Five Strategies for Revitalizing Bankcard Growth

Transcription

1 bankcard Five Strategies for Revitalizing Bankcard Growth 360 degree view of credit risk FICO 8 Score...3 FICO PreScore Service...5 FICO Credit Capacity IndexTM...7 FICO Econimic Impact Index...19 Right offer to right prospect FICO Precision Marketing Manager...22 Balance acceptance rate/profit FICOTM Decision Optimizer...24 Cross-sell/upsell FICO TRIAD Customer Manager...26 Nurture customer loyalty FICO Score ViewTM Service...29 Finding the right path to profitability is on the mind of every bankcard executive today. With new regulations and a slow economic recovery, card issuers are retrenching business models in an effort to move forward. There s a demand for improving profitability, but it needs to be focused and sustainable. This type of reliable, strategic growth requires precision. FICO has deep global experience in helping bankcard issuers improve the precision of their decision strategies with sophisticated analytics. The solutions in this document are designed to deliver the clarity and insight that results in measurable, ongoing success. When every decision needs to be the most precise decision possible, these five strategies can help. 1. Take a 360 degree view of credit risk Making precise, profitable decisions requires a more complete view of each customer and prospect. An effective way to achieve this broader customer view is by not only looking at credit risk, but also the various factors that affect a customer s total risk picture. Taking a multi-dimensional approach enables you to see opportunities for maximum profit and business expansion. These views include: Risk View Identify the most profitable customer segments and avoid loss with the FICO 8 Score and FICO PreScore Service Opportunity View Assess customers ability to safely manage more debt with FICO Credit Capacity Index Macro View Adjust credit risk assessment based on changes in economic indicators with FICO Economic Impact Index 2. Make the right offer to the right prospect Making exactly the right offer can improve profitability as well as consumer loyalty. But it takes a great deal of insight into each individual consumer s value and potential. This type of insight can be achieved with advanced analytics. Using the latest clustering algorithms, FICO can develop actionable and targeted customer segments that allow you to make highly relevant offers. Unlike traditional segmentation techniques, Make every decision counttm

2 FICO s techniques tune the segments beyond finding customers who are homogeneous in profiles, but are also predictive of future behavior linked to desired business outcomes. Advanced analytics are a key feature in FICO s comprehensive marketing platform FICO Precision Marketing Manager, that delivers precise customer targeting, as well as cross-channel campaign optimization and dynamic delivery of personalized offers. 3. Optimize the balance between acceptance rate and profit It s easy enough to offer a credit product that will generate a high acceptance rate as long as you re not worried about profit. And making a high value offer won t do you much good if no one wants it. Striking that perfect balance between acceptance rate and revenue is key to maximizing profitability. It s also an area where decision optimization can provide you with a distinct competitive advantage. Rather than engaging in a costly, drawn-out trial-and-error process, optimization enables you to hit the ground running with the right offer strategy from the outset. FICO Decision Optimizer is the software tool that FICO s modeling teams use to develop custom optimization solutions. It is able to handle complex large-scale optimizations, and enables you to balance competing objectives, such as acceptance rate and profit, and helps you identify the best action for meeting your specific business goals. 4. Sharpen the focus of cross-sell and upsell campaigns Just as with marketing to new prospects, it is essential to communicate with existing customers in the right way with the right messages. This is especially true for cross-sell and upsell campaigns, that can have a direct impact on the value of your relationships and the long-term profitability of your business. An effective way to manage your customer contact is with the Marketing Communications decision area within FICO TRIAD Customer Manager. This feature can help you increase revenue through proactive messages, promotional offers and cross-selling invitations. It automates segmentation for any type of communication, and using the TRIAD system s flexible strategy design, you can select the appropriate targets for each campaign. This can improve both attrition and activation rates, as well as assist in increasing cross-sell penetration. 5. Nurture customer loyalty Given the substantial costs of marketing and originating new customers, the need to maintain profitable ongoing relationships is critical. A proven method of increasing satisfaction and loyalty is by giving customers the type of useful financial information they value. FICO Score View Service is a program that provides your customers with a free FICO Score on their regular monthly online statement. Helping consumers know, understand and manage their FICO Score can give your bank a solid improvement in customer retention. As accountholders become accustomed to tracking their monthly scores, they are less likely to churn. In addition, the FICO Score View Service creates a new source of fee-based income, improves portfolio quality through consumer education, and provides a strong incentive for customers to switch from paper to online statements. FICO, PreScore, Credit Capacity Index, TRIAD, FICO Score View, Expansion, Blaze Advisor, Debt Manager, myfico and Make every decision count are trademarks or registered trademarks of Fair Isaac Corporation in the United States and in other countries. Other product and company names herein may be trademarks of their respective owners Fair Isaac Corporation. All rights reserved. 2684FS 06/10 PDF For more information US toll-free International web (0) info@fico.com

3 » Back to Index scoring FICO 8 Score Raising the bar on an» industry standard» The latest release of the FICO Score provides improved risk evaluation where lenders need it most, with minimal system changes. FICO Scores are now better than ever with a 5% to 15% lift in predictive power for credit shoppers and those with prior blemished credit histories ( nonprime ). The FICO 8 Score incorporates new, patent-pending technology that addresses two key concerns of lenders protection from authorized user abuse with continued support of regulatory compliance. The score also includes adjustments to better address consumers with limited credit experience. Reduce risk for acquisitions and originations with FICO 8 Scores New Accounts All Industries % Improvement % 90+ DPD Identi ed Current FICO Score FICO 8 Score 12% <10% <20% <30% Cumulative Lowest-Scoring % Accounts DPD = Days Past Due Data provided by TransUnion; analysis conducted by FICO In the lowest-scoring 10% of new accounts across all industries, the FICO 8 Score identified roughly 41% of future bad accounts in the development sample, compared to slightly over 36% with the current FICO Score a 12% improvement with the new score. 5% 3% When the FICO Score was introduced almost two decades ago, it fueled a revolution in the credit industry. Now FICO is raising the bar on an industry standard. FICO 8 Scores offer powerful new features, including upgraded scorecard segmentation, refined risk performance classifications and minimized minor collec tion and public record infractions. These were made as seamless changes to the FICO design blueprint, while retaining the same reason codes and other factors that ensure lenders an easy transition to the new score. Using FICO 8 Scores instead of a previous version should enable you to improve risk management decisions across the credit lifecycle: Increase new account bookings at same/better risk Reduce delinquency and loss while booking same volume Refine risk-based pricing Assign more targeted customer management actions Improve customer satisfaction Reduce loss reserves Reduce exposure to fraudulent abuse of authorized user trade lines Increased power» where you need it To develop the latest FICO Score, FICO analysts used state-of-the-art analytic capabilities and predictive technologies, along with extensive industry expertise. As a result, the FICO 8 Score boosts predictive strength by more than double the typical improvements seen in prior updates. The largest increases of 5% 15% occur among important consumer segments: New accounts particularly nonprime mortgage, bankcard and auto borrowers Nonprime borrowers who pose higher risk as reflected in prior serious delinquency and/or derogatory credit histories In addition, the FICO 8 Score more appropriately addresses new-to-credit consumers those with only a few accounts (thin files) and those with only a few years of credit history (young files). The FICO 8 Score includes new features to sharpen lending decisions: Upgraded scorecard segmentation We have increased the number of scorecards, delivering sharper segmentation to reflect today s consumer credit trends. For instance, new scorecards for accounts with serious delinquencies and derogatory items allow for more accurate risk assessment of those with previous credit problems. Refined risk performance classification FICO scientists exhaustively researched alternative means to boost predictive power via alternative performance classifications (good vs. bad). The new score reflects a modified classification that considers the page 3

4 degree of bad behavior for instance, a consumer record delinquent on two of eight trades is categorized differently from one that s delinquent on eight of eight trades. Minimized minor infractions Small collection account and public record items (originally under $100) will not be evaluated, ensuring consumers are not negatively impacted by relatively minor occurrences of these items. 1 Improved Auto and Bankcard Industry Options The Auto and Bankcard Industry Options have been updated to incorporate the improvements made with the FICO 8 Score. Protection from authorized user abuse The FICO 8 Score also includes a modification designed to help protect lenders from authorized user abuse. Over the last few years, lenders have become increasingly concerned about exposure to possible fraud by consumers who deceptively boost their score by paying to be added as an authorized user on someone else s seasoned and good credit account (a practice sometimes referred to as piggybacking ). Yet lenders also want the FICO Score to continue to consider spousal authorized user trade lines to help support their compliance with federal regulations (specifically, ECOA Regulation B) 2. In response to these needs, FICO scientists have invented an innovative way to include authorized user credit accounts in the calculation of FICO 8 Scores, while materially reducing potential impacts to the score. The gain without the pain Lenders can obtain the benefits of FICO 8 Scores with minimal system modifi cations. The new score offers the stability and consistent odds-to-score relationships 3 across the credit reporting agencies that lenders have come to count on with FICO Scores. FICO 8 Scores feature the same look and feel as FICO Scores, including: The same score range The same score reason codes The same minimum scoring requirements The same loan shopping inquiry treatment The same consistent score-to-risk alignment as prior versions You gain improved performance without the expense and the resource demands of a long implementation period. Realize benefits across» your portfolio The new FICO Scores will give you improved prediction across the customer lifecycle: Marketing: The quality of the applicants you attract can affect your bottom line for years to come. Using a refined risk tool to drive more targeted campaigns can result in significant cost savings and increased revenues. Originations: The decisions you make at originations whether to approve the account, for which products and at what price affect more than 80% of the measurable risk over the lifetime of an account. Improved risk assessment through FICO 8 Scores, when used with other underwriting guidelines, can help you approve more loans without increasing risk. Customer management: Building a rewarding relationship is an ongoing project. Crossselling. Credit line management. Early collection efforts. Loyalty programs. Authorizations. All these are areas in which FICO Scores can help improve revenues, reduce delinquencies and build quality relationships. Working with lenders to» educate consumers Consumers who understand how to use credit responsibly make for stronger, more stable portfolios for individual lenders and the industry. That s why FICO works proactively to help consumers become more credit-savvy. Our myfico.com website has educational articles and other programs designed to give consumers the information they need. Setting the risk industry standard US and Canadian businesses have used more than 100 billion FICO Scores to make smarter decisions about customers and prospects 91 of the largest 100 US financial institutions use FICO Scores More than 80% of the largest Canadian lenders use FICO Scores 75%+ of US residential mortgage originations use FICO Scores 95% of US adults over 17 can receive accurate, objective risk assessment when lenders combine the FICO Score and the FICO Expansion Score Improving model performance The FICO 8 Score reflects our 20-year commitment to keeping pace with changes in lender reporting practices, new products and marketing approaches, and consumer behavior and economic conditions, as reflected in credit bureau information. Our analysts continuously work to identify key predictive elements that significantly enhance the FICO Score. For more information on the FICO 8 Score, contact FICO at or cbhelpline@fico.com. 1 For 3rd party collection accounts only; does not pertain to a lender s own collection activity. 2 Lenders are encouraged to work with their Legal and Compliance departments to understand what steps are required to evaluate spousal authorized user information to ensure ECOA Regulation B compliance when using the FICO 8 Score. 3 Relative to current FICO Scores on development data.» Back to Index FICO, Expansion and Make every decision count are trademarks or registered trademarks of Fair Isaac Corporation in the United States and in other countries. Other product and company names herein may be trademarks of their respective owners Fair Isaac Corporation. All rights reserved. page 4

5 » Back to Index scoring FICO PreScore Service Improve prescreening results with FICO scores, strategy consulting and analytic services in a single package» Solicitation strategy using FICO risk and revenue score matrix Risk score Revenue score FICO PreScore Service combines scores, consulting and analytics to empower credit grantors to achieve more profitable prescreening campaigns. Successful US credit grantors have leveraged FICO s expert analytic and credit marketing knowledge included with PreScore Service to conduct thousands of campaigns and signifcantly enhance results. Standard Line Minimum Line Standard Line/ Low APR Minimum Line/ Medium APR Premium Line/ Very Low APR No Fee This is an example of a multi-score matrix approach that may be developed for your solicitations by your PreScore Service consultant to expand your mail base, control acquisition costs and select prospects based on risk and revenue potential. PreScore Service consultants can also help you increase response rates and reduce adverse selection through promotional plan development, enhanced segmentation criteria definition, response analysis, product feature design and targeting and alternative mailing strategies proposals. When you market pre-approved credit, you face a delicate balancing act: successfully attracting new customers while controlling risk. With FICO PreScore Service, you can achieve greater balance and greater profits. PreScore Service draws on FICO s recognized industry leadership in predictive modeling and our experience helping marketers and risk managers develop more profitable prescreen campaigns. We combine analytic expertise with up-close knowledge of your business goals, and collaborate with you to achieve them. Three flexible» service components PreScore Service contains three elements, customized to your needs: Access to FICO s industry-leading credit bureau scores, delivered directly to you or your database manager from the credit reporting agencies A strategy consultant who helps you construct targeted campaigns based on more profitable prescreen strategies Sophisticated credit marketing analytics that provide insight into your optimal use of FICO credit bureau scores Improve performance using» the industry s top scores As a PreScore Service subscriber, your prospects will be screened using the most up-to-date FICO credit bureau scores available for new account acquisition. These scores are the recognized industry standard for assessing: Overall credit risk FICO and FICO NextGen risk scores Industry-specific credit risk Auto, Bankcard, Installment and Personal Finance industry option risk scores Bankruptcy risk Revenue potential for bankcard and other revolving products page 5

6 Features Easy access to the full range of FICO risk, revenue and bankruptcy scores from all three major US credit reporting agencies Scores can be used in building prescreen segmentation strategies or to populate prospect and analytic databases Customized score and campaign analyses provide valuable insight for improving future programs Design strategies that» drive profitability Even the best scores are only as effective as the strategies that employ them. FICO PreScore Service consulting provides fresh thinking about your acquisition strategies, combining our broad industry knowledge with your unique experience, and applying the latest direct marketing techniques to identify new opportunities for revenue growth. Our strategy consultants specialize in credit bureau score technology and how to apply scores in a way that fits your credit policies and marketing objectives. Benefits Achieve higher response rates, revenues and profits from your prescreen campaigns Design sharper marketing and risk management strategies with the guidance of a seasoned marketing strategy consultant Reduce costs by consolidating score purchases across business units and product lines Continually improve results of subsequent solicitations by incorporating knowledge gained from each campaign Sharpen programs» with custom analyses To make sure every campaign increases your prescreening proficiency, FICO consultants can also assemble and manage an analytic team to empirically guide business decisions for custom projects such as: Streamlined campaign testing: Evaluate different offer combinations in less time Relevance clustering: Leverage demographic and credit bureau information to best match prospects to product features Multiple bureau strategy testing: Explore the value of using scores and attributes to meet universe expansion, response and profitability objectives Retrospective and live scoring validations: Analyze the effects of a new score, for example the FICO NextGen score, on key performance measures such as response, activation and revenue Criteria analysis: Empirically determine the best criteria design strategy for reducing risk and increasing revenue potential. PreScore Service and» Basel II compliance FICO believes that PreScore Service plays an important role in meeting regulatory compliance standards, including Basel II compliance. Our consultants can help you address Basel and regulatory compliance, as well as ways to help your enterprise attain best-practice credit risk management.» Back to Index FICO, PreScore and Make every decision count are trademarks or registered trademarks of Fair Isaac Corporation in the United States and in other countries. Other product and company names herein may be trademarks of their respective owners Fair Isaac Corporation. All rights reserved. page 6

7 » Back to Index insights How Much Credit Is Too Much? Analytic measures of credit capacity can help bankcard lenders build strategies that go beyond compliance to deliver business advantage Number 35 April 2010 On a portfolio of 1 million bankcards, integrating FICO Credit Capacity Index into a lender s initial line strategy would boost profits by $1.6 million. The landscape for bankcard lenders has changed significantly. An unstable economy, industryhigh delinquency rates and increased government intervention have had serious impact to both strategies and profitability. In response, many lenders are taking steps to retrench their business models, searching for ways to comply with new regulations, while mapping a return to profitability and reducing risk. A critical focus for both compliance and growth is the ability to accurately ascertain a customer s ability to safely manage additional credit. It impacts: Customer Acquisition. Identifying higher-capacity segments allows lenders to build portfolios responsibly by targeting low-risk customers with higher growth potential. Matching Right Product to Right Customer. Given regulatory constraints on interest changes within the first year of service, lenders are keen to construct the right product offerings from the onset. Credit Lines. Understanding both risk and credit capacity are essential for making the most favorable limit decisions. Cross-Selling. To gain a greater share of wallet, lenders need to understand a consumer s capacity to take on new debt, not just repayment risk on current obligations. Regulatory Compliance. Regulation Z, recently amended to implement provisions of the Credit CARD Act, places a burden on issuers to determine the consumer s ability to pay before extending credit. Today s constrained environment presents a dichotomy for bankcard lenders, who must be riskconscious and tighten credit standards, while still pursuing new opportunities. The good news is that analytic measures of credit capacity can help bankcard lenders walk the fine line of growing the business without over-extending consumers. These analytics measure a consumer s capacity to take on additional credit, and as such, provide powerful new insight into managing consumer debt. page 7

8 How Much Credit Is Too Much? insights Traditional Measures of Ability to Pay Are Limited The CARD Act mandates that card issuers consider either the consumer s income or assets as well as their current obligations, and requires that process to be reasonable. However, traditional options for accomplishing this task have key limitations. Income validation: Income, while somewhat predictive, is often self-reported, difficult to verify and subject to manipulation. Consumers who attempt to report income honestly and not all do often are unclear how to calculate their earnings accurately: Do I report my income as gross or net? Do I include stock income/bonuses? Do I account for spousal support? Even when income is accurate, it does not account for discretionary income relative to cost of living. Consider for example, the same income won t stretch as far if you live in Manhattan vs. Little Rock. Additionally, income validation is costly to gather and maintain, putting further burden on operational resources already under stress with compliance and customer management related to high delinquencies. Income estimators: Typically based on a combination of reported income (where available) plus geographic and demographic inferences, income estimators attempt to roughly approximate a borrower s income. Depending on the quality of underlying data and breadth of a truly representative development sample, income estimators can provide practical guidelines. But they don t provide a completely accurate portrayal of an individual s ability to repay new debt. Validating the precision of these estimations can be costly and burdensome. Measures of debt ratio: These ratios, obtained either from the consumer or the credit bureau, may not be sufficient on their own to use as a measure of ability to pay since they don t consider the risk impact of the additional debt of the new card or line. When used, many lenders rely on such metrics assessed during origination which over time, fail to reflect a customer s current status. Lenders need a more precise measure, frequently updated, that considers how the new line will impact a consumer s ability to pay as agreed. While these measures meet immediate compliance obligations, they provide little or no opportunity to create better decisions and competitive differentiation. Stronger, more empirical and more automated measures of capacity are needed for a more complete picture of consumer credit risk.»» Putting Credit Capacity to Work While income and income estimators are required for compliance, the FICO Score is a strong risk predictor, and thus an essential tool within risk management strategies. But bureau-based risk scores predict credit risk given current obligations not how the risk would change given a change in a consumer s available credit. There are many reasons why different consumers are assigned similar FICO Scores. For example, some with mild delinquency and low utilization may receive the same score as those with no delinquency but high utilization. These various credit profiles within the same score band represent different sensitivities to incremental debt, as shown in Figure 1. The theoretical consumers on this chart have similar risk scores and the same default probability, but different credit capacities. page 8

9 How Much Credit Is Too Much?»» insights Figure 1: Same Risk, Different Capacity (Theoretical Example) Larry, Mary and Harry Similar FICO Score, Different Capacity ESTIMATED DEFAULT RATE 50% 40% 30% 20% 10% Legend Capacity Level Larry Low Mary Medium Harry High BALANCE CHANGE What s missing in today s bankcard lending strategies is the ability to determine, For consumers who look equally risky, which can more safely manage additional credit? in other words, more precise measures of credit capacity. Capacity measures would allow bankcard lenders to reallocate loss exposure and reserves toward consumers best able to repay debt, not to mention protect its customers long-term credit health and loyalty. And proactive management of consumer debt levels can go a long way in addressing today s legislative and consumer advocate pressures for greater consumer protections within lending practices (see sidebar on next page). FICO Credit Capacity Index (FICO CCI) generates a complementary measure that predicts which consumers can more safely manage new or increased credit. Combined with FICO Scores, FICO CCI helps bankcard lenders better target and set initial credit amounts and product terms, and refine account management actions such as credit line assignment and authorizations, within the guidelines of new regulations. Research shows that FICO CCI can effectively capture and leverage capacity. Validation results for both new and existing revolving accounts show that FICO CCI effectively rank-orders consumers most likely affected by incremental debt within each risk score range those whom, without a change in debt, would have the same expected risk of default. FICO CCI is extremely effective within existing credit strategies. Across income groups and risk levels, there are segments with relatively high, moderate and low capacities to manage increased debt, as shown for the mid-fico Score range of in Figure 2. This knowledge can be used to target or refine offers of new credit for each group. page 9

10 How Much Credit Is Too Much?»» insights Figure 2: Opportunities to Target Action FICO by Income and FICO Credit Capacity Index TM Results on pooled bankcard sample POPULATION % 60% 50% 40% 30% 20% Legend Capacity Level Low Medium High 10% 0% UNKNOWN < $30K $30K 54K $55K 79K $80K 114K $115K+ FICO CREDIT CAPACITY INDEX WITHIN INCOME GROUPS Beyond regulatory compliance the value of capacity measures Using a model that empirically estimates a consumer s capacity to assume additional debt can help card issuers more accurately measure ability to pay. This, in turn, helps them: Increase control over loss exposure and reserves. Lenders can refine line assignments toward consumers best able to repay debt, and limit exposure for those posing the highest default risk. This would help reduce loss reserves and reallocate working capital to» more profitable areas of business to alleviate over-indebtedness. Grow portfolio profits conscientiously. Line assignments can more closely correspond with what a consumer can safely handle, minimizing losses. Demonstrate responsible lending practices. Proactive management of consumer debt loads would help address consumer advocacy and legislative pressures to alleviate over-indebtedness.»» Improve customer satisfaction, retention and corporate image. Public promotion of responsible lending practices could help boost customer ties and corporate image, and attract and retain more good customers. page 10

11 How Much Credit Is Too Much? insights Improving Assessment of Ability to Pay How does FICO CCI compare with commercially available income estimators or self-reported income as a predictive measure of a consumer s ability to pay? FICO conducted research on a large pool of bankcard accounts to determine the accuracy of FICO CCI in predicting future risk of payment default compared to self-reported income and a monthly debt service ratio. Figure 3 charts future bad rates (90+ days delinquent) for the FICO 8 Score, FICO CCI, selfreported income and the monthly debt service ratio (MDS%). 1 This graph provides a comparison of the ability of each measure to independently rank-order credit risk. Each measure is ranked from the worst (expected highest risk) decile to the best (expected lowest risk) decile as follows: FICO Score lowest FICO Score range in decile 1 up to highest FICO Score range in decile 10. FICO CCI lowest CCI in decile 1; highest CCI in decile 10. Income lowest income in decile 1; highest income in decile 10. MDS% highest MDS% in decile 1; lowest MDS% in decile 10. Figure 3: FICO 8 and FICO CCI More Accurately Predict Ability to Pay Decile Ranking New and Existing Accounts General Performance (90+) 80% BAD RATE (90+ DAYS DELINQUENT) 70% 60% 50% 40% 30% 20% 10% Legend FICO 8 FICO CCI Self Reported Income Monthly Debt Ratio (MDS%) 0% DECILE The FICO 8 Score, which is designed to rank-order credit risk, was indeed the most predictive of future delinquencies. We see that those in the highest-risk deciles resulted in higher bad rates, while those in the lowest-risk deciles resulted in lower bad rates. This reinforces the fact that FICO Scores continue to be essential in risk management strategies. 1 MDS% = Ratio of the monthly debt service and monthly income. Monthly debt service is a measure of the expected minimum payments consumers would have, based on their outstanding balances on their credit reports. A high MDS% indicates the consumer has a large portion of their income already consumed by minimum payments, while a low value indicates very little debt relative to the income. page 11

12 How Much Credit Is Too Much? insights The chart also shows that FICO CCI is a much stronger predictor of ability to pay compared to self-reported income and the monthly debt service ratio, which separated future risk less effectively. Therefore, using FICO CCI to further segment accounts within the FICO 8 Score band is the most accurate and prudent way to ascertain both risk and ability to pay. Since most lenders will use the income measures in combination with other criteria, the study further investigated the ability of FICO CCI and income to differentiate risk for given FICO 8 Score ranges. Figure 4: FICO CCI Is More Predictive Within FICO 8 Score Bands FICO 8 by Estimated Income & CCI New and Existing Accounts General Performance (90+) 60% BAD RATE (90+) 50% 40% 30% Legend Low CCI Low Income Med CCI Med Income High CCI High Income 20% 10% 0% FICO 8 SCORE In Figure 4, FICO CCI is shown to more effectively isolate the least risky (solid blue line) and riskiest (solid red line) subpopulations compared to the income estimator (dotted lines), which shows little variance in bad rate by FICO Score bands. For example, consumers in the FICO 8 Score range with a high FICO CCI are roughly 14% lower risk than those with the highest estimated income grouping (19% vs. 22% for 90+ days delinquent). The bottom line is that while these measures can be useful within strategies and for compliance, they do not provide nearly the predictive value as FICO CCI in determining which consumers can more safely take on incremental debt.»» Managing Capacity A Practical Approach So, how would a bankcard lender use FICO CCI in practice? Let s explore a sample strategy for new bankcard accounts. For prescreen acquisitions and originations underwriting, strategies often include FICO Scores, income and other measures. page 12

13 How Much Credit Is Too Much? insights FICO CCI would be added to existing strategies, providing new information on credit capacity not otherwise captured. This would help determine target offers and initial line assignments, especially near existing cutoff zones, as illustrated in Figure 5 where FICO CCI is used in addition to a FICO Score and income measure. Figure 5: Using Capacity in Practice Simple New Account Acquisition Very High Accept Maximum Line High FICO Score + Income Medium Decrease Line from Standard Standard Line Assignment Increase Line from Standard Low Very Low Decline / Accept Minimum Line Low Medium High FICO CREDIT CAPACITY INDEX TM While this sample strategy is somewhat basic 2, it demonstrates the overall approach for using FICO CCI: Consumers with very low FICO Scores and low income, as well as those with high FICO Scores and high income, would be treated the same as before, with few exceptions. Consumers with FICO Scores in the lender s operating range, missing income or other borderline areas, would be assigned either higher or lower lines, depending on capacity. For example, in the mid-fico Score range of , there would be opportunities to increase lines for highcapacity consumers, but reduce total lines by the same amount when capacity is low. This would minimize future losses and retain consistent exposure levels. A similar approach to Figure 5 could also be used in account management. FICO CCI would be included on top of existing measures, such as internal analytics, FICO Score, current delinquency and relationship status. FICO CCI is a powerful tool for use within existing lending strategies not a replacement for other risk measures. It s still essential, for instance, to consider the consumer s projected risk to repay the debt. After all, you may not want to extend credit to high-capacity consumers who are also high-risk. That s why FICO CCI and FICO Scores work hand-in-hand. 2 For more complex strategies, consider using FICO CCI in conjunction with additional measures such as internal scores, application information and down payment for more accurate risk assessment. page 13

14 How Much Credit Is Too Much? insights Just as the FICO Score s rank-ordering of risk is used in strategies to determine whether to extend credit to consumers and doesn t provide a yes/no answer on its own FICO CCI operates much in the same way. It serves as a key part of the strategies that answer the question How much new debt is too much? Adding techniques like strategy optimization can help determine the optimal combination of risk measures to make fully informed credit decisions. A customized alignment process could also be incorporated into account management procedures to assess how customers in various segments behave relative to a range of credit lines, in order to determine specific line assignments. Top US Lender Results Tell the Story In recent validations on top US lenders bankcard portfolios, FICO examined the effectiveness of FICO CCI to identify consumers who could safely assume more credit. The results reflect that consumers at the same FICO Score range can have a wide variance in their ability to manage additional credit. The findings indicate that by knowing a consumer s ability to manage new credit, lenders can take actions to reduce delinquency rates and identify areas of profitability for real financial impact. FICO examined the bad rates (90+ days delinquent) for these lenders accounts by FICO 8 Bankcard Score range, shown in Figure 6. This was further segmented by the low, medium and high capacity as designated by FICO CCI. (Note: In this chart, ranges below 630 were removed to better demonstrate FICO CCI separation in realistic lending ranges.) The results clearly demonstrate that within each score band, FICO CCI accurately identified the highest bad rates attributed to the lowest CCI values and the lowest bad rates attributed to the highest CCI values. Figure 6: Determining Credit Capacity Within Segments of Similar Credit Risk FICO CCI Bad Rate by FICO 8 Score Range 16% BAD RATE (90+) 14% 12% 10% 8% 6% Legend Capacity Level Low Medium High 4% 2% 0% FICO 8 SCORE RANGES page 14

15 How Much Credit Is Too Much? insights Figure 7 demonstrates that FICO CCI captures a different dimension of credit than a FICO Score and is not merely a finer ranking of risk within a FICO Score range. The average FICO Score within these ranges and within the FICO CCI assignments is very similar, and in many cases equal. When compared with the variance of FICO CCI in Figure 6, however, the difference in measurement factors is clear. Figure 7: FICO CCI Captures a Different Dimension than a FICO Score Average FICO 8 Score by FICO CCI Level Capacity Level Legend Low Medium High 700 AVERAGE FICO 8 SCORE % Below FICO 8 SCORE The benefits of FICO CCI become further apparent in Figure 8. CCI levels are plotted against bad rates and incremental increases in balances (expressed as percentage increases over prior balances). When examining these different levels of incremental revolving balances against bad rates for the same risk population, the variance of bad rates is higher for the low CCI population. page 15

16 How Much Credit Is Too Much? insights Figure 8: Refining Treatments for Low-Risk Segments FICO 8 Score Segment BAD RATE (90+) 7% 6% 5% 4% 3% Legend Capacity Level Low Medium High Pop% 24% 52% 23% 2% 1% 0% NO INCREASE (56%) 1% 20% (9%) 21% 100% (14%) 101% 300% (9%) 300%+ (12%) PERCENT REVOLVING BALANCE CHANGE (PERCENT POPULATION) While this score range typically represents a low-risk population, these lenders can now segment by CCI values and treat the segmented populations differently. For consumers falling in the low CCI population, where bad rates are higher for all incremental levels, the lenders may decide to decline credit or reduce initial credit limits. For those with high CCI values, they may decide to offer increases in credit lines, cross-sell promotions for other products and grant preferential customer service treatments.»» Calculating Financial Advantage FICO performed a validation to assess the financial value that FICO CCI could bring to a bankcard lender s origination activities. The study assumed different credit limit strategies were applied to consumers falling in targeted categories, resulting in significant acquisition of new revenue and loss avoidance for the lender. In the Figure 9 example, a population of 1 million new accounts booked was segregated by FICO Score range and by FICO CCI value (low, medium and high). The research found populations for action and applied following assumptions: Initial lines range: $6,000 $12,000. Increase initial line: $2,000 for high CCI. Lower initial line: $2,000 for low CCI. Revenue per good vary by FICO Score and FICO CCI: range $410 $510. Loss per bad vary by FICO Score and FICO CCI: range $4,900 $7, page 16

17 How Much Credit Is Too Much? insights The resulting net profit to the lender was $1.6 million. Figure 9: Using FICO CCI Results in a Net Profit of $1.6 Million Scenario: Change from Champion Line Decision Adjust Initial Credit Card Lines from Current Champion +$2,000 for High CCI; -$2,000 for Low CCI Within FICO Score Ranges Lines Increased Lines Decreased CCI Challenger Impact % of Accounts with Different Initial Lines 14.5% 10.2% 4.3% Total Exposure Change $290,000,000 ($203,750,000) $86,250,000 Goods 140,854 96,651 Bads 4,146 5,224 Bad Rate 2.9% 5.4% Incremental Revenue $4,330,302 -$3,759,457 $570, Incremental Loss $3,345,994 -$4,326,486 -$980, Incremental Profit $984,308 $567,030 $1,551,337 Incremental Profit per Account $0.98 $0.57 $1.60»» Modeling for the Future Like the FICO Score, FICO CCI is built on credit bureau data and is designed to rank-order consumers according to risk for use within lending strategies. But FICO Scores reflect consumer risk based on today s credit mix. By contrast, FICO CCI measures consumer risk if he/she takes on future incremental debt. This new debt can be in the form of new credit accounts or increases in existing accounts. FICO CCI, now available at FICO, is based on patent-pending technology called Future Action Impact Modeling. Unlike traditional bureau-based risk modeling, Future Action Impact Modeling can isolate consumer sensitivity to new behaviors not currently present on the credit report and infer tolerance for incremental future debt. page 17

18 How Much Credit Is Too Much? insights Conclusion Today s lending challenges call for new approaches to carefully target customer acquisition, manage collections activities and comply with government mandated regulations. As we emerge from the economic crisis, tools such as FICO CCI offer lenders a significant competitive advantage by adding a new dimension for a more complete picture of consumer risk. Learn more: Get additional information about FICO CCI Read the Insights paper, Credit CARD Act: Move Ahead of the Curve Contact us at or info@fico.com» Back to Index The Insights white paper series provides briefings on best practices, research findings and product innovations from FICO. To subscribe, go to FICO, Credit Capacity Index and Make every decision count are trademarks or registered trademarks of Fair Isaac Corporation in the United States and in other countries. Other product and company names herein may be trademarks of their respective owners Fair Isaac Corporation. All rights reserved. page 18

19 » Back to Index scores FICO Economic Impact Index Predict impact of changing macro-economic conditions on customer credit risk FICO Economic Impact Index enables creditors to bring a broad range of economic factors to bear on assessments of individual customer risk. It provides an empirical means of adjusting score cutoffs to expected future default rates under forecasted economic scenarios. With this analytic edge you can act ahead of downturns to limit losses, ahead of upturns to increase growth. Bad Rate Improve control over risk exposure by taking future risk into account 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Score FICO Q3 FICO Q3 FICO 8 + FICO EII 2005Q3 FICO 8 + FICO EII 2007Q3 The dotted lines show that as economic conditions worsened from 2005 to 2007, default rates rose above those historically observed at FICO 8 Score levels. The solid lines show that using the FICO Economic Impact Index with the score would have enabled lenders to maintain consistent default rates. Take a more comprehensive view of credit risk when making marketing, originations and customer management decisions. Now you can base these decisions on not only the default rate historically associated with a consumer s FICO Score, but also on how economic conditions could change expected default rates. You can also more easily quantify the impact of these factors on your portfolio when performing stress tests. The FICO Economic Impact Index quantifies the relationship between economic factors, such as GDP, unemployment and housing prices, and expected FICO Score default rates. It helps lenders understand and anticipate the impact of macro-economic change on their account and portfolio performance. The index was tested on Equifax performance data from a national sample of new accounts booked from 2007 to Results showed that if the index had been used with the FICO 8 Score, the overall bad rate would have been reduced from 3.7% to 2.9%, and profits increased by as much as $5 6 per account. This patent-pending FICO innovation is delivered as an optional enhancement with the FICO 8 Score (Equifax BEACON 09 Score). Generated for six economic scenarios with forecasts driven by Moody s Analytics, Inc., the index is updated quarterly. The result is a new level of predictive accuracy and consistency for dynamic financial markets. Consistent risk exposure The FICO Economic Impact Index helps you maintain consistent risk exposure even when actual default rates change significantly from those historically observed with specific FICO Score ranges. With FICO Economic Impact Index you can: Limit losses tighten credit policies sooner and for the right populations during an economic downturn. Grow portfolio responsibly loosen credit policies at the right moment for the right populations as markets recover and expand. Increase accuracy of reserve estimates take future economic conditions into account when estimating loss and capital reserve requirements. Improve stress testing for the future simulate the impact of future macro-economic conditions on portfolio risk and loss to adjust long-term strategies based on risk preferences. page 19

20 Use the index to adjust scoring cutoffs Score drops suggest raising cutoffs Score increase suggest lowering cutoffs This chart shows an example of the FICO Economic Impact Index at score bands between 600 and 760 for six forecasted economic scenarios from Moody s Analytics, Inc.. The Baseline forecast at the far left is the scenario Moody s believes is most likely for the upcoming quarter. Scenarios 1 5 provide a range of other possibilities. Selecting the scenario closest to your company s own outlook, you can adjust your scoring cutoffs up or down according to the predicted shift in the expected default rate (e.g., adjust threshold up for negative shifts; down for positive shifts). For example, in 2006, the historically observed default rate associated with a score of was 2%. By 2007, the actual default rate was 4.5%, causing many lenders to unknowingly increase their risk exposure. Bad rates rose for all score ranges during this period. Using FICO Economic Impact Index with the FICO 8 Score would have given lenders a more accurate estimate of their risk exposure and they could have adjusted their score cutoffs to hold bad rates constant over time. Even when market conditions are less volatile, the FICO Economic Impact Index provides lenders with the means to fine-tune score cut-offs and other aspects of decision strategy. Clear predictions of even modest changes in default rates per score help lenders avoid leaving money on the table by overtightening or over-loosening their risk exposure. Lenders can also use the FICO Economic Impact Index for performance-based analysis in managing strategic portfolio direction as well as more accurately estimate risk exposure for loss and capital reserve requirements. Your company s economic outlook quantified for» FICO 8 Scores Most lenders already incorporate their own economic outlook into credit decisions in some manner. Often the approach is judgmentbased, since it is difficult to quantify the impact of economic factors on account-level behavioral predictions with the consistency needed to systematically incorporate these factors into decision strategies. The FICO Economic Impact Index solves this problem for lenders using the FICO 8 Score. It provides consistent metrics indicating the degree and direction (positive or negative) of predicted default rate changes at each score range. For example, an index value of -5 at the score band would indicate that individuals scoring in that range are likely to have a default rate closer to that historically expected for a score of To maintain the same risk exposure despite this higher default rate, a lender could raise its score cutoff by 5 points. Quantifying the impact» of economic forces on» customer behavior FICO has applied its analytics expertise and deep knowledge of the FICO 8 Score to the problem of quantifying economic impact on customer credit risk. To uncover the relationships between macroeconomic factors and odds, we examined nearly 10 million Equifax consumer credit files in conjunction with 40 macro-level variables, with time and economic transformations yielding over 2,000 predictive variable variations. The result is a consistent index of adjustment metrics, which has been validated on Equifax performance data from a national sample representing one million new accounts booked from 2007 to By selecting one of the six economic scenarios provided with each quarterly index update, you can apply the metrics that most closely match your company s own view of what the economy will do in the upcoming quarter. By examining predicted default rate shifts by your customer segments, you can see which populations are likely to be most sensitive to economic changes. Such insights not only enable more fine-grained control of risk exposure, but may also be helpful in acquiring better customers and shaping more effective customer management and collections policies. By exploring multiple scenarios, you can ask What If? the economy behaves differently than your company expects. Using the index, for example, you know how much you could lower score cutoffs to maintain your current default rates as the market shifts toward growth. You could also examine what the impact of making such a change might be on other aspects of your business, such as booking rates, revenue and attrition Fair Isaac Corporation. All rights reserved. page 20

21 Innovative and documentable This patent-pending analytics advance provides lenders with a data-driven, rather than judgment-based, means of considering future economic conditions when making current credit risk decisions. Built on industry-standard economic forecasts, the index is explainable to regulators and customers based on empirical relationships between historical economic data and default rates. FICO 8 Score foundation for analytic innovation The FICO 8 Score is more than a big leap forward in predictive power. It s also a foundation for a stream of analytic innovations, of which the FICO Economic Impact Index is an example. In this changing market, the FICO 8 Score provides you with the competitive advantage of being able to rapidly incorporate leading-edge analytic solutions into your credit decisioning processes. Find out more See how your organization can make more accurate, consistent credit risk decisions in dynamic markets. us at info@fairisaac.com.» Back to Index FICO Economic Impact Index is available through Equifax, in both online mode for originations decisions, and offline batch mode for prescreening and account management decisions. It is also available through the FICO PreScore Service. For lenders wanting to bring macro-economic adjustments into other types of scoring, the FICO Economic Impact Service builds custom analytics. The service uses client data to model the impact of economic change on expected goods-per-bad ratios. The methodology can be applied to origination scores, behavior scores, broad-based bureau scores, such as the industry-standard FICO Score, and Basel II risk metrics. FICO, Prescore and Make every decision count are trademarks or registered trademarks of Fair Isaac Corporation in the United States and in other countries. Other product and company names herein may be trademarks of their respective owners Fair Isaac Corporation. All rights reserved. page 21

22 » Back to Index marketing FICO Precision Marketing Manager Build profitable personal relationships with every valuable customer. FICO Precision Marketing Manager is a next-generation marketing platform that drives revenue through precise customer targeting, crosschannel campaign optimization and dynamic delivery of personalized, relevant offers. An Analytic Engine for Precision Marketing Brand Strategy Consumer Marketing Strategy Business Rules Results & Recommendations FICO Blaze Advisor Website SMS & WAP Triggered API Data Exchange Call Center Real Time Channel Management Direct Mail Advanced Analytics SMS Telemarketing Batch Data Exchange Push Campaign Management External Data Sources Batch Data Exchange Reporting and Analysis Data Warehousing and Management FICO Precision Marketing Manager Precision Marketing Manager integrates data management, analytics, campaign management and reporting to improve campaign planning and real-time decisioning. Marketers today do not suffer from a lack of consumer information. What they lack is actionable information and a way to turn it into profitable relationships. Incomplete consumer data from unrelated touchpoints, stored in multiple databases, results in faceless demographic groupings rather than real consumer profiles. It is little wonder that direct marketing campaigns based on this information generate meager response rates of 2% or less. With such low response rates, marketing program ROI tends to underperform other corporate investments. The ability to answer a few important questions could turn this performance around, and improve your bottom line through enhanced customer loyalty: Who are your most profitable customers, and how do you know? Are you ignoring, or simply not connecting, with valuable consumers? What steps should be taken to build better relationships with consumers? What steps that you are taking today have the most potential promise? To build and maintain long-term, valuable relationships, you need to connect dynamically with your customers either consumers or other businesses to collect and analyze relevant consumer information resulting in unique insights, and to perfect marketing strategies for better execution and return on investment. Precision Marketing Manager gives marketers the power to accomplish these objectives with one integrated solution. Real-time consumer engagement Precision Marketing Manager enables you to use the consumer interactions on your web site to execute immediate, personalized and relevant offers. New campaign ideas can be easily put into production with a few mouse clicks, enabling you to respond quickly to customer input. You can set up customized surveys and polls, administer loyalty and promotional programs, or direct high-value customers to specific web site content, making With Precision Marketing Manager, you can: Know more about each individual customer or consumer s value and potential, leading to more targeted campaigns. Engage personally with individual consumers on the web, to gather relevant data, administer loyalty programs and push promotions in real time. Reduce campaign costs by ensuring that the most relevant messages reach the right targets through the most effective channels. each interaction count toward a profitable relationship. This dynamic engagement and adaptability means that every response makes you smarter about how to treat each consumer. page 22

23 Cross-channel campaign management Configurable workflow management tools and the champion/challenger testing methodology enable you to specify parameters such as sample size, promotion duration, and response goals to maximize the effectiveness of every campaign dollar spent across multiple communication channels. You can easily coordinate with leading third-party providers to support highly measurable campaigns while maintaining control over program terms. Campaigns enabled through FICO Precision Marketing Manager include electronic coupons, , SMS, direct mail, sweepstakes, prizes, gifts and samples. Analytics for more precise and relevant offers Predictive analytics based on rich, accurate consumer data provide insight into consumer behavior to improve segmentation and profiling beyond an RFM framework. Retention, risk, purchase propensity and other predictive outputs tell you more about your consumers, to improve targeting of interactive and traditional direct marketing efforts. More accurate consumer identification and targeting FICO has developed specialized analytic tools to enable companies with multiple sources of customer information to completely identify each individual. FICO Contact Builder merges incomplete customer data such as debit card, credit card or check transactions captured at point-ofsale with over 200 million U.S. consumer records, to identify individual consumers. FICO Customer Data Integration references a database with over 1600 third party sources to match disparate and inconsistent consumer data from multiple locations to create a single data warehouse of identifiable consumers. The result is an accurate 360º view of each consumer, leading to more effective segmentation and targeting. Retention, risk, purchase propensity and other predictive scores can then be run on these enhanced profiles to improve the impact of interactive and direct marketing efforts by identifying those individuals likely to respond to any given offer. Closed-loop learning Create a closed loop environment where measurement and analysis can be used to rapidly improve your decisions. Precision Marketing Manager includes: Performance metrics Campaign tracking and analysis Forecasting ROI analysis Lifetime customer value analysis Precision Marketing Manager helps our clients more effectively identify and understand their potential consumers or business customers, engage and respond to these targets in more individual and personalized ways, and conduct campaigns that deliver the most relevant offers to consumers through the most effective channels. Major consumer goods, pharmaceutical and financial services companies use Precision Marketing Manager to forge longer, more satisfying and profitable relationships with their customers. Contact us to find out how this solution can make your marketing efforts more profitable.» Back to Index Fair Isaac, FICO, Blaze Advisor and Make every decision count are trademarks or registered trademarks of Fair Isaac Corporation in the United States and in other countries. Other product and company names herein may be trademarks of their respective owners Fair Isaac Corporation. All rights reserved. page 23

24 » Back to Index decision management tools FICO Decision Optimizer Maximize business value» in an uncertain world» Explore alternatives to optimize business results FICO Decision Optimizer helps companies apply portfolio optimization techniques to maximize profits, minimize costs and make better business decisions throughout the organization. FICO Decision Optimizer lets business users adjust business goals, facts and constraints while analyzing business outcomes to determine the best strategy. Making better business decisions is the key to thriving in an increasingly competitive business world. Small changes in actions at the customer or account level can produce differing reactions that can significantly impact business outcomes, especially when large numbers of accounts are involved. Most decisions require making trade-offs on satisfying potentially conflicting goals and organizational constraints. FICO Decision Optimizer lets you compare the potential business impact of alternative strategies on competing business goals, such as increasing revenue and profit while managing for acceptable risk, to help find the optimal balance that will best meet your specific needs. Proven Approach» to Optimization Decision optimization uses analytic models and historical data to help you find the best ways to use resources to achieve your goals while living within real-world constraints. Decision Optimizer lets companies apply sophisticated optimization capabilities to decide the best action to take with each customer interaction in order to achieve portfolio-level business goals. It identifies the optimal set of account-level actions to best satisfy both account-level and portfolio-level goals and constraints. Decision Optimizer encapsulates a proven approach to solving high-value business optimization problems with outstanding performance and accuracy. How it Works Decision Optimizer helps companies apply portfolio optimization techniques using analytic models and historical data to find the best ways to maximize profits, minimize costs and make better business decisions throughout the organization. It allows analysts to create decision models that are used to explore the impact of alternative approaches to their business problems. Decision models can be relatively basic, using look up tables and simple formulas, or highly sophisticated using a network of analytic components, such as action-effect models and predictive scorecards developed using FICO Model Builder or other analytic tools. Historical data, models and business expertise can be used to simulate the business impact of alternative decision actions and to identify optimal solutions by applying the embedded FICO Xpress Optimization Suite. An intuitive user interface allows business users to adjust business goals, facts and constraints, and then review the results in graphical reports to compare and contrast the business outcomes and determine the best strategy. Powerful Technology Decision Optimizer embeds Xpress-MP the world s leading mathematical modeling and optimization software within a powerful approach that allows analysts page 24

25 to incorporate behavioral and economic measures while accounting for risk and uncertainty. You can use data and models from a variety of sources to design a strategy that maximizes business value. A single decision environment allows you to incorporate the best information available by integrating: Model Builder models Linear and logistic regression Ad-hoc equations Look-up tables Neural nets FICO Decision Optimizer also provides built-in capabilities that help analysts validate their decision models and debug any issues that may arise within the potentially complex network of contributing components. It ensures a robust strategy by considering multiple possible scenarios and optimizing across the expected outcomes from each. It reveals the impact of actions and uses that knowledge to control strategies to maximize value. Uncertainty & Stress Testing Decision Optimizer explicitly handles uncertainty within the decision model. This advanced capability lets users include variables with a range of possible values rather than a single value. Strategies can be created that are optimal under a wide variety of conditions. Similarly, strategies can be stress tested to analyze the impact of implementing them in various business or economic scenarios. These capabilities give business users greater confidence that the decisions will work as well in the real world as they do in the lab. Flexible User Controls Decision Optimizer provides a flexible environment for defining and calculating the business metrics to be included in strategy determination. The modular nature of Decision Optimizer enables the use of constraints that consider business limitations such as finite resources or targets. It also provides the ability to prioritize constraints and puts increased emphasis on more important business requirements. Decision Optimizer has the unique capability of assigning weights to different objectives to balance the trade-off between conflicting goals. This allows users to understand the trade-offs between factors such as revenue and risk, or between long-term and short-term impacts. Decision Optimizer includes a rich set of graphical charts that help users analyze the impact of strategies and compare them using a variety of summary and drill-down reports. A point-and-click interface makes it easy to configure report information the way the user needs it, allowing quick insight into the details behind a forecast result without making the user pick their way through pages of potentially irrelevant data. Solving High-Value Problems Decision Optimizer is being successfully used by companies in a variety of industries to improve their decision strategies. Decision Optimizer is the primary software tool used in delivering FICO Custom Decision Optimization solutions which provide industry-leading expertise to support the analytical design of the optimization / decision models, tuning and implementing optimized strategies; and continuous review and support of ongoing optimization needs. Decision Optimizer is used in more than 100 projects at more than 45 financial institutions throughout the world to optimize decisions that have achieved significant bottom-line results in acquisition, origination, account management, customer retention and fraud referrals. Regulatory Compliance Decision Optimizer plays an important role in meeting regulatory compliance standards by providing methodologies for building powerful, yet interpretable optimization models. It delivers a unique combination of business rules for enforcement of constraints and analytic models for portfolio segmentation, risk and default prediction. FICO Decision» Management Suite Decision Optimizer is a core component of FICO s Decision Management suite of solutions and technologies that enable organizations to automate, improve and connect decisions across their business. Developers can call upon this combination of tools for data analysis, decision optimization, business rules management and open-platform deployment.» Back to Index FICO and Make every decision count are trademarks or registered trademarks of Fair Isaac Corporation in the United States and in other countries. Other product and company names herein may be trademarks of their respective owners Fair Isaac Corporation. All rights reserved. page 25

26 » Back to Index customer management FICO TRIAD Customer Manager Drive profits higher by making increasingly astute decisions across all aspects of account and customer management FICO TRIAD Customer Manager automates, improves and connects customer decisions for 65% of credit cards worldwide. Its champion/ challenger testing has been fundamental to driving continual improvement in cards decisions. Highly competitive companies throughout the financial services and in telecommunications, retail and other customer-driven industries also rely on TRIAD Customer Manager to make the right decision at the right time, adapt to market change and keep lifting performance to the next level. TRIAD Customer Manager provides superior account/customer management Strategy Design Consulting and Tools Analytics Software infused with FICO IP The world s leading system for credit account management, TRIAD Customer Manager leverages more than 20 years of continual product innvation, and FICO s 50+ years of pioneering work in predictive analytics and Decision Management. TRIAD clients benefit from this immense intellectual capital, available nowhere else, which is embedded in the analytics and software, and delivered through consulting. FICO continues to push the frontiers of adaptive control for sharper data-driven customer decisioning. Today s TRIAD Customer Manager offers unmatched capabilities for forecasting customer behavior and rapidly turning these insights into successful strategies for automating operational decisions. No other solution provides such a full set of powerful features with deep analytic, strategy and business expertise built right into the software and delivered through consulting. TRIAD Customer Manager also provides you with new ways to gain more value from these rich features. For instance, Decision Graph and the TRIAD Analytic Datamart both standard in TRIAD 8.5 enable you to develop more competitive challenger strategies by quickly simulating the impact of custom decision keys based on data unique to your portfolio without having to implement them and collect production data. TRIAD Customer Manager users have been able to receive top-line and bottom-line benefits, including: A 15% increase in average total balance An average 15% 25% reduction in account-level bad debt A 17% increase in response rates and amounts borrowed while also reducing losses An average 40%+ reduction in loan-loss provisions while doubling portfolio size An average 25% 30% decrease in revolving account-authorization referrals A 25% 30% increase in portfolio sales TRIAD Customer Manager combines: Superior analytics. Custom, pooled or expert models predict risk with unparalleled precision. Business users can easily fold these and other scores into decision strategies. Industry-leading strategy design consulting and tools. Our strategy experts provide TRIAD Customer Manager clients with a substantial competitive edge. Graphical tools simplify and accelerate building, optimizing, exploring and comparing strategies. Powerful software infused with FICO IP. Our experience improving and automating account management decisions is structured into the software, including built-in interfaces for delivering in-stream decisions to your systems. page 26

27 FICO TRIAD Customer Manager highlights Flexibility to make data-driven decisions your way. From a single platform, you can perform account and customer-level management for multiple business lines (credit cards, debit cards, home equity loans, auto financing). Within or across these portfolios, you can implement any number of automated decisioning strategies for predefined and user-defined functional areas (e.g., credit facilities, collections, authorizations, marketing, pricing, reissue). Advanced analytics for precise, timely predictions of customer behavior. Take advantage of FICO experience finding the most predictive variables in data and building robust behavior scorecards (custom, pooled, expert) that accurately forecast customer risk. Improve precision in segmentation and targeting by adding custom models that predict other dimensions of account performance into TRIAD Customer Manager (see sidebar). Strategy tools giving business users more power and independence than ever before. Decision Graph, standard in version 8.5, is the latest way TRIAD puts more decisioning control in the hands of business users. This graphical tool enables you to automatically optimize strategies for efficiency and compare them logically. You can use it with the TRIAD Analytic Datamart, a standard feature that supports flexible data aggregation for extracts, to more easily explore the competitive possibilities of applying custom decision keys based on your unique data. The FICO TM Blaze Advisor system enables business users to quickly develop custom TRIAD decision keys. You can also use this world-leading business rules management system to fold additional scorecards and other types of analytic models into your strategies, without need for IT assistance. Champion/challenger testing and the means to develop higher performing challengers. TRIAD Customer Manager was first to offer this controlled, low-risk method of comparing the results of multiple decision strategies in production and efficiently rolling out winners across portfolios to drive continuous improvement. Today the combination of Decision Graph, Analytic Datamart and Blaze Advisor provide a potent set of tools for developing better and better challengers with unmatched efficiency and ease. FICO Custom Decision Optimization (see sidebar) is available to help you identify optimal strategies faster. Results tracking and reporting for measuring ongoing strategy effectiveness. TRIAD Customer Manager reports give you the detailed, comprehensive information you need to measure performance over time. Enhanced reporting is provided through integrated BusinessObjects software and over 70 FICO report templates. Our consultants work with you to interpret reports and inject learning back into strategy development. Closed loop architecture for continuous improvement. The TRIAD Analytic Datamart captures all data and requests coming into the system, all decision keys and all decisions the system generates. Storing this operational data locally with a web-based front-end, gives business users quick and convenient access to the information they need for faster strategy refinement, including development of custom decision keys. TRIAD Customer Manager is available as an end-user installed application or as a hosted service through major credit card processors worldwide. Companion Analytic Services Custom scoring services. FICO builds collections scores and other types of analytic models for many TRIAD Customer Manager clients. FICO Transaction Scores. Transaction scores based on authorizations data raise predictive power when used in conjunction with behavior scores in TRIAD strategies. They improve good-bad separation by revealing different levels of risk in day-to-day behavior patterns not evident in cycle-end activity summaries. They also provide fresh analytic insights to sharpen intra-cycle decisioning. FICO TM Custom Decision Optimization. FICO provides decision modeling/optimization to mathematically identify the true-optimal (not just better, but best) strategy for meeting all your objectives under your constraints. The service accurately predicts customer reactions to your potential actions and assigns the best treatment for every customer across even the largest portfolios. FICO Basel II Analytic Services. FICO helps banks accelerate Basel II Internal Rating Based (IRB) compliance. We help banks that have achieved it increase the value of their investment by building analytic innovation on top of industry-standards and using sharpened risk forecasting with corresponding reward metrics to make better decisions in numerous areas, including credit approval and product pricing Fair Isaac Corporation. All rights reserved. page 27

28 Success story Caixa Catalunya Challenge: Transitioning from manual to automated risk management, Spain s third largest savings bank sought to integrate decisions from originations through customer management. We wanted to be more competitive, provide consistency across the customer lifecycle and improve our standing among investors and ratings agencies, explains Ricard Climent, Caixa Catalunya s director of credit risk management. Additionally, the bank sought to meet expected Basel II regulatory requirements. Success: Caixa Catalunya implemented FICO TRIAD Customer Manager to meet customer management objectives, and integrated the system with FICO origination software and scores. The solution provided a sophisticated level of automation for the bank s personal loan and mortgage portfolios and enabled the bank to link strategies across the customer lifecycle. Using the integrated FICO solution, the bank realized substantial reductions in delinquency rates for both existing and new customers. The bank also reduced costs and strain on internal resources and improved customer response times. Not only has our work with FICO automated decisions and improved risk management, it s helping us meet Basel regulatory requirements, adds Climent. Once its risk management tools and methods are certified with the new Basel II Accord, the bank expects a reduction to its capital reserve requirements. Toward lifecycle decision management For even greater performance improvement and competitive advantage, FICO helps you automate, improve and connect decisions across the customer lifecycle. For example, TRIAD Customer Manager works with other FICO systems, such as FICO Debt Manager solution for collections and recoveries. This integration increases control over the execution of collections strategies by both in-house and outsourced resources, and even helps you compare the projected cost of prescribed treatments against the actual cost of what happened. FICO s Decision Management architecture is facilitating this type of linked decisioning by bringing all our applications and tools together onto a common web-servicesbased platform.» Back to Index FICO, TRIAD, Blaze Advisor, Debt Manager and Make every decision count are trademarks or registered trademarks of Fair Isaac Corporation in the United States and in other countries. Other product and company names herein may be trademarks of their respective owners Fair Isaac Corporation. All rights reserved. page 28

29 » Back to Index scores FICO Score View Service Boost performance and profitability of Bankcard and DDA Accounts FICO Score View Service helps financial institutions develop better, more profitable customers by enabling lenders with large online Bankcard or DDA portfolios to provide their customers with information they need to deal with the financial realities of today s credit environment. At the same time, FICO Score View facilitates the transparency that government regulators are demanding and the information consumers want from their financial institutions. FICO Score View Service helps financial institutions stay at the top of the payment pyramid, while retaining consumers by influencing their behavior through proactive and transparent programs. Sample FICO Score View Web page Sample FICO Score View page, accessible from the customer s online account. FICO Score View Service provides your bankcard and DDA customers with a free monthly FICO Score, the top two contributing factors to the score, tracking of progress of score changes over time and access to credit education information, clearly displayed from within their online account. The program drives online customer activity designed to help them better manage their credit, increase their loyalty to you and improve payment and credit activities in ways that boost core customer profitability. With FICO Score View Service, you can expect lower attrition and reduced write-off rates through a proactive payment behavior program. Improve customer loyalty» and retention Credit-savvy consumers know that the FICO Score is used by most lenders in making credit evaluation decisions. Therefore, having access to view and track their score on a monthly basis is a useful tool that your customers will value. A recent emarket.com customer satisfaction study revealed that a major US lender who offered free monthly FICO Scores to customers through the FICO Score View Service achieved the survey s highest ranking. The study showed that 78% of FICO Score View customers were Highly Satisfied and would recommend their bank to others. This represents an 11% improvement over the next bank surveyed. Comprehensive benefits Adding the FICO Score View Service to your customer s online experience positively impacts several business areas. With FICO Score View TM Service, you can: Help consumers protect their financial health by tracking their FICO Score. Move customers online and increase online activity, boosting profitability. Improve payment behavior» by linking it with FICO Scores. Maximize your share of wallet by proactively promoting additional banking services. Drive fee income through cross-selling FICO credit management services. Increase transparency to consumers. Build customer loyalty to your brand. page 29