Recapturing CLIs How a Diversified Data Strategy Can Help Card Issuers Restore Credit Line Increases and Boost Revenue Michael Blix Analytic Expert September 2013
Table of Contents 1 The CLI conundrum 3 Create an internal hub 3 Institute a consumer outreach program 4 Leverage annualized income data from The Work Number 6 Extend the shelf life of stated income 8 Conclusion Equifax Inc. Recapturing CLIs ii
The CLI conundrum: How to overcome regulatory hurdles to restore the credit line increases consumers and card issuers want. When credit cardholders can spend more on their cards, they usually do. And that boosts revenue for card issuers. It is a simple formula for success that has served the credit card industry well for years. Credit line increases drive bankcard balance growth Source: Equifax 8% In the past, card issuers used in-house data, credit bureau data and analysis to determine a cardholder s ability to pay. Those who met the criteria were automatically given a credit line increase. The resulting revenue was impressive: Cardholders who received a 10-30% credit line increase boosted their balance by about 3% within a year. By contrast, consumers who did not receive a credit line increase actually cut spending showing a 4% balance drop in the same 12 months 1, netting a 7% swing. It should also be noted that consumers were generally paying down their balances during this period (June '11 - June '12), so the results should be more compelling in the present day. That is what makes credit line increases such an important opportunity for card issuers: CLIs produce new revenue, and when CLIs do not happen, revenue does not hold steady. It actually falls. 6% 4% 2% 0% -2% -4% -6% -8% -10% -12% -14% -11% Line decrease -4% No change 2% Line increase.01% - 10% 6% Line increase 11% - 30% Credit line changes measured over 6 months (Jan.-Jun. 2011). Balance changes measured one year after line increase (Jun. 2011-Jun. 2012). 1 Equifax research based on a random sample of 870,000 The Work Number -verified incomes with bankcard trades appended. Equifax Inc. Recapturing CLIs 1
Regulation Spotlight: How Reg Z and the CARD Act Affect Credit Line Increases A key component of the Credit Card Accountability Responsibility and Disclosure Act is an abilityto-pay provision. It expands upon the long-standing Truth in Lending law, or Regulation Z. Under Reg Z, credit card issuers cannot open a credit card account or increase the credit limit of an existing account without considering a consumer's ability to make the required payments. To assess ability to pay for a credit line increase, credit card companies may rely on financial information provided by the consumer so called stated income or they may use third-party verified income data. The ability-to-pay provisions have made the process of identifying eligible customers more difficult, contributing to the 85% decline in credit line increases since 2010. Sources: Federal Reserve Bank of Philadelphia, Equifax research Today, offering credit line increases is much more difficult for card issuers. Regulators have changed the rules on how cardholders qualify for CLIs. Issuers are limited in using personal income models to demonstrate a cardholder s ability to pay a crucial prerequisite for offering a credit line increase. Now, card issuers must rely on the stated income a consumer provides in the initial application information that regulators say is only valid for CLI verification for a limited time frame. Or issuers must use income data that is verified by a third party. The regulatory change has been a costly one for card issuers, who have seen an 85-90% drop in CLI-eligible accounts since the Credit Card Accountability, Responsibility, and Disclosure Act took effect in early 2010 2. Having relied for years on income modeling to show ability to pay, many card issuers simply do not possess all the verified income information now required for CLI ability to pay decisions. Before the ability to pay provisions, 10-15% of card issuers' customer base was CLI-eligible. Now, that eligible customer base has dropped to 2-5% not because these consumers are less worthy of credit line increases, but because card issuers lack the ability to demonstrate income that indicates an ability to pay. 85-90% drop in CLI-eligible 3 accounts since 2010 But card issuers can recapture that eligible consumer base and restore CLI-related revenue with four possible (and complementary) strategies: 1 2 3 4 Card issuers can consolidate their existing ability-to-pay data into an internal income hub. They can reach out directly to CLI prospects to request updated income information. Issuers can go to the marketplace for third-party solutions that will help them fill the verified income gap with speed and confidence. They can lobby regulators to expand the validity of consumers stated income beyond the current thresholds. Equifax Inc. Recapturing CLIs 2
1 Create an internal income hub By building an internal income hub, card issuers can harness the power of information already within reach. The first step is to consolidate income data across all portfolios to which a card issuer has access. Mortgage records, auto loans, student loans, personal lines of credit and even data related to other credit cards are all loaded with financial facts and figures, including the income data stated and/or internally verified that can enable credit line increases. In addition, card issuers should look at other business lines to which they are privy. Such information is a treasure trove for card issuers, but there are some drawbacks. For example, many card issuers do not have in-house access to this full sweep of financial data, so collecting and consolidating it can prove both time-consuming and expensive. Even when the data is contained within a financial institution, regulatory rules or internal silos may hamper data collection and consolidation and drive up the cost of mining the information for income-verifying gold. Ultimately, the expense of extracting data through an internal income hub across lines of businesses may not seem worth the return. In general, an internal hub with auto, mortgage, student loans and personal lines of credit information yields a credit line increase recapture rate of 4-6%, based on information from Credit Trends, Equifax's proprietary consumer credit database. 2 Institute a consumer outreach program The reality is that consumers generally like credit line increases. That is why their spending goes up after a credit limit rise. Card issuers can tap into that consumer interest to help get credit limit increases back on track. Reach out to consumers whose credit profiles make them likely candidates for credit line increases. Then invite them to apply for a credit limit rise with an application that requires employment and income information. The largest benefit of such an outreach program is that it provides card issuers with targeted, up-to-date stated income data that comes directly from consumers a source specifically approved under the new credit card regulations. Another plus is that it fosters what is likely to be a positive exchange between a card issuer looking to increase a consumer s credit line and a consumer who would like a higher credit limit. It is simply good customer relations. But, as with the internal income hub, there are a few potential drawbacks. First, the effort is at its most basic a fishing expedition. There is no guarantee consumers will bite. Second, the marketing and communications dollars needed to facilitate such outreach can add up very quickly. If the outreach is successful, it still offers a slightly lower return than the income hub. It yields a credit line increase recapture rate of 3-5%, according to Equifax research. 2 ibid. 3 ibid. Equifax Inc. Recapturing CLIs 3
3 Leverage annualized income data from The Work Number The Work Number can quickly jumpstart CLIs by providing instantly accessible, viable and verified income data that shows ability to pay. The Work Number includes more than 53 million payroll records today and is expected to reach 66 million payroll records by 2014. It comes from Equifax, a brand that regulators, card issuers and consumers have come to know. And it is available immediately. Using The Work Number as a verified source for income information allows card issuers to resume CLIs without delay. The constantly updated income information comes directly from millions of employer payroll records. And if a card issuer wants data on specific consumers whose income records are not already in the database, The Work Number can retrieve that data in a matter of hours or days. Tapping into The Work Number database also enables financial institutions to build a knowledgebase using the waterfall approach. The idea is to combine internal and external data from reliable sources like The Work Number. It is a Big Data approach that can transform discrete streams of information into insightful and predictive customer profiles. The return on The Work Number investment is impressive. Using The Work Number, credit card issuers can realize a potential CLI recapture rate of 15-18%. The Work Number CLI recapture rate exceeds all sources but stated income 4 Source: The Work Number /Credit Trends /Equifax Total CLI eligible bankcard population (FICO 700+ w/ balance) Volume: 121.6M # New bankcards in past 12 months (stated income) Volume: 21.8M Expanding stated income window to 18 months Volume: 11.6M Income hub non-card sources (Mortgage, auto, retail banking) Volume: 4.4M Proactive customer reach (4%) Volume: 3.4M 46 % Potential CLI eligible recapture volumes and rates Volume: 55.7M The Work Number verified income Volume: 14.5M Equifax Inc. Recapturing CLIs 4
The Work Number enables a quick return to CLIs and related revenue 5 $240M $220M $200M $180M $160M $140M $236.2M $74.2M $162.0M Profit increase with income hub and The Work Number income Recapture with income hub and The Work Number income is based on the following assumptions: Expanding the stated income window on cards to 18 months (9% of eligible population) Building an internal income hub with stated incomes from accounts that crossover from auto, mortgage, and direct deposit income (5%) Customer outreach to get updated incomes (4%) The Work Number annualized income (18%) $120M $100M $94.5M Recapture with 12 months Stated card income only assumes that all credit eligible bankcards opened in the past 12 months would be eligible for a credit line increase. $80M $29.7M Assumption: 30% utilization, 6% net interest. $60M $40M $35.4M $11.1M $20M $24.3M $59.0M $18.5M $40.5M $64.8M $750 Line increase $1,250 Line increase $2,000 Line increase $5,000 Line increase Used on its own, The Work Number s potential CLI recapture rate outpaces all other information sources except stated income. Combined with other information, it enables a waterfall of data that allows lenders to recapture almost half of the eligible population for credit line increase programs. 4 Percentage listed applies to volume after prior tier is subtracted. 5 Recapture rate with 12 months of stated card income assumes that all bankcards opened in the past 12 months would be eligible for a credit line increase. Equifax Inc. Recapturing CLIs 5
4 Extend the shelf life of stated income There is regulatory scrutiny around the shelf life of stated income data used to validate credit line increases. Many card issuers are wary of presenting regulators with information older than 12 months. But what if issuers could show regulators powerful statistics demonstrating the accuracy and stability of stated income over time? Such evidence could ease the anxiety of card issuers and regulators alike, and potentially streamline and reinvigorate the CLI approval process. That data exists and can be drawn from The Work Number database of more than 53 million current payroll records. Analyzing The Work Number s substantial database shows overall consumer income levels are stable over time, particularly for people in the income bands most attractive to card issuers. And when income does change, it is most likely to rise. About 1/3 of employees experience a 10%+ increase in income annually, and this number jumps to over 1/2 of employees over a three year period. Income declines of 10% or more account for less than 14% of income changes in the first year, and less than 17% in three years 6. Overall, consumer income is stable or rises over time Source: The Work Number /Equifax, based on employers reporting to The Work Number Nov. '08 through Nov. '11. More than 10%+ Increase +/- 10% change or No change 10%+ Decrease 100% 90% 14% 16% 17% 80% 70% 60% 54% 41% 32% 50% 40% 30% 20% 10% 32% 43% 51% Migration 12 months Migration 24 months Migration 36 months The data is real and it is compelling. Without a doubt, it offers clear evidence that stated income retains its validity over time. The data opens the door to pushing regulators to consider reauthorizing the use of consumer provided incomes beyond 12 months for use in validating credit line increases. Equifax Inc. Recapturing CLIs 6
But changing regulators minds and lobbying to shift policy is a long-term play. Card issuers will not be able to convince regulators overnight, and they might not be able to do it alone. Consumer groups that hear from frustrated consumers who cannot get credit cards or credit line increases could be powerful allies in making the case to regulators. The argument: Some of the new regulations for card application and CLI approval are simply too onerous for the credit card industry and for consumers. It is a long-term battle that could be worth waging. Equifax research shows that if card issuers could extend the viability of stated income from 12 months to 18 months and use it for automatic credit line increases, their CLI recapture rate could rise from 18% to as much as 27%. Extending the shelf life of stated income pumps up the CLI recapture rate 7 Total CLI eligible bankcard pop. (FICO 700+ w/ balance) 121.6M records 100% New bankcards in past 6 months 11.1M records 9% New bankcards in past 12 months 21.8M records 18% New bankcards in past 18 months 33.4M records 27% 6 ibid. 7 Many lending institutions do not provide credit line increases to consumers who have held cards less than six months. This may reduce the eligible population with stated incomes by as much as 50%. Equifax Inc. Recapturing CLIs 7
Conclusion New regulations make offering credit line increases much more difficult for card issuers, which now must use stated or third-party verified income to show a consumer's ability to pay. As a result, card issuers have seen an 85-90% drop in CLI-eligible accounts since 2010. But card issuers can recapture that eligible consumer base and restore some CLI-related revenue with four possible strategies: Proposed Solution Pros Cons Card issuers can consolidate their existing ability-to-pay data into an internal income hub. Harnesses the power of consolidating data across all portfolios to which a card issuer has access. Collecting and consolidating the data can be time-consuming and expensive, and the CLI recapture rate is just 4-6%. Card issuers can reach out directly to CLI prospects to request updated income information. Yields the targeted, up-todate stated income data that regulators like and can bolster the relationship between the issuer and consumer. The marketing and communications costs can be high, and there is no guarantee consumers will sign on. The CLI recapture rate is only 3-5%. Issuers can go to the marketplace for third-party solutions that will help them fill the verified income gap with speed and confidence. The Work Number s 53 million active payroll records can jumpstart a CLI program by instantly demonstrating ability to pay. The Work Number also can enable a waterfall approach to data consolidation. Using The Work Number, credit card issuers can realize a CLI recapture rate of 15-18%. The payroll records database is not universal, but is still growing and is expected to reach 66 million payroll records by 2014. Issuers can lobby regulators to expand the validity of consumers stated income beyond the current thresholds. Regulatory change would yield a long-term and effective solution. Their CLI recapture rate could rise from 18% to as much as 27%. Lobbying to change regulators minds and shift policy would take time and resources and could require card issuers to ally with other interest groups. Equifax Inc. Recapturing CLIs 8
About The Work Number The Work Number database is the largest central source of consolidated employment and income information. The database houses more than 53 million active employment records and more than 165 million historical records. These records are contributed by more than 2,500 employers nationwide from Fortune 500 companies to small regional and local employers representing every major industry. Accessible 24/7, The Work Number database enables a streamlined verification process for lenders of all types. About Equifax Equifax is a global leader in consumer, commercial and workforce information solutions, providing businesses of all sizes and consumers with information they can trust. Equifax organizes and assimilates data on more than 500 million consumers and 81 million businesses worldwide, and uses advanced analytics and proprietary technology to create and deliver customized insights that enrich both the performance of businesses and the lives of consumers. Contact Us Today For more information, please contact info@theworknumber.com 888-577-1999 www.theworknumber.com Equifax Inc. Recapturing CLIs 9
For more information on Equifax Verification Services, please visit www.theworknumber.com. EFX-WS-4100-07/30/2013 There are references throughout this publication/website to various trademarks or service marks and these, whether registered or not, are the property of their respective owners. Equifax is a registered trademark of Equifax Inc. Inform > Enrich > Empower is a trademark of Equifax Inc. The Work Number is a registered trademark of TALX Corporation, a wholly owned subsidiary of Equifax Inc. Copyright 2013. Equifax Inc., Atlanta, Georgia. All rights reserved.