Credit & Risk

Last week I attended the Merchant Risk Council’s 2011 MRC Annual e-Commerce Payments & Risk Conference.  I presented a session titled “Efficiency and Empowerment in Risk-based Authentication” with a client who has been able to use knowledge based authentication as a sales enabler - Home Shopping Network.  You might be wondering what I mean by this.  It is actually pretty simple:  Home Shopping Network already has a fraud prevention program in place and utilizes risk based authentication to send a percentage of orders to an outsort queue.  By using knowledge based authentication to further verify the true consumer, Home Shopping Network has been able to release an increased portion of those orders for shipping, increasing both revenue and the customer experience.  The paradigm shift was thinking of knowledge based authentication as a sale enabler, rather than just a fraud tool.  It was a great experience, to help share the story of this client’s success.   If you are interested in the Merchant Risk Council:  The Merchant Risk Council (MRC) is a merchant-led trade association focused on electronic commerce risk and payments.  They lead industry networking, education, benchmarking and advocacy programs to make electronic commerce more efficient, safe and profitable. For more information on the Home Shopping Network, visit: http://www.hsn.com

By: Kristan Frend I was recently pleased to see that the state I reside in, Minnesota finished in the bottom third of a state ranking.  Luckily the rankings weren’t about overall health (#6), high school graduation (#3), or SAT scores (#2); instead it was the Federal Trade Commission’s state identity theft complaint ranks.  Minnesota has just 49.2 complaints per 100,000 population, whereas the highest ranked state, Florida, as 114.8 complaints per 100,000 population.   The top three states leading identity theft consumer complaints (per 100,000 population) included Florida, Arizona, and California.   Besides warm sunshine and top-tier golf courses, what do these three states have in common?  According to the February 2011 RealtyTrac U.S. Foreclosure Market Report™, all three rank in the top 5 states for foreclosure, and two of the three (Florida and California) rank #49 and #50 in unemployment rates, according to a March 2011 report released by the Bureau of Labor Statistics.    On a national level unemployment rates and identity fraud incidence rates both improved from 2009 to 2010.  From 2009 to 2010, unemployment rates went from 10.0% to 9.4% while according to Javelin’s 2010 Annual Identity Fraud Survey Report, identity fraud incidence rates fell from 4.8% to 3.5%.    While it may be inaccurate to state that economic distress causes higher rates of identity fraud, there does seem to be a natural correlation between economic downswings and fraudulent activity.   As we move further into 2011, it will be interesting to see if identity fraud incidence rates will continue to decrease as unemployment and economic outlook is on the upward swing. 

The subject of “bill shock” has been getting an increasing amount of coverage lately. On one side, the FCC and consumer groups are advocating new regulations mandating customer alerts and other information to help customers avoid unexpected monthly charges, or “bill shock.” On the other side, three wireless industry groups, CTIA, the Rural Cellular Association (RCA) and the Rural Telecommunications Group (RTG), have come out in opposition to the FCC’s proposed mandate. The consumer view According to Consumer Reports, bill shock is a common occurrence: One in five survey respondents reported receiving an unexpectedly high bill in the previous year, often for exceeding the plan's voice, text, or data limits… half of them were hit for at least $50, and one in five for more than $100. The industry view In comments to the FCC, the CTIA maintained that new mandates were not only unnecessary but costly, and that carriers already provided sufficient monitoring tools for customers. In addition, the CTIA argued that the FCC did not have the authority to impose such rules and that they would violate First Amendment protections: The FCC should refrain from initiating prescriptive rules that not only would likely cost carriers (and therefore consumers) tens, if not hundreds, of millions of dollars to put into practice, but that also would raise numerous legal issues, create substantial implementation challenges, and force companies to upgrade to a set of government standards instead of creatively competing in the provision of service to customers. A No-Win Situation? The issue puts carriers in an awkward position. Even if they prevail with the FCC and prevent the proposed mandates, they may still lose in terms of public relations with consumers. Connected Planet Blogger Susana Schwartz got to the heart of the matter with the question of who is ultimately responsible: the customer or the carrier? At what point is it too much responsibility to put on the carriers’ shoulders and at what point should people be held responsible for their choices? Regardless of the answer to such philosophical questions, there are the three key FCC proposals that wireless carriers need to be aware of as the issue moves forward. Three New Potential FCC Mandates   Over-the-Limit Alerts: The FCC’s proposed rules would require customer notification, such as voice or text alerts, when the customer approaches and reaches monthly limits that will result in overage charges.   Out-of-the-Country Alerts: The FCC’s proposed rules would require mobile providers to notify customers when they are about to incur international or other roaming charges that are not covered by their monthly plans, and if they will be charged at higher-than-normal rates.     Easy-to-Find Tools: The FCC’s proposed rules would require clear disclosure of any tools offered by mobile providers to set usage limits or review usage balances. The FCC is also asking for comment on whether all carriers should be required to offer the option of capping usage based on limits set by the consumer.   How will these proposals affect your business? Let us know your concerns. We’ll keep a close watch on this issue as it develops and keep you posted.

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.

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.

TRMA’s Spring Conference scheduled for February 22-23, 2011 As you probably already know, the mission of the Telecommunications Risk Management Association (TRMA) is to “drive positive change in order to reduce fraud and optimize risk for the benefit of the industry, individual members and paying customers.” As part of that mission, TRMA is committed to bringing together risk management professionals several times a year for information-sharing forums. The organization’s 2011 Spring Conference is scheduled for February 22-23, 2011 at the Treasure Island Hotel & Casino in Las Vegas. Experian representation at the TRMA Conference At Experian, we’re committed to investing in new technologies in order to offer our communications customers the most advanced fraud prevention and risk management tools. Being a part of TRMA helps us better understand how we can best respond to existing and emerging requirements to one of the key industries we serve. And it allows us to share what we see as up-and-coming trends as well as new developments in risk management. Experian Decision Analytics personnel are scheduled to present at TRMA’s 2011 Spring Conference, as follows: Jim Nowell, Business Consultant TRMA Learning Lab – The SimTel Business Game Tuesday, February 22, 8:00 a.m. – 12:00 p.m. Jim’s lively Learning Lab will have several small teams of risk managers working together to solve problems for a fictitious Telco portfolio. The results of the game will be delivered on Wednesday morning at 10:45 AM.   Linda Haran, Senior Director, Strategy and Marketing Economic Update Wednesday, February 23, 9:30 – 10:30 a.m.   Linda serves as one-half of this panel, reviewing the historical linkages between credit conditions and the economy with an emphasis on how they relate to telecommunications.   Greg Carmean, Program Manager, Small Business Credit Share Small Business Panel Wednesday, February 23, 11:15 a.m. – 12:15 p.m.   Greg serves as one-half of this panel, discussing best practices for small business risk assessment, such as employing a blend of consumer and commercial data to combat fraud.   Jeff Bernstein, Executive Strategic Consultant Leveraging Technology to Maximize Returns on Outsourced Collections Wednesday, February 23, 2:00 – 2:45 p.m.   Jeff serves as one-half of this panel, discussing ways to avoid the “perfect storm” of rising delinquency rates, lower liquidation and staff drowning in the tidal wave of bad debt. We hope to see you there More details on each of these presentations will follow this post in the coming week. We look forward to seeing you at TRMA’s Spring Conference. If you can’t attend (or even if you can), be sure to follow us on Twitter for live conference updates, and check back here for post-conference blog posts.

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.

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?  

Increased incidence of “involuntary renters” According to the Mortgage Bankers Association, one out of every 200 homes will be foreclosed. The incidence of “involuntary renters” will increase as a high foreclosure rate continues, in turn, fueling the current trend of consumers who rely solely on mobile service instead of landlines. Implications for communications companies Does it necessarily follow that foreclosure equals bad risk? I don’t think so. For example, many consumers who have undergone foreclosure were subjected to a readjusted ARM that doubled or even tripled their mortgage payments. While taking a mortgage out of a consumer’s credit file can negatively impact the overall credit score, it can also potentially generate a more positive cash flow. The consumer’s new rent payments would be lower than the readjusted mortgage would have been, making the consumer a potentially good customer for communications services. Wireless companies, in particular, prefer to approve customers for regular installment plans (as opposed to prepaid plans). The goal, for nearly all communications companies, is to qualify customers for service without the need for a deposit. The key, when assessing credit risk, is to look at the total credit/payment history, not just the credit score alone. Best Practices for qualifying involuntary renters: Validate ID/authenticate. Checking the credit application information against several data sources will help avoid potential fraud. Look at the overall credit picture, especially the current debt-to-income ratio. Review third-party data for payment history. Along with the typical payment data, Experian now offers rental histories through RentBureau. This data has the ability to increase credit report accuracy for renters. Consider the basic lender mentality. Consumers who have exhibited good payment history on utilities, credit cards, and other debt in the past are likely to continue that behavior despite having lost their house to foreclosure.   Considering the total credit picture allows you to rank-order customers and group them into populations that are lower risk, identifying, for example, those who can be serviced without an upfront deposit. In future posts, I’ll provide some guidance for rank-ordering customers as to their credit-worthiness.

In the communications industry, effective acquisition is a multi-step process, best begun by asking (and accurately answering) simple, but critical questions: Who are our best prospects? Where can we find them? What should we offer them and how? Of course, the “why” is obvious—beating competitors to the punch. The similarities of today’s increasingly undifferentiated products and services make attracting high-quality customers more critical than ever. On the surface, the “who” seems equally straightforward. But it’s surprising how many communications companies still blanket the nation with ads and offers without knowing whom they want to reach or which messages to lead with. This brings us to the “how” of effective acquisition. Banks get it right Banks provide a good acquisition model. In these days of tight budgets and high expectations, most would never dream of investing in a campaign without first creating a well-defined, data-driven segmentation strategy. To get the results they want, institutions usually establish some credit-score threshold, check past payment history and assess other factors and behaviors, before starting up their marketing machine. Not surprisingly, the rewards for this foresight often include higher response rates, lower costs and greater value per promotional dollar. What’s next? Once you zero in on a fresh crop of qualified prospects the “whats” come next: what’s the best marketing channel? What products or services should we offer? What terms? Again, clean historic data, combined with up-to-date information from surveys and questionnaires can reveal surprising insights into why customers choose your company or offer over your competitors’. In communications, as in banking, reliable data is a proven source for answers to a whole slew of customer-acquisition questions. But does it offer similar value in other phases of customer lifecycle management? And if so, how? Funny you should ask. Because that’s exactly what future posts here will cover, so please check back often.

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: Kari Michel Lending institutions are more challenged today than ever before when assessing credit risk to find creditworthy consumers. Since 2006, the start of the housing bust and recession, consumer’s overall creditworthiness has deteriorated, especially those consumers who once had a high score (low risk). “For example, a study earlier this year by VantageScore® Solutions LLC found that the probability of serious delinquency, defined as nonpayment for 90 days or more, had increased by 417 percent among “super prime” borrowers between June 2007 and June 2009. Default risk during the same period rose by 406 percent for the second-highest rated category of “prime” consumers, and nearly doubled for those at the “near prime” scoring level.”* The VantageScore® credit score model is one example of a credit risk model that was recently redeveloped to capture the changing consumer behavior of repayment. The development data set included 45 million consumer credit profiles for the time period of 2006 to 2009.  The VantageScore® credit score will be released for lenders use January 2011. *Source: The Washington Post, “Walk-aways leading to big changes for all borrower’s credit score, November 5, 2010 Link for article:  http://www.washingtonpost.com/wp-dyn/content/article/2010/11/05/AR2010110502133.html

By: Kristan Frend According to the 2011 Identity Theft Assistance Center Outlook (ITAC), new forms of small business identity theft are emerging. This shouldn’t be a surprise that criminals view small business accounts as a lucrative funding source. What is surprising is that the ‘new’ form of small business identity theft consists of the U.S. Postal Inspection Service reporting a surge in criminal rings using small business information from stolen mail, check writing software and other tactics to counterfeit checks. That’s the new wave of small business identity theft??? I consider this one of the least sophisticated types of fraud that can easily be eliminated by small business owners not leaving mail unattended. Reading this report makes me realize that we have a long way to go in identifying and reporting the more sophisticated types of small business fraud.  As I’ve mentioned before, the industry has come a long way in advancing consumer fraud solutions.  Yet, as fraud has migrated into business accounts, we as an industry still have a ways to go in reporting the latest business fraud trends and tracking statistics.  I’m adding this to my wish list for 2011… What’s on your wish list? On a side note, I’ve noticed nearly all of the articles posted in our blog include no reader comments. I’d like to think that this means our readers are too busy to add comments and/or our articles are so well-written that they answer all of your questions. One can dream right? Seriously though, as we approach 2011 and plan our topics, we’d love to hear from you- if you can think of any topic you’d like us to cover more in depth, please let us know.

By: Kristan Frend As my colleague Margarita Lim discussed in her December 3rd article, the SSA announced that it will change how social security numbers (SSNs) will be issued, with a move toward a random method of assigning SSNs. For organizations that currently incorporate the validation of an applicant’s SSN issue date and state as a part of their risk-based decisioning, they will lose this piece of applicant authentication post-randomization. But there is some good news - first, this validation piece won’t be entirely terminated on day one of the SSN randomization for organizations. All the change means is that the newly issued SSNs will be randomized. In other words, the only SSNs that the issue data and state won’t be validated on day one are the SSNs that have just been issued to the recently born or immigrants. Given that its likely newborns won’t be applying for credit for another 18 years, the bulk of the newly issued SSNs that organizations will see for a while are those belonging to adults who were recently issued a SSN…A growing number of applicants, but not the majority of applicants. The other bit of good news is this may actually be a good thing for all of us in the long run.   While we’ll end up losing the ability to validate an applicant’s SSN issue data and state, the criminals will be at an even greater disadvantage. Consider this- Last year researchers* were able to “identify all nine digits for 8.5 percent of people born after 1988 in fewer than 1,000 attempts. For people born recently in smaller states, researchers sometimes needed just 10 or fewer attempts to predict all nine digits.” I don’t expect this change to drastically reduce third party fraud rates but over time it should eliminate one component of identity theft and ultimately benefit an organization’s Customer Information Program. *The National Science Foundation, the U.S. Army Research Office, Carnegie Melon Cylab, and the Berkman Faculty Development Fund provided support for the research.  To view the entire study, please visit http://www.pnas.org/content/106/27/10975.full.pdf+html.