk – and the need for that goes out of the window if the customer chooses Apple Pay. This is huge and the repercussions go beyond Android – in to CNP fraud, CRM and loyalty. Networks, Tokens and new end-points (e.g. LoopPay): The absence of uniformity in Android has provided a window of opportunity for others – regardless of how fragmented these approaches be. Networks shall parlay the success with tokenization in Apple Pay in to Android as well, soon. Prime example being: Loop Pay. If as rumors go – Samsung goes through with baking in Loop Pay in to its flagship S6, and Visa’s investment translates in to Loop using Visa tokenization – Loop may find the ubiquity it is looking for – on both ends. I don’t necessarily see the value accrued to Samsung for launching a risky play here: specifically because of the impact of putting Loop’s circuitry within S6. Any transaction failure in this case – will be attributed to Samsung, not to Loop, or the merchant, or the bank. That’s a risky move – and I hope – a well thought out one. I have some thoughts on how the Visa tokenization approach may solve for some of the challenges that Loop Pay face on merchant EMV terminals – and I will share those later. The return of the comeback: Reliance on networks for tokenization does allay some of the challenges faced by payment wrappers like Loop, Coin etc – but they all focus on the last mile and tokenization does little more for them than kicking the can down the road and delaying the inevitable a little while more. The ones that benefit most are the networks themselves – who now has wide acceptance of their tokenization service – with themselves firmly entrenched in the middle. Even though the EMVCo tokenization standard made no assumptions regarding the role of a Token Service Provider – and in fact Issuers or 3rd parties could each pay the role sufficiently well – networks have left no room for ambiguity here. With their role as a TSP – networks have more to gain from legitimizing more end points than ever before – because these translate to more token traffic and subsequently incremental revenue – transactional and additional managed services costs (OBO – On behalf of service costs incurred by a card issuer or wallet provider). It has never been a better time to be a network. I must say – a whiplash effect for all of us – who called for their demise with the Chase-VisaNet deal. So my predictions for Apple Pay a week before its launch: We will see a substantial take-up and provisioning of cards in to Passbook over the next year. Easy in-app purchases will act as the carrot for consumers. Apple Pay will be a quick affair at the point-of-sale: When I tried it few weeks ago – it took all of 3 seconds. A comparable swipe with a PIN (which is what Apple Pay equates to) took up to 10. A dip with an EMV card took 23 seconds on a good day. I am sure this is not the last time we will be measuring things. The substantial take-up on in-app transactions will drive signups: Consumers will signup because Apple’s array of in-app partners will include the likes of Delta – and any airline that shortens the whole ticket buying experience to a simple TouchID authentication has my money. Apple Pay will cause MCX to fragment: Even though I expect the initial take up to be driven more on the in-app side vs in-store, as more merchants switch to Apple Pay for in-app, consumers will expect a consistency in that approach across those merchants. We will see some high profile desertions – driven partly due to the fact that MCX asks for absolute fealty from its constituents, and in a rapidly changing and converging commerce landscape – that’s just a tall ask. In the near-term, Android will stumble: Question is if Google can reclaim and steady its own strategy. Or will it spin off another costly experiment in chasing commerce and payments. The former will require it to be pragmatic and bring ecosystem capabilities up to par – and that’s a tall ask when you lack the capacity for vertical integration that Apple has. And from the looks of it – Samsung is all over the place at the moment. Again – not confidence inducing. ISIS/SoftCard will get squeezed out of breath: SoftCard and GSMA can’t help but insert themselves in to the Apple Pay narrative by hoping that the existence of a second NFC controller on the iPhone6 validates/favors their SIM based Secure Element approach and indirectly offers Softcard/GSMA constituents a pathway to Apple Pay. If that didn’t make a lick of sense – It’s like saying ‘I’m happy about my neighbor’s Tesla because he plugs it in to my electric socket’. Discover how an Experian business consultant can help you strengthen your credit and risk management strategies and processes: http://ex.pn/DA_GCP This post originally appeared here.

By: Joel Pruis When the OCC put forth the supervisory guidance on model risk governance the big focus in the industry was around the larger financial institutions that had created their own risk models.  The overall intent to make sure that the larger financial institutions were properly managing the risk they were assuming through the use of the custom risk models they had developed.  While we can’t say that this model risk governance was a significant issue, the guidance provided by the OCC is intended to provide financial institutions with the minimum requirements for model risk governance. Now that the OCC and the Federal Reserve have gone through the model risk governance reviews for the largest financial institutions in the US, their attention has turned to the rest of the group.  While you may not have developed your own custom scorecard model, you may be using a generic scorecard model to support your credit decisions either for loan origination and/or portfolio management.  As a result of the use of even generic scorecards and models, you do have obligations for model risk governance as stated in the guidance.  While you may not be basing any decisions strictly on a score alone, the questions you have to asking yourself are: Does my credit policy or underwriting guidelines reference the use of a score in my decision process? While I may not be doing any type of auto-decision, do I restrict any credit authority based upon a score? Do I adjust any thresholds/underwriting guidelines based upon a score that is returned?  For example, do I allow a higher debt to income if the score is above a certain level? How long have you been using a score in your decision processes that may have become a significant influence on how you decision credit? As you can see from the questions above, the guidance covers a significant population of the financial institutions in the US.  As a result, some of the basic components that your financial institution must demonstrate it has done (or will do) are: Recent validation of the scorecard against your portfolio performance Demonstration of appropriate policy governing the use of credit risk models per the regulation Independence around the authority and review of the model risk governance and validations Proper support and documentation from your generic scorecard provider per the guidance. If you would like to learn more on this topic, please join me at the upcoming RMA Annual Risk Management Conference where I will be speaking on Model Validation for Community Banks on Monday, Oct. 27, 9:30 a.m. – 10:30 a.m. or 11 a.m. – 12 p.m. Also, if you are interested in gaining deeper insight on regulations affecting financial institutions and how to prepare your business, download Experian’s Compliance as a Differentiator perspective paper.

By: Maria Moynihan As consumers, we expect service, don’t we? When service or convenience lessens or is taken away from us altogether, we struggle to comprehend it. As a recent example, I went to the pharmacy the other day and learned that I couldn’t pick up my prescription since the pharmacists were out to lunch. “Who takes lunch anymore?” I thought, but then I realized that too often organizations limit their much needed services as a cost-saving measure. Government is no different. City governments, for instance, may reduce operating hours or slash services to balance budgets better, especially when collectables are maxed out, with little movement. For many agencies, reducing services is the easiest way to offset costs. Often, municipalities offset revenue deficits by optimizing their current collections processes and engaging in new methods of revenue generation. Why then isn’t revenue optimization and modernization being considered more often as a means to offset costs? Some may simply be unsure of how to approach it or unaware of the tools that exist to help. For agencies challenged with collections, there is an option for revenue assurance. With the right data, analytics and technologies, agencies can maximize collection efforts and take advantage of their past-due fines and fees to: Turn stale debt into a new source of revenue by determining the value of their entire debt portfolio and evaluating options for a stale assets sale Reduce delinquencies by better assessing constituents and businesses at the point of transaction and collecting outstanding debt before new services are rendered Minimize current debt by segmenting and prioritizing collection efforts through finding and contacting debtors and gauging their capacity to pay Improve future accounts receivable streams by identifying the best collectable debt for outsourcing What is your agency doing to offset costs and balance budgets better? See what industry experts suggest as best practices for collections, and generate more revenue to keep services fully in place for your constituents.

Collection agencies provide reports with respect to their performance and collection activities.  Depending on which system the agencies are using and the extent it has been modified, the reports may look similar, but then again the data and format may be completely different.   Finding the common data and comparing the performance of two or more agencies may become a daunting, manual task. Agency management systems have solved that problem by bringing back performance, activity and other data from the agencies back into a common reporting database.  This allows for easy comparison through tables and calculations via common data elements.  The ability to truly compare data in this way allows for a more analytical “champion/challenger” approach to managing collection agencies.  The key to champion/challenger is the ability to easily compare the performance of one or more agencies using like accounts placed at the same time.  Tracking allocations of accounts which fall into the same placement strata, split between agencies on the same allocation, makes it easy to compare recoveries of discrete, similar “sample data sets” over time for a more true comparison.  These results should lead to the allocation of more accounts of similar types to the champion, less to the challenger. Do you have the systems you need for a champion/challenger approach with respect to your collection agencies?  Experian can help with its agency allocation and management solutions through Tallyman Agency Allocation. Learn more about our Tallyman Agency Allocationsoftware. 

By: Mike Horrocks A recent industry survey was published that called out the number one reason that lenders were dissatisfied or willing to go to another financial institution (and take their book of business with them) was not compensation.  While, compensation is often thought of as the number one driver for this kind of change in your bench of lenders, it had much more to do with being able to serve customers efficiently. One of the key reasons that lenders were unhappy was that they were in a workflow and decisioning process where the lender could not close loans on time, putting stress on the loan officer's relationships and destroying borrower confidence.  Thinking of my own experiences as a commercial lender, my interactions with the private bankers, branch managers, and lenders that served every kind of customer, I would absolutely have to agree with this study.  Nothing is more disheartening then working on bringing in a client, and then having the process not give me a response in the time that my clients are expecting or that the completion is achieving. Automation in the process is the key.  While lenders still will need to be engaged in the process and paying attention to the relationship, it can be significantly refocused to other parts of the business.  This leads to benefits such as: Protecting the back office and the consistence of booking and servicing loans. Ensuring that the risk appetite is consistent for the institution for every deal. Growing a portfolio of loans that can and will adhere to sound portfolio management techniques. So how is your process supporting lenders?  Are you automating to help in areas that give you a competitive advantage with robust credit scores, decision strategies or risk management solutions that are helping close deals quickly or are you requiring a process that is keeping them from bringing more customers (and profits) in the door? Henry Ford is credited to say, “Coming together is a beginning. Keeping together is progress. Working together is success.”   Take a closer look at your lending process.  Do you have the tools that help bring your lenders, your customers, and your organization together?  If you don’t you may be losing some of your best talent for loan production at a time when you can least afford it.

By: Maria Moynihan At a time when people are accessing information when, where and how they want to, why aren’t voter rolls more up to date? Too often, voter lists aren’t scrubbed for use in mailing, and information included is inaccurate at the time of outreach. Though addresses and other contact information becomes outdated, new address identification and verification has not typically been a resource focus.  Costs associated with mandated election-related communications between government and citizens can add up, especially if messages never get to their intended recipients and, in turn, Registrar Offices never get a response. To date, the most common pitfalls with poorly maintained lists have been: Deceased records — where contact information for deceased voters has not been removed or flagged for mailing Email and address errors — where those who have moved or recently changed information failed to update their records, or where errors in the information on file make it unlikely for the United States Postal Service® to reach individuals effectively Duplicate records — where repeat records exist due to update errors or lack of information standardization With resources being tighter than ever, Registrar Offices now are placing emphasis on mailing accuracy and reach. Through third-party-verified data and advanced approaches to managing contact information, Registrar Offices can benefit from truly connecting with their citizens while saving on communication outreach efforts. Experian Public Sector recently helped the Orange County Registrar of Voters increase the quality of its voter registration process. Click here to view the write-up, or stay tuned as I share more on progress being made in this area across states.

One of the challenges that we hear from many of our clients is managing multiple collection agencies in order to recover bad debts. Collection managers who use multiple collection agencies recognize the potential upside to utilizing multiple agencies.  Assigning allocate accounts to different agencies based on geography, type of account, status of account (such as a skip), first, second or third placement, and other factors may lead to greater recoveries than just using a single agency.  Also, collection managers recognize the advantage of pitting agencies against each other in a positive manner to achieve significantly better results. However this can present a challenge in that the more agencies collection managers use, the greater the risk of losing operational control. Here are some questions to ask before engaging in a multiple collection agency strategy: Do you know which agency has which accounts?  Were some accounts accidently assigned to more than one agency?  Is it easy to locate an account with an agency if it needs to be withdrawn from it? Is information flowing from one agency to another if agencies are used for second and third placements? Managing multiple agencies can get complex pretty quickly, but rather than just using one agency to avoid these complexities, there is an alternative to consider: Loss of control can be overcome with effective systems that allocate and manage accounts assigned to multiple agencies.  These systems allow for the allocation, recall, activity tracking, performance reporting, and commission calculations or vendor audits.  No more spreadsheets or other time consuming, error prone manual processes.  Experian can help with its agency allocation and management solutions through Tallyman Agency Allocation. Learn more about our Tallyman Agency Allocation software. 

by John P. Robertson, Senior Business Process Specialist As a Senior Business Process Specialist for the Experian Decision Analytics, John provides guidance to clients in the areas of profitability strategies for risk based pricing and relationship profitability. He assists banks in developing and implementing successful transitions for commercial lending that improve both the financial efficiency of the lending process and the productivity of the lending officers. John has 26 years of experience in the banking industry, with prior background in cash, treasury, and asset /liability management. For quite some time now, the banking industry has experienced a flat funding curve. Very small spreads have existed between the short and long term rates. Slowly, we have begun to see the onset of a normalized curve. At this writing, the five year FHLB Advance rate is about 2.00%. A simplistic view of loan pricing looks something like this: + Interest Income + Non-Interest Income - Cost of Funds - Non-Interest Expense - Risk Expense = Income before Tax The example is pretty simple and straight forward, “back of the napkin” kind of stuff. We back into a spread needed to reach breakeven on a five year fixed rate loan by using the UBPR (Uniform Bank Performance Report) national peer average for Non-Interest Expense of approximately 3.00%. You would need a pre-tax rate requirement of 5.00% before you consider the risk and before you make any money. If you tack on 1.00% for risk and some kind of return expectation, the rate requirement would put you around a 6.00% offering level. From a lender’s perspective, a 6.00% rate on a minimal risk five year fixed rate loan doesn’t exist. They might as well go home. CFO’s have been asking themselves, “What do we do with this excess cash? We get such a paltry spread. How can we put higher yielding loans on our books at today’s competitive rates? We’ve got plenty of capital even with the new regulation requirements so can we repo the securities and use the net spread for our cost of funds?” Leveraging the excess cash and securities in order to meet the pressing rate demands may be a way banks have been funding selective loans at such low rates on highly competitive, quality loan originations of size. But you have to wonder, what about that old adage, “You don’t short fund long term loans.” Won’t you eventually have to deal with compression and “margin squeeze”? Oh and by the way, aren’t you creating a mismatch in the balance sheet which requires explanation. Are they buying a swap to extend the maturity? If so, are they really making their targeted return? If this is what they are doing, why not just accept a lower return but one that is better than the securities? Share your thoughts with me.  

Every prospecting list needs to be filtered by your organizations specific credit risk threshold.  Whether you’re developing a campaign targeting super-prime, sub-prime, or consumers who fall somewhere in between, an effective credit risk model needs to do two things: 1) accurately represent a consumer’s risk level and 2) expand the scoreable population. The newly redeveloped VantageScore® credit score does both. With the VantageScore® credit score, you get a scoring model that’s calibrated to post-recession consumer behavior, as well the ability to score nearly 35 million additional consumers - consumers who are typically excluded from most marketing lists because they are invisible to older legacy models. Nearly a third of those newly-scoreable consumers are near-prime and prime. However, if your market is emerging to sub-prime consumers - you’ve found the mother-load! Delinquency isn’t the only risk to contend with. Bankruptcies can mean high losses for your organization at any risk level.  Traditional credit risk models are not calibrated to specifically look for behavior that predicts future bankruptcies. Experian's Bankruptcy PLUS filters out high bankruptcy risk from your list.  Using Bankruptcy PLUS you’re able to bring down your overall risk while removing as few people as possible. My next post looks into ways to identify profitable consumers in your list.   For more see: Four steps to creating the ideal prospecting list.

Companies are facing incredible difficulties identifying fraud risks at the point of origination. Setting up accurate fraud detection processes has become more and more challenging as mobile and online channels have become widely used by consumers. At the same time, fraudsters’ techniques are becoming increasingly sophisticated. To compensate, organizations have had the choice of either: a) Implementing very tough identity-proofing standards — risking turning away legitimate customers. b) Lessening their criteria and opening themselves to increased risk. Any business that functions in a web connected environment that has a need to recognize new or returning consumers must look beyond the simple credentials that have been provided by the user such as usernames, passwords, email addresses, phone numbers, handles, secret questions or secret answers. To increase assurance businesses need to start need to start looking at authenticating users through their devices that are being used to present those credentials. The underground is awash in legitimate but stolen credentials and should be treated with a great deal of skepticism by the businesses attempting to authenticate their customers. There will always be a pendulum swaying in the echoes of this kind of news – with businesses locking down access with more stringent policies and in doing so they begin to undo all the work that has been done to create a frictionless consumer experience.  The industry may now begin to realize the ultimate dream of the consumer: completely effortless access. Rather than requiring consumers to type in credentials that may have been compromised why not leverage the various technologies that exist to simply recognize the consumer when they access the site in question? Digital consumers interact with businesses via their digital proxies – their devices – which must come in digital contact with the web servers in order to gain access. The industry should require the machines to do heavy lifting (rather than consumers) when it comes to “recognizing” them when they return. The right technology offers a more robust, privacy-compliant and transparent way for businesses to recognize their digital consumers. As we’ve discussed previously the authentication process will shift from a single view to a layered, risk-based authentication approach that will include comprehensive and real-time updates of consumer information. This is done through technology that has been tested over the years and protects millions of customer accounts today with incredible results in terms of both fraud detection and frictionless consumer experience. The time has come to embrace the realities and the possibilities of the new digital environment in which we operate. Learn more about how your business can authenticate consumers confidently.  

By: Mike Horrocks As summer comes to end, so does the summer reading list but if you are still trying to get one in, I just finished reading “Isaac's Storm: A Man, a Time, and the Deadliest Hurricane in History”, which is about Isaac Cline the resident meteorologist  for  U.S. Weather Bureau and the 1900 Hurricane that devastated Galveston, Texas. It is a great read, using actual telegraphs, letters, and reports to show the flaws of an outdated system and how not looking to new sources of information and not seeing the values of nontraditional views, etc., lead to unfathomable destruction for the people of Galveston.  As I read the book, I was challenged to think of what is right in front of me that I am not seeing for what it is, just like Mr. Cline ignored reports that would have clearly saved lives and helped predict the storm.  So, how can this historical storm teach us a thing or two in the financial industry? Clearly one of the most rapidly changing aspects in banking today is the mobile channel.  Many institutions have already adjusted to using it as a service channel, with remote deposit capture, balance, inquiry etc., but what are they doing to take it to the next step? On August 7, 2014, Experian is hosting a webinar by American Banker titled, “What is next for mobile banking?”  The webinar will have a powerful panel with thought leaders such as Dominic Venturo, the Chief Innovation Officer at U.S. Bank, Gordon Baird, the Chief Executive Officer at Independence Bancshares, and Cherian Abraham, Senior Business Consultant with Experian’s Global Consulting Practice. If you are already using mobile or maybe trying to look at what you could change, this is a great session to attend.  Over the next couple of weeks, we are going to go into some of the key topics from this webinar and explore them some more.  Hope to see you at this American Banker webinar.

At Experian, we frequently get asked by clients how they can get bigger mailing list that open new markets and reach more people. But bigger isn’t necessarily better, and it doesn’t always translate to a higher return on your marketing investment. Instead of just increasing volume, let’s consider a different, more focused approach - using the latest in analytic tools and scores.  This approach relies on effective pre-screening to create the ideal prospecting lists based on your business objective. We’ve identified four key steps to building a prescreen list of your ideal prospects: Optimize risk selection Find the most profitable consumers Target customers who need or want your products Design the right offer In the next post, Optimal Risk Selection,  I’ll dig deeper into each step and present some tools and scores that can help meet the objective of each.      

By: Teri Tassara “Do more with less” is a pervasive and familiar mantra nowadays as lenders seek to make smarter and more precise lending decisions while expertly balancing growth objectives and tightened budgets.  And lest we forget, banks must also consider the latest regulations and increased regulatory scrutiny from the industry’s governing bodies - such as OCC and CFPB. Nowadays, with the extensive application of predictive analytics in everyday lending practices, it makes sense to look to analytics to fine tune decision-making and achieve a greater return on investment in three common growth objectives for bankcard acquisitions: Profitable growth - How do I find the most profitable acquisition targets?  How do I know the borrowing characteristic of each consumer?  Are they high spend or high income?  Do they carry a balance but always make timely payments? Universe expansion - How many more consumers are there that meet my lending criteria? How can I effectively reach them? Customer experience - How do I offer the right product to the right customer? How do I communicate to my customers that I understand their lending needs? To that end, growth objectives vary by lender; as such, so should their bankcard acquisitions analytical toolkit. The analytical toolkit arsenal should enable lenders to develop refined bankcard campaign strategies based on their specific objectives. Look for upcoming posts on the essential components of the bankcard acquisitions analytical toolkit.  

  Residential real estate lending was the leading component of the Great Recession of 2007-2009.  Could it happen again?  Let’s analyze our Intelliview data  to see where U.S. lending trends are headed with HELOCs. A large portion of Home Equity Lines of Credit (HELOCs) were originated from 2004 to 2007.  The term structure of these HELOCs will soon result in larger monthly payments, which could potentially promote consumer debt burden troubles.  Additionally, with as much as 13% of all first mortgage customers having balances greater than the value of homes, many HELOCs wallow underwater. HELOCs typically have a ten year draw followed by a twenty-year repayment period. However, there are variations in the term structures.  HELOCs can have as little as a five year draw, while others have a fifteen year repayment period.  During the draw period, customers only pay interest on the balance.  In the repayment period, the account functions like a loan, customers pay principal and interest. In 2012, the Office of Comptroller of the Currency (OCC, the primary banking regulator) reported that 58% of all bank HELOC balances would enter the repayment period and begin to amortize between 2014 and 2017 (OCC, Semiannual Risk Perspective, Spring 2012).  This report renewed fears that the increase in payments would lead to higher delinquencies and foreclosures, limit consumer spend and provide a drag on the U.S. economy. Paradoxically, the OCC estimates of the HELOC balances entering the repayment period may be low.  The OCC has accounted only for $392 billion of HELOC balances among banks.  Experian’s review of all HELOC trades shows a significantly higher level of balances.  Additionally, American Banker estimates the top 200 banks and thrifts had more than $477 billion in HELOC outstanding as of the end of 2013, with the top three lenders (Bank of America, Wells Fargo and JP Morgan Chase) comprising nearly $300 billion. Experian examined HELOCs in the four states with the greatest surges in home values and lending prior to the Great Recession.  California comprises nearly 19% of all HELOC balances and lines.  With averaging HELOC balances of 53% above the national mean, Arizona, Florida and Nevada are the three highest utilization rates by state.  Nevada has the highest 30+ day delinquency rate in the country at 2.92%, while the national average is 1.64%.           According to CoreLogic’s most recent home price index report, Nevada, Florida and Arizona home prices remain 30-39% below their peak real estate values.  California’s prices are down 17%, and the national average home value is still 14% below its highest value. Refinancing HELOCs may be difficult due to the significant number of second liens still underwater.  Compounding this difficulty, lending standards also have tightened, with regard to loan-to-value, debt ratios and credit quality. The average HELOC was examined at a 4.5% interest rate and a 20 year repayment period.  The average monthly payment increases almost 69% when the account leaves the draw period and requires paying principal balance as well as interest. This payment increase accounts for approximately 2.6% of the median U.S. household gross annual income. It is estimated that the increase in HELOC payments will comprise $1 billion in additional annual payments during 2014, and an additional $9 billion between 2015 through 2017.   However, it is important to remember that not all HELOCs will reach repayment. HELOCs are priced based on the prime rate.  That rate has been 3.25% for more than five years, a historical low.  When prime rate reached this level in December 2008, the rate was at its lowest in 53 years.  Only 18 months prior to reaching 3.25%, the prime rate had been 8%. If the prime rate increases by 1% to 4.25%, the average payment of accounts in the draw period would increase 22%, affecting just about every HELOC, with a national increase in annual payments of about $5 billion. The volume of HELOCs that are beginning to enter the repayment period may eventually increase delinquency rates.  However, no such increase is yet evident.  As shown below, delinquency rates are steady after a long decline.  In the past three years, 90+ days delinquency has declined 41%.     The Majority of HELOCs are second mortgages.   Successful completion of a foreclosure would involve making the customer’s monthly first mortgage payment in addition to all other expenses incurred in foreclosure and the sale of the property.   Very often foreclosing from a second lien does not make financial sense unless the financial institution also holds the first mortgage on the property. As a large portion of HELOCs enter the repayment period in the next four years, the payments that customers must make will increase considerably.  With interest rates as low as they are, the prime rate will eventually rise, and increase debt service ratios.  These payment increases will have implications on consumers, lenders and the economy.  Having grown 10.5% in the last year,  home values continue to recover from the recession.  It is yet to be determined whether this payment increase will have a broader or more isolated impact. In the meantime, HELOCs will continue to see their resurgence. For more insight like this from Experian Decision Analytics, watch our 2014 Q1 Experian–Oliver Wyman Market Intelligence Report presentation.    

Are you sure you are making the best consumer credit decisions? Given the constantly evolving market conditions, it is a challenge to keep informed. In order to confidently grow and manage the bottom line, organizations need to avoid these four basic risks of making credit decisions with limited trend visibility. Competitive Risk - With limited visibility to industry trends, organizations cannot understand their position relative to peers. Product Risk - Organizations without access to the latest consumer behaviors cannot identify and capitalize on emerging trends. Market Risk - Decisions suffer when made without considering market trends in the context of the economy. Resource Risk - Extracting useful insights from vast market data requires abundant resources and comprehensive expertise. Get more information on the business risks of navigating credit decisions with limited trend visibility.