Credit & Risk

By: Staci Baker The Durbin Amendment, according to Wikipedia, gave the Federal Reserve the power to regulate debit card interchange fees. The amendment, which will have a profound impact on banks, merchants and anyone who holds a debit card will take effect on October 1, 2011 rather than the originally announced July 21, 2011, which will allow banks additional time to implement the new regulations. The Durbin Amendment states that card networks, such as Visa and Mastercard, will include an interchange fee of 21 cents per transaction, and must allow debit cards to be processed on at least two independent networks. This will cost banks roughly $9.4 billion annually according to CardHub.com. As stipulated in the Amendment, institutions with less than $10 billion in assets are exempt from the cap. In preparation for the Durbin Amendment, several banks have begun to impose new fees on checking accounts, end reward programs, raise minimum balance requirements and have threatened to cap transaction amounts for debit card transactions at $50 to $100 in order to recoup some of the earnings they are expected to lose. These new regulations will be a blow to already hurting consumers as their out of wallet expenses keep increasing. As you can see, The Durbin Amendment, which is meant to help consumers, will instead have the cost from the loss of interchange fees passed along in other forms. And, the loss of revenue will greatly impact the bottom line of banking institutions. Who will be the bigger winner with this new amendment - the consumer, merchants or the banks? Will banks be able to lower the cost of credit to an amount that will entice consumers away from their debit cards and to use their credit cards again? I think it is still far too soon to tell. But, I think over the next few months, we will see consumers use payment methods in a new way as both consumers and banks come to a middle ground that will minimize risk levels for all parties. Consumers will still need to shop and bankers will still need their tools utilized. What are you doing to prepare for The Durbin Amendment?

Every communication company wants to inoculate its portfolio against bad debt, late payments and painful collections. But many still use traditional generic risk models to uncover potential problems, either because they’ve always used generics or because they see their limited predictive abilities as adequate enough. Generalization dilutes results The main problem with generics, however, is how they generalize consumers’ payment behavior and delinquencies across credit cards, mortgages, auto loans and other products. They do not include payment and behavioral data focused on actual communications customers only. Moreover, their scoring methodologies can be too broad to provide the performance, lift or behavioral insights today’s providers strive to attain. Advantages of industry-specific models Communications-specific modeling can be more predictive, if you want to know who’s more likely to prioritize their phone bill and remit promptly, and who’s not. In multiple market validations, pitting an optimized industry-specific model against traditional generic products, Experian’s Tele-Risk ModelSM and Telecommunications, Energy and Cable (TEC) Risk ModelSM more accurately predicted the likelihood of future serious delinquent or derogatory payment behavior. Compared with generics, they also: Provided a stronger separation of good and bad accounts More precisely classified good vs. bad risk through improved rank ordering Accurately scored more consumers than a generic score that might have otherwise been considered unscorable Anatomy of a risk score These industry risk models are built and optimized using TEC-specific data elements and sample populations, which makes them measurably more predictive for evaluating new or existing communications customers. Optimization also helps identify other potentially troublesome segments, including those that might require special handling during on boarding, “turn ons,” or managing delinquency. Check the vital signs To assess the health of your portfolio, ask a few simple questions: Does your risk model reflect unique behaviors of actual communications customers? Is overly generic data suppressing lift and masking hidden risk? Could you score more files that are currently deemed unscorable? Unless the answer is ‘yes’ to all, your model probably needs a check-up—stat.  

By: Kennis Wong On the surface, it’s not difficult to define existing account fraud. Obviously, it is fraud perpetrated against an existing account. But the way I see it, existing account fraud can be broken down into four types. The first type is account takeover fraud, which is what most organizations think as the de facto existing account fraud. This is when a real consumer using his or her own identity to open a legitimate account, but the account later on get taken over by an identity fraudster. The idea is that when the account was first established, it was created by the rightful person. But somewhere along the way, the account and identity information were compromised.  The fraudster uses the compromised information to engineer their way into the account. The second type is impersonation. Impersonation is somewhat similar to account takeover in the sense that it is also misusing the victim’s account. But the difference is that impersonation is more of a one or few times misuses of the account. Examples are a fraudulent use of a credit card or wire transfer. These are the obvious categories. But I think we should also think about these other categories. My definition of existing account fraud also includes this third type – identity fraud that was undetected during application. In other words, an account is established based on stolen identity.  Many organizations call this “new account fraud”, which I don’t have a problem with. But I think it’s really also existing account fraud, because –  is this existing account? The answer is yes. Is this fraud? Absolutely. It’s not that difficult, is it? Similarly, I am including first-party fraud in existing account fraud as well. A consumer can use his or her own identity to open an account, with an intention to default after the account is established. Example is bust out fraud. You see that this is an expanded definition of existing account fraud, because my focus is on detection. No matter at what point and how identity fraud comes in, it becomes an account in your organization, and that is where we need to discover the fraud. But at the end of the day, it’s not too important how to categorize or name the fraud - whether it's application fraud, existing account fraud, first party fraud or third party fraud, as long as organizations understand them enough and have a good way to detect them. Read more blog posts on existing account fraud.

This week, American Express unveiled a new payments offering that will surely compete with not just other prepaid options, but will impact debit and credit sales volume as well. The prepaid card offered by American Express carries no fee for activation, reloading or lost card replacement. The card also offers consumers the option of drawing cash at an ATM. Since the consumer funds all transactions, default risk goes away, exponentially opening up the market potential. The question becomes, how will this impact other plastic and mobile payment sales today and down the road? Back in the year 2000, credit cards dominated purchase volume generating 77% of all merchant sales on general purpose cards, versus 23% on debit. Last year, debit and prepaid purchases captured close to half of all general purpose card spend with credit sales capturing ~53%, debit 44% and the remaining volume coming from prepaid cards. With all of the regulatory changes impacting bank revenue and cost positions, financial institutions are having to rethink existing practices eliminating rewards programs tied to debit charge volume and resurrecting monthly checking account fees in large scale. It's not a question of bank gouging, rather how do financial service providers offset lost interchange income of $0.40+ per transaction down to $0.12 to $0.20 as is being mandated with the quickly approaching implementation of the Durbin Amendment on July 21st. Add to that reduced fee income from Dodd-Frank and institutions have to figure out how to still be able to afford to offer these services to their customers. Who will the winners and losers be?Let's start with the Merchant perspective. With companies now actively promoting services to help merchants calculate which payment vehicles generate the lowest costs without impacting sales volumes, we very well may start to see more of the "Costco" business model where only certain pay-types are accepted at different merchants. My predictions are that first, merchants will continue to send a message loud and clear that they perceive the cost of interchange to be too high. Smaller institutions, presumably protected from interchange caps, will be forced to reduce rates anyway to sustain merchant acceptance unless existing federal law requirements remain unchanged, precluding retailers from following the laws of capitalism. One certainty is that we will see continued development of alternatives similar to Wal-Mart and Starbucks payment options.Credit and Debit sales will be impacted although they will continue to be valued highly by specific segments. The affluent will continue to expect rewards and other benefits deeming credit cards highly relevant and meaningful. Additionally, small business owners will need the payment float utility to fund services they typically don't get paid for up front. At the same time, many consumers will continue to deleverage and sustain favoritism to debit over credit. Prepaid and emerging Mobile Payments technology will continue to attract younger consumers as well as the early adapters that want to leverage the newest and coolest products and services. The negatives will take some time to surface. First, how will the CFPB react to prepaid growth and the fact that the product is not subject to interchange caps stipulated under Durbin? Next, how will merchants react and again, will we continue to see retailer specific options dominate merchant acceptance? Lastly, when fraudsters figure out how to penetrate the prepaid and mobile space, will consumers swarm back to credit before advanced fraud prediction models can be deployed since consumers bear the brunt of the liability in the world of prepaid?

For communications companies, acquiring new accounts is an ongoing challenge. However, it is critical to remember that managing new and existing accounts – and their respective risks – is of tremendous importance. A holistic view of the entire customer lifecycle is something every communications organization can benefit from. The following article was originally posted by Mike Myers on the Experian Business Credit blog. Most of us are pretty familiar with credit reports and scores, but how many of you are aware of the additional tools available to help you manage the entire credit risk lifecycle? I talk to credit managers everyday and as we’re all trying to do more with less, it’s easy to forget that opening accounts is just the first step. Managing risk on these accounts is as critical, if not more so, than opening them. While others may choose to “ship and chase”, you don’t need to. Proactive alert/monitoring services, regular portfolio scoring and segmentation are key components that a successful credit department needs to employ in the constant battle against “bad” accounts. Use these tools to proactively adjust credit terms and limits, both positively and negatively. Inevitably some accounts will go bad, but using collection research tools for skip tracing and targeting services for debt collection will put you first in line for collections. A journey of 1,000 miles begins with a single step; we have tools that can help you with that journey and all can be accessed online.

By: Tracy Bremmer Score migration has always been a topic of interest among financial institutions. I can remember doing score migration analyses as a consultant at Experian for some of the top financial institutions as far back as 2004, prior to the economic meltdown. Lenders were interested in knowing if I could approve a certain number of people above a particular cut-off, and how many of them will be below that cutoff within five or more years. Or conversely, of all the people I’ve rejected because they were below my cut-off, how many of them would have qualified a year later or maybe even qualified the following month. We’ve done some research recently to gain a better understanding of the impact of score migration, given the economic downturn. What we found was that in aggregate, there is not a ton of change going on. Because as consumers move up or down in their score, the overall average shift tends to be minimal. However, when we’ve tracked this on a quarterly basis into score bands or even at a consumer level, the shift is more meaningful. The general trend is that the VantageScore® credit score “A” band, or best scorers, has been shrinking over time, while the VantageScore® credit score “D” & “F” bands, lower scorers, has grown over time. For instance, in 2010 Q4, the amount of consumers in VantageScore® credit score A was the lowest it has been in the past three years. Conversely, the number of consumers falling into the VantageScore® credit score “D” & “F” bands are the highest they have been during that same time period. This constant shift in credit scores, driven by changes in a consumer’s credit file, can impact risk levels beyond the initial point of applicant approval. For this reason, we recommend updating and refreshing scores on a very regular basis, along with regular scorecard monitoring, to ensure that risk propensity and the offering continue to be appropriately aligned with one another.

About a month ago, Senior Decisioning Consultant Krista Santucci and I gave a presentation at Experian’s 2011 Vision Conference on Decisioning as a Service. Due to the positive feedback we received, I thought it might be of interest to members of the communications industry who might not have had the opportunity to attend. A common malady The presentation revolved around a case study of an Experian client. Like many communications industry companies, this client had multiple acquisition systems in place to process consumer and commercial applications. In addition, many of the processes to mitigate fraud and support Red Flag compliance were handled manually. These issues increased both complexity and cost, and limited the client’s ability to holistically manage its customer base. The road to recovery At the beginning of the presentation, we provided a handout that listed the top ten critical functionalities for decisioning platforms. After a thorough review of the client’s system, it was clear that they had none of the ten functionalities. Three main requirements for the new decisioning platform were identified: A single system to support their application processes (integration) A minimum of 90% automatic decisions for all applications (waterfall) The ability to integrate into various data sources and not be resource intensive on their IT department (data access)     Decisioning as a ServiceSM is a custom integrated solution that is easily applied to any type of business and can be implemented to either augment or completely overhaul an organization’s current decisioning platforms. We designed this client’s solution with a single interface that manages both consumer and commercial transactions, and supports a variety of access channels and treatment strategies. Following implementation, the client immediately benefited from: Streamlined account opening processes A reduction in manual processes Decreased demand on IT resources The ability to make better, more consistent decisions at a lower cost The agility to quickly respond to changing market needs and regulatory challenges     Evaluate your own business Do you recognize some of your own challenges in this post? Download our checklist of the top ten critical functionalities for decisioning platforms and evaluate your own system. As you go through the list, think about what benefits you would derive by having access to each of the capabilities. And if you’d like to learn more about Decisioning as a Service, please complete our form.  

The Consumer Financial Protection Bureau (CFPB) is a new regulatory agency that is still evolving. But even now it’s clear that it will have unprecedented powers with a broad reach across industries – including communications. Although there are questions about how the CFPB will operate, there are still steps you can take to prepare. To help you get ready, let’s review a few of the areas you should expect CFPB to affect your business, followed by three questions you can help your customers answer. 3 Ways the CFPB Will Impact Business: Consumer disclosures must be clear and easy to read. The goal is to ensure that financial terms and conditions of services (especially for credit cards and mortgages) are disclosed in clear, easy-to-understand terms that allow consumers to compare offers. Consumer products to be examined rather than industries – Regulatory agencies are typically structured around the kinds of businesses they supervise. With the CFPB, we’ll see a regulator with a perspective more focused on consumer financial products and services. Transparency on how credit scores affect terms & conditions – Greater transparency about credit scores and how they are used to determine loan rates will also be a priority. Lenders are required to disclose a score they used in all risk-based pricing notices and adverse action notices beginning July 21, 2011.   CFPB Takes Authority on July 21 The CFPB receives full regulatory and enforcement authority on July 21, so it’s important for covered entities to continue complying with current law and striving to follow industry best practices. Companies need to demonstrate that they have taken steps to increase consumer credit education and transparency of credit scores, as these items top the CFPB agenda. Experian Consumer Education Resources Experian is addressing the growing need for consumer education by offering Experian Credit EducatorSM, a credit education service in which consumers engage in a one-on-one credit education session with an Experian credit professional agent,  together reviewing  a copy of their credit report and VantageScore® credit score. Answers to 3 Consumer Questions: As part of Experian Credit Educator, consumers learn the answers to three main questions: What’s in a credit report? What is a score, and what types of information can increase or decrease a score? How does credit affect my financial situation?     Experian Credit Educator allows lenders to provide customers a personalized education service, thereby advancing customer engagement while improving customer satisfaction, loyalty, portfolio quality, and cross-sell opportunities. Do you have questions about the CFPB’s role? Leave a comment or contact your Experian representative if you need assistance in complying with new regulatory requirements.

By: Kari Michel On March 18th 2011 the Federal Reserve Board approved a rule amending Regulation Z (Truth in Lending) to clarify portions of the final rules implementing the Credit CARD Act of 2009. Specific to ability to pay requirements, the new rule states that credit card applications generally cannot request a consumer's "household income" because that term is too vague to allow issuers to properly evaluate the consumer's ability to pay. Instead, issuers must consider the consumer's individual income or salary. The new ruling will be effective October 2011. Given the new direction outlined in the latest rules, we've been hard at work on developing 2 income models to support these regulatory obligations and enhance the underwriting and risk assessment process - Income InsightSM and Income Insight W2SM.  Both income models estimate an individual’s income based on an individual credit report and can be used in acquisition strategies, account management review and collection processes.  Why two models? Income InsightSM estimates the consumer’s total income, including wages, investments, rentals and other income. Income Insight W2SM estimates wages only.  Check them out - and let us know what you think! We want to hear from you.

While the majority of your customers may be consumers, most telecommunications companies also work with a number of business accounts. Understanding business credit scores — and what attributes have the most impact on them — can go a long way in helping you identify good customers as well as better manage risk. The following article was originally posted by Peter Bolin on the Experian Business Credit blog. There are a number of factors that impact business credit risk scores. Keep in mind that most risk models are built using multivariate statistical methods that not only look at each attribute, but also look for the interaction between the attributes. However, there are three general factors that will impact a business score. Recency: How recently has the business been delinquent? Events that have happened recently tend to be most predictive of business behavior in the near future. For example being days beyond credit terms (DBT) in the past 30, 60, and 90 days will tend to negatively impact, on average, a business’s credit score versus those that are current. Frequency: How frequently is the business delinquent or applying for credit? If a business has multiple beyond terms events then the algorithm will reflect this behavior and will tend to impact the score to the low side. In addition, if a business is frequently applying for credit (called inquires) then this will also negatively impact the score. Monetary/Usage: How large is the debt burden? Businesses that carry large balances in relation to credit limits tend to be more risky than those that carry lower balances in relation to credit limits. This is called the utilization ratio or balance-to-limit ratio. As the debt burden increases interest payments also grow placing more stress on cash flows. This tends to negatively impact a business’ risk score. Please comment on this post to let me know of specific topics you want to hear more about.

The next time a consumer asks about his or her credit score, consider it an opportunity. Recent changes to the Risk-Based Pricing (RBP) rule may provide new opportunities to strengthen relationships by educating consumers about what their credit scores mean, how they’re used, and how they can be improved. For many lenders and other businesses, this could be the first time they’ve had a chance to speak directly and openly with customers about their credit scores. The RBP rule is intended to improve financial literacy As we’ve discussed, the Risk-Based Pricing Rule was instituted in response to policymaker concerns that consumers were not being sufficiently informed of the impact that credit reports can have on their annual percentage rate (APR). Now, when a lender makes a credit decision based on a consumer credit report and does not offer the best possible rate, or denies credit, the RBP Rule requires lenders to notify the customer about the decision – through either an explanation of the rate offered or disclosing a credit score. New requirements take effect on July 21 RBP compliance is changing following recent passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Companies will now be required to provide all customers with a credit score within a Risk Based Pricing Notice, along with educational material. The new requirement is effective July 21, 2011. This is also the date when the new Bureau of Consumer Financial Protection (CFPB) is set to be fully operational. How to prepare for consumer questions about credit scores Experian offers a number of resources to help lenders answer consumer questions. Online resources, including the Ask Experian column and our extensive Credit Education section, provide fundamental information to help consumers better understand credit scores and credit reports. The Experian Credit Score Basics booklet, plus more than 20 other educational documents, are available electronically and formatted for easy printing and distribution. All documents, PowerPoint presentations, virtual seminars and education videos are available on a free mini-disk. Customized training and education is available The Experian Public Education team can also provide customized, live Internet-based training and education for our clients’ employees to help them effectively answer customer questions about credit reports and credit scores. For a free mini-disk or more information about training events, please contact Rod Griffin, Experian’s Director of Public Education, at 1 (972) 390-3528, or email clientcorner@experian.com. Take a moment to check out our Risk-Based Pricing microsite, too. Note: While Experian is happy to provide our observations related to the new Risk-Based Pricing Rule, please work with your own legal counsel to ensure that you comply with your obligations under the rule.

Managing commercial credit in today’s economy can be a real challenge. For telecommunications companies, pulling a report can be helpful in deciding whether or not to offer service to a consumer. But pulling credit reports alone is simply not effective to perform true, proactive portfolio management. The following article was originally posted by Minnie Blanco on the Experian Business Credit blog. If you make decisions just by pulling credit reports, you may want to think about how you can manage your accounts proactively. Pulling a report is helpful in deciding whether you should offer credit to a business. But, consider these basic steps when looking for any negative trends: Develop a policy for how you’d handle accounts that are current, delinquent, bankrupt, etc. Segment your portfolio by those accounts who pay within a particular range of time or who fall within a particular category, i.e. Current 1-30 days, 31-60, 61-90, 91 plus or filed bankruptcy. Review your accounts and apply your company policy to that particular segment.     By applying steps 1 -3, you’ll be able to proactively identify good candidates for increased credit limits, as well as those you’ll need to pay closer attention to because they may be headed for delinquency or collections. BusinessIQ allows you to easily pull reports, segment accounts and submit them for account review. It’s easy-to-use…plus, the Portfolio Module is free! Here’s a demo on the application. Look for future blog posts from me where I’ll write more about managing your portfolio. And, feel free to comment and let me know if there are specific topics you want to hear about.

By: Staci Baker It seems like every time I turn on the TV there is another natural disaster. Tsunami in Japan, tornadoes and flooding in the Mid-West United States, earthquakes and forest fires – everywhere; and these disasters are happening worldwide. They are not confined to one location. If a disaster were to happen near any of your offices, would you be prepared? Living in Southern California, this is something I think of often. Especially, since we are supposed to have had “the big one” for the past several years now. When developing a preparedness plan for a company, there are several things to take into consideration. Some are obvious, such as how to keep employees safe, developing steps for IT  to take to ensure data is protected , including an identity theft prevention program, and establishing contingency business plans in case a disaster directly hits your business and doors need to remain closed for several days, weeks, or …. But, what about the non-obvious items that should be included in a disaster preparedness plan? When a natural disaster hits, there is an increase in fraud. So much so, that after Hurricane Katrina battered the Gulf, the Hurricane Katrina Fraud Task Force, now known as the National Center for Disaster Fraud, was created. In addition to the items listed above, I recommend including the following. Create a plan that will put fraud alerts in place to minimize fraud.  Fraud alerts are not just to notify your clients when there is fraudulent activity on their accounts. Alerts should also be put in place to let you know when there is fraudulent activity within your own business as well. Depending on the type of disaster, delinquency rates may increase, since borrower funds may be diverted to other needs. Implement a disaster collections strategy, which may include modifying credit terms, managing credit risk, and loan loss provisioning. Although these are only a few things to be considered when developing a disaster preparedness plan, I hope it gets you thinking about what your company needs to do to be prepared. What are some things you have already done, or that are on your to do list to prepare your company for the next big event that may affect you?

Unless you’ve been hiding under a rock, you are undoubtedly aware that the 4G ship has sailed into port. The 4G network is a completely different technology as compared to 3G, the network it is replacing. 3G was fast, but 4G will set the world on fire. It’s kind of like the difference between a farm tractor and a Lamborghini. Rather than just being able to check email and (slowly) surf the net (as with 3G), 4G users will be able to watch live television and rip through online content like nobody’s business. So what does this mean for communications companies? Change device, change carrier? The big question for wireless providers is whether or not customers will change carriers as they upgrade to new, 4G-supported devices. The simple answer is, it depends. Customers who are currently under contract will not likely jump ship for the simple fact that it will cost too much. For example, let’s say I want to upgrade five devices. I can probably buy these less expensively by changing carriers (due to attractive introductory offers). However, if I have to cancel three contracts prior to term end to do it, it may cost me upwards of $1,000—probably more than I can save by changing carriers. For customers who are at the end of a contract term, upgrading to 4G presents a golden opportunity to change providers, if that’s something they’ve been considering. Wireless providers will obviously need to contact these customers well before their contracts are up and make them an offer they simply can’t refuse. Other concerns for wireless providers Obviously, key players in the market have invested a significant amount of money to develop the 4G infrastructure, and sooner or later they’re going to want to recoup those costs. Introductory offers will motivate many to upgrade to 4G, but will all these new/upgrade customers be able to pay the higher monthly bills that will likely come with their new 4G devices? While locking in all these new contracts will positively affect sales quotas, it will be more important than ever to assess these customers’ cash flow situations and credit-worthiness, so they don’t end up negatively affecting the bottom line. Concerns for other telecommunications companies One other interesting aspect to consider is this: With a 4G device, consumers can effectively create their own “hot spot.” So the question is, just as many people are dropping their landlines in favor of wireless, will 4G device users decide to drop their Internet providers? How about their cable television service? I intend to revisit this topic in 3-6 months to see whether early 4G adopters are in fact jumping to different carriers and/or dropping other services. What do you think might happen as 4G becomes the new normal? Leave a comment and share your thoughts.

As more and more consumers recover from the recent economic turmoil, they have a driving need to better understand how their credit situations impact their ability to make purchases and obtain services like wireless, cable television, Internet and more. Here at Experian, we recently launched a pilot program through our National Consumer Assistance Center (NCAC) to gauge consumers’ receptiveness to receiving credit education. A frustrated population The pilot program involved consumers referred to the NCAC by some of our utility clients. Like many cable, wireless and telecom customers, these people were frustrated about having to pay a security deposit to obtain service. Experian offered them a one-on-one educational session over the phone that included: An explanation of the major components of a credit report The distinction and relationship between a credit history and a credit score Definitions of negative elements on a credit history   Positive outcomes The results of the pilot program, as measured through exit surveys, were quite positive: On a scale of 1 to 5, with 5 being the highest, those who participated in the program scored the service as a 4.9 in terms of being helpful. 96% of respondents indicated they are “likely” or “very likely” to act on the knowledge they received and/or change how they use credit. Despite still having to pay a deposit, nearly 50% of respondents ultimately felt “positive” or “very positive” about the utility company whose actions led to their being involved in the educational session. Implications for communications companies The benefits of offering consumer credit education are far-reaching. Not only can it help you build stronger relationships with current and potential customers, it can also help your customers improve their own credit-worthiness, and thus increase their eligibility for the products you offer and decrease the need for hefty deposits. Did you know that April is Financial Literacy Month? In support of Financial Literacy Month, Experian is participating in a number of events with the JumpStart Coalition for Financial Literacy and providing education materials and resources to many different organizations that are conducting financial literacy programs around the country. We are also enhancing our consumer education web site and developing a package of credit education and mentoring services that communications companies can offer to their customers. Check back for more information on that development in future posts.