Technology Solutions to Manage Instant Credit Card Decisions and Improve Customer Acquisition & Retention

Technology Solutions to Manage Instant Credit Card Decisions and Improve Customer Acquisition & Retention Analyst Author: Dennis Moroney Research Director, Retail Banking & Cards October 10, 2011 Reference # V69:01K TowerGroup Key Findings The effectiveness of acquiring new credit card customers via direct mail has decreased and TowerGroup estimates the cost to acquire a new credit card customer through direct mail has increased by 30%. To manage costs, banks have lessened their dependence on direct mail and increased their use of alternate and potentially riskier acquisition channels. Real-time credit decisioning creates new risk management and marketing business challenges for the banks, but TowerGroup indentifies technology solutions to address these problems. Enhanced technology solutions are required to make split-second decisions necessary in realtime credit decisioning. Technology vendors provide credit card issuers the flexibility to outsource or host in-house their instant decisioning solution. Offering the right product design and credit line when the account is acquired will increase customer account usage, retention, and credit card profits. Report Coverage This TowerGroup Research Note examines vendor technology solutions that support the shift in new credit card account acquisition and retention strategies to ones that rely less on the direct mail channel. Instant new account decisioning is the real-time acquisition process of a credit card when a consumer is surfing the internet or at a bank branch or the sales counter in a store. Instant new account decisioning optimizes, in real-time, the likely acceptance of the credit card offer by the prospect. To be successful, the instant decisioning process must minimize issuer credit risk and maximize potential profits through active customer card usage and customer retention. Bank Card Issuers Switch to Cheaper Acquisition Channels Direct mail has historically been the main source for originating new credit card customers with a less risky credit profile. To reduce risk of credit and/or fraud loss, credit card issuers typically prescreen prospects who receive a direct mail solicitation and/or an invitation to apply for credit. The prescreen process eliminates prospects identified as a potential credit or fraud risk from the mailing. Other acquisition channels such as the internet, take-ones, and mass media do not receive this review and typically are more risky acquisition channels. Consequently, credit risk managers defend that direct mail credit card account acquisition is more expensive than the internet and takeone acquisition channels, but originate more customers that are profitable because of the screening. Things have changed though; the effectiveness of direct mail has decreased as response rates declined and mass media messaging directs consumers to company websites. Consumers rely on the internet for information and comparison-shopping. The internet provides easy access and 1

convenience and credit card issuers and merchants must have a real-time marketing and credit decisioning process to support consumer demand. When the US recession began in fourth Q4 2007, 1.3 billion new direct mail credit card solicitations were mailed in the fourth quarter penetrating approximately 70% of all US households. During the fourth quarter of 2007, approximately 55% of new credit card accounts were acquired through direct mail and 35% of new credit card accounts through take-one applications and the internet, the remainder were from outbound telemarketing and cross selling. The US household penetration rate declined and bottomed out at 35% due to the recession and tighter credit policies, yielding only 43% of new credit cards in Q3 2009. The most recent second quarter 2011 household penetration rate has rebounded to 62%, but the yield of new credit card accounts from direct mail remains low at 38%. However, for the first time, new credit cards originated from the internet, take-one, and mass media channels exceeded direct mail, estimated at 50% of total new credit card accounts acquired in the Q2 2011. Exhibit 1 illustrates the shift in the percentage of new account volumes for each acquisition channel, the increase in the percentage of real-time acquisition channel volumes, and the decline in direct mail volume beginning in Q4 2007 through Q2 2011. Exhibit 1 Credit Card Issuers Choose Instant Decisioning for New Account Acquisition (Q4 2007 Q2 2011) Source: Synovate, TowerGroup 2

Direct Mail Acquisition Costs Increase TowerGroup estimates that the reduced effectiveness of direct mail has increased acquisition expenses 30% above their historic averages and decreased future credit card revenue potential for issuers that do not support instant decisioning. Future revenue is lost to competitors whose business model includes an effective instant decisioning process less dependent on direct mail, and that relies on the internet and take-one channels to improve their new account acquisition results. Direct mail will not regain its number one position for credit card acquisitions because the alternate acquisition channels are less expensive but will remain an important source for new customers. Credit card issuers that do not have an effective instant decisioning technology solution typically used in conjunction with direct mail are scrambling to reverse their negative performance. Because of the weak economy and thinner bank card profit margins, card issuers are credit risk averse and are seeking technology solutions that will improve their business process and increase the number of new profitable credit card customers. Alternate Acquisition Channels Consumers regularly use internet and, increasingly, mobile devices to make purchases and to conveniently and efficiently comparison-shop for products and services including credit cards. Increased dependence on internet and take-one marketing channels has created new risk management and marketing business challenges for the banks. Making split-second decisions about the right product offer and assigning the appropriate credit line to an applicant requires sophisticated technology and access to real-time credit and demographic information from a variety of different sources to succeed and to prevent significant financial loss for the institution. To increase sales and acquire new credit card customers, merchants and card issuers use incentives at their website or the point-of-sale or a branch. It is a common practice to combine the purchase of merchandise and/or a service with a new credit card account. TowerGroup believes failure to offer the consumer a product that matches his or her demographic and credit profile will reduce the likelihood the credit card will be used beyond the promotion period. Weak technology tools and passive management of the instant decisioning acquisition process will result in higher acquisition costs and increase customer attrition. An effective instant decisioning acquisition process will produce profitable and satisfied customers who will use the card because the instant decisioning process matches the right product design and credit line. Shared Risks. Connecting the sales transaction to establishing a new credit card account creates an expectation for the consumer and both a risk and an opportunity for the merchant and the card issuer. The consumer expects to be approved and the approval process to be quick. The merchant or card issuer has the opportunity to complete the sale and to gain a new credit card customer but also bears the risk of a bad credit decision and a future credit loss. This action is weighted against declining the credit and losing both the sale and the consumer as a customer. The creditor has limited time in which to offer the card, approve the credit, and complete the sale and relies on sophisticated technology to manage this complex business challenge. This note examines several leading vendors that have broadly penetrated the credit card market and provide instant credit decisioning technology solutions for many of the leading credit card issuers. These are alphabetically Equifax, Experian, FICO, TransUnion, and Zoot. Technology Solutions There is a consistent theme for the five companies we examined that support a real-time, approval/decline, right product, right credit line, instant decisioning process. These technology companies provide an integrated review and decision-centric process that optimizes credit card product design and credit line assignment to minimize risk and achieve maximum enterprise profitability. Depending on system capabilities and the timeline required by the end user, several of 3

the companies profiled provide the end user the option to host all or some part of the instant decisioning process in-house. The five companies examined in this report provide a unified framework utilizing a variety of their proprietary products, but can also integrate third-party data and/or software to tailor the solution to the end-user's need and budget to improve the performance of their process. The five technology companies provide consulting support available on an à la carte menu basis. Recommendation Summary TowerGroup believes these five companies are the leading providers of real-time sophisticated risk and marketing decisioning analytics. Therefore, you should not exclude any of these companies from your analysis and discussions. Our research reveals that because the complexity of instant decisioning requires real-time access to multiple data and analytic resources, the in-house solutions tend to be the most cost effective when deployed at larger institutions. However, if as a business requirement, you prefer to host the instant decisioning process on your in-house system, begin your evaluation with Experian, FICO, and Zoot followed by Equifax and TransUnion. During our interviews with Experian, FICO, and Zoot they stated their preparedness to support a customer in-house installation. Equifax and TransUnion can provide selected hosting of specific products. This cannot be generalized and must be determined for each installation. Exhibit 2 summarizes and contrasts, at a high level, business and system attributes of each of the technology companies examined. 4

Exhibit 2 Service Provider Summary: Instant Decisioning Source: TowerGroup Equifax Instant Decisioning Equifax offers the end user the option of a managed solution and/or a combination of a managed and user hosted solution for account acquisition. The Equifax process supports both new account instant decisioning for bank card prospects without other bank relationships and cross selling to existing bank customers a variety of lending and deposit products across the entire account management life cycle. The Equifax process also supports referrals to private and small business banking. These solutions centralize and automate business processes and are designed to deliver insights to help better optimize risk/revenue trade-offs, thus allowing faster and more consistent business decisions. Instant Decisioning InterConnect is the Equifax managed solution that includes a comprehensive set of products and the supporting data to streamline the application and risk decisioning process and support strategy development and change management control. Within InterConnect is a campaign management integration process for prescreen acquisitions and an offer management process designed to recommend real-time next-best actions throughout the account life cycle for existing bank customers. This process is channel agnostic and leverages the Equifax databases to improve product targeting of offers and risk management decisions. 5

System Design Equifax has been advancing its position as a provider of differentiated data through its Decision 360 suite of products, a three hundred and sixty degree view of consumers assets and liabilities. In 2007, Equifax acquired TALX Corporation, now called Equifax Workforce Solutions, which enabled the inclusion of The Work Number product in customer workflows. The company hosts 190 million income records supplied by 2,000 employers, the only real-time repository of United States employment and income data, supplemented by income tax data from the largest 4506-T fulfillment house. (IRS Form 4506-T is a request for a transcript of tax return. This form is used to evaluate a borrower s creditworthiness to obtain any type of loan.) In 2009, Equifax acquired IXI. IXI Corporation enhances InterConnect by providing real-time access to financial wealth information received from over 100 major banks, brokerage firms, and annuity providers totaling $10 trillion (USD), an estimated 42% of total investable US household assets and deposits. Additionally, Equifax can provide full property and valuation data on more than 75 million US homes. The combination of Equifax consumer credit records, income records, and IXI financial wealth information improves the Equifax real-time next-best-actions for product targeting of offers and risk management decisions for both new bank prospects and existing customers. Equifax brands this combined solution of financial assets as the Equifax 360 Consumer View illustrated in Exhibit 3. Exhibit 3 Equifax Instant Decisioning: 360 Consumer View Source: Equifax 6

Experian Instant Decisioning Experian organizes its creditor support under the umbrella of the Decision Analytics platform and Decisioning as a Service is organized around the life cycle of an account. Within each platform, there are business focus areas addressing originations, debt management, fraud management, customer management, and strategy management. A combination of shared and specific products and consulting services support each of the five functions. With these solutions, Experian provides the end user the option to select to install these products on site or rely on Experian to host and integrate with the end users proprietary in-house systems. Instant Decisioning The instant decisioning process that supports new account, new bank prospects, or cross-selling of existing bank customers is channel agnostic. Real-time decisioning at the point of sale and/or via the internet is facilitated through Experian s Attribute Toolbox. Attribute Toolbox enables the user to integrate credit and noncredit data either from Experian or from other internal or external data sources available to the end user. An example includes non-homeowner proprietary databases such as Experian s RentBureau. Attribute Toolbox executes real-time data parsing, combines consumer attributes, and then normalizes the data allowing the end user to interact with all three major credit bureaus (Equifax, Experian, and TransUnion). One of the challenges of instant decisioning is income verification and compliance with the Credit Card Accountability Responsibility and Disclosure Act of 2009 or Credit CARD Act. This requires the credit card issuer to ensure that the prospect s income is adequate to manage the credit line assigned. Experian handles this problem with their product Income Insight an income estimation tool that relies on tax return data. Income Insight is Fair Credit Reporting Act (FCRA) compliant and compatible with all three credit bureaus. Competitors that do not offer a similar solution must request the information from the prospect. System and Product Design Experian s Marketswitch Optimization is a patented mathematical decision software that helps determine the best product offer to extend through instant decisioning. If the prospect does not make a specific product card type request, Marketswitch recommends a card design using a mathematical algorithm based on the information from the prospect s application responses and user databases and credit bureau data. Over time, Marketswitch collects and reports on the success and effectiveness of these recommendations. Marketswitch was acquired by Experian in 2004 and operates as a product line within Experian. Exhibit 4 summaries the key functions within each of the Experian modules. 7

Exhibit 4 Experian Provides Solutions for Card Acquisitions and Portfolio Management Source: Experian, TowerGroup FICO Analytic Learning Hub The FICO instant decision solution resides between the credit card issuer acquisition and origination systems. The FICO solution does not replace the issuer s acquisition and origination systems, assuming they are functioning satisfactorily. FICO recognizes this would require extensive time and expense, and its solution enables an issuer to retain these systems, thus completing an installation quicker and less expensively versus having to replace both the acquisition and origination systems. Instant Decisioning At the option of the end issuer, the software can reside on the issuer s computer system or be hosted by FICO. FICO confirmed that most of its application solutions are hosted on the client site. To reduce the time for the new client to use the instant decisioning solution, FICO will host the software until the client is prepared to manage it in-house. The FICO Analytic Learning Hub (ALH) is the integration module that accepts information from both the issuer acquisition and origination systems. The ALH is channel agnostic and can be used for traditional campaign management and instant decisioning through the internet and/or at the point of sale. The FICO process supports new account instant decisioning for new bank card prospects without other bank relationships and/or for cross selling existing bank customers a variety of lending products. When the full Bankcard Growth Solution (including the Analytic Learning Hub, FICO Originations Manager, and FICO Precision Marketing Manager) is installed and integrated, the issuer is able to offer the prospect a card design with features and a credit line that is most likely to 8

be accepted and utilized by the applicant. System Design Within the ALH are three separate elements designed to interact with each other, which are supported by specific FICO product solutions, although using FICO products for these functions is not mandatory. The three modules are Datamart, Analytics, and Decisions. Datamart. Included in the Datamart is a tracking process that provides business information about the performance of all the offers and decisions. Within the Datamart is a simulation process that simulates or forecasts outcomes based on defined economic and risk parameters. These forecasts become part of the user learning process. The Datamart provides updates based on a changing environment and includes an alarm process that alerts the end user, indentifying variances to expected outcomes. Analytics. The Analytics module houses all the software that drives customer decisioning. These analytics include FICO products and bank proprietary software solutions. FICO products include FICO Economic Impact Service, which predicts the economic effect on consumer risk performance. The module also includes FICO Segmentation Models and Action Effect Models that focus on a variety of behavioral dynamics of a consumer deemed important to predicting future consumer behavior. Combining these analytic tools improves end-user decisions. Decisions. The FICO Decision module is where the optimum offer is determined and referred to the end user acquisition and/or origination system. The Decision module includes a repository of products and offers, a history of channel type, prescreen-of-one information, accept and reject information of prospects, initial credit lines and test and learn experimentation. Decisions are tracked and monitored over time including the output from the issuers accept and reject decisioning process. Information is collected in the Datamart and sent to the Analytics module to update and improve the product offering. This final step completes the feedback loop necessary for continual business improvement. Exhibit 5 is a summary of the FICO Analytic Learning Hub. 9

Exhibit 5 FICO Integrated Bank Card Growth Solution: Components Source: FICO TransUnion Decisioning Solutions The credit card instant decisioning process is one of five applications within the TransUnion enterprise customer life cycle decisioning and continuous learning platform marketed as TransUnion Decisioning Solutions. TransUnion segments its product offerings into two classes with adjusted pricing for each. The two marketed solutions are the Basis Decisioning Solution and the Advanced Decisioning Solution. The Advanced Decisioning Solution suite includes a flexible, data agnostic engine with business rule management capabilities. This structure supports multi-product decision strategies beginning with account acquisitions to cross selling other bank products through to collections. The Basic Decisioning Solution operates on the same platform as the Advanced, but offers fewer user features and is not data agnostic. The end users pay only for the applications they use, which will appeal to the institution with small instant decisioning volumes. Instant Decisioning TransUnion utilizes an application service provider (ASP) business model. The ASP model significantly reduces installation time and cost because of standardization and the gained experience from having successfully completed multiple installations. The company maintains relationships with six of the top ten card issuers, provides 24x7 dedicated customer production teams with redundant backup hot sites in Chicago and Atlanta. Although the processing systems are hosted by TransUnion, an end user accessible management console is available, which allows users to control the decisioning rules stored inside the system. With this interface, the end user can make strategy changes, initiate and manage champion challenger test scenarios, and perform 10

extensive acquisition and portfolio analysis. TransUnion believes the management console and the champion challenger structure gives the company a competitive advantage compared to both hosted and in-house alternative structures. TransUnion provides the end user direct access to the system, which eliminates the requirement to submit updates and changes to the service provider or, in the case of the in-house system internal IT personnel, who must also support multiple clients. With TransUnion s Decisioning Solutions, financial institutions can also cross-sell existing bank customers new credit products. The TransUnion decisioning process is channel agnostic and supports traditional prescreened mailed offers, prescreen-of-one offers to existing customers, and/or non-customer initiated inquiries at the point of sale, over the internet, or any other channel. The TransUnion new account instant decisioning process can accept information from the end user and/or a third party that would be necessary to process bank card prospects who do not have other bank relationships. The engine can also access internal bank systems and files and incorporate proprietary bank data into the decision process. For example, this can include DDA balances or deposit information, bank customer segments, transaction history or any other relevant data. The company supports twice per week, on average, user-initiated criteria changes to the production system and/or champion challenger test scenarios. This schedule enables the end users hands-on timely access to the system to ensure control of the acquisition process. System Design TransUnion segments customers and their business solutions based on customer need and individually tailors each installation. Although customer size is a factor, customer need more appropriately defines the system requirements. TransUnion segments its product offerings into two classes with adjusted pricing for each. The two marketed solutions are the Basis Decisioning Solution and the Advanced Decisioning Solution. The two classes of TransUnion Decisioning Solutions manage instant decisioning in the same way, but only the Advanced Decisioning Solution system allows the end user to easily and independently manage system criteria changes and champion challenger test scenarios. Basic Decisioning Solution. TransUnion s Basic Decisioning solution typically, but not exclusively, targets institutions with low-decisioning volume. The platform is a single bureau solution that relies only on TransUnion credit data. The library includes pre-coded risk assessment rules that can be configured to meet customer-specific requirements. The platform can selectively receive data from alternative sources, but is not completely data agnostic. The benefits of this solution are lower cost, shorter installation time frames, and ease of communicating credit decisions directly to the credit bureau and/or to the end users platform. The limitations of the Basic Decisioning solution are that the system is not data agnostic and there is no end user management console for making strategy changes. The end user must submit changes to system criteria parameters, including champion challenger test scenarios to TransUnion configuration analysts. Smaller issuers tend to prefer this extra control process. Advanced Decisioning Solution. The Advanced Decisioning solution typically, but not exclusively, targets institutions with larger decisioning volume. The platform includes a dataagnostic decision and business rules engine that is highly flexible. The platform is customizable and enables the end user to independently manage acquisition and portfolio adaptive control mechanisms. Exhibit 6 is a summary of the TransUnion solutions. 11

Exhibit 6 TransUnion s Decisioning Platform Architecture Source: TransUnion Prescreen-of-One: Zoot zacquire Zoot markets and brands its customer-initiated instant decisioning solution as zdecision. For creditor initiated offers, including prescreen-of-one, Zoot provides zacquire. Zoot also offers the end user zoriginate for more complex origination processes, which require extensive exception management (i.e., information verification or fraud review). This software provides end users a workflow and manual review screens for exception processing. For deposit gathering, Zoot has an instant decisioning process, zinitiate, which includes capabilities for identity confirmation and fraud protection in addition to cross-sell capabilities. The z solutions are sold separately based on enduser need, but when bundled together, the entire Zoot suite of capabilities supports account life cycle management from account acquisition through portfolio servicing and collections. Instant Decisioning The zacquire instant prescreen decisioning solution utilizes a rules-based engine to analyze applicants demographic and credit attributes and executes real-time product optimization and pricing for profitability, credit line assignment and policy decisioning to mitigate risk. Zoot relies on a combination of end-user provided information and third-party data sources integrated into the decisioning process to ensure, based on the end-user business requirements, profit and risk optimization of the new account decisioning process. The Zoot offering also supports new account instant decisioning for new bank card prospects without other bank relationships. Zoot provides the end user a variety of additional capabilities to facilitate the new account opening process from sales engineering to vendor comparison testing. Zoot offers three important 12

capabilities for new account opening including: a non-production simulation environment that includes test and control capabilities; an offers repository to track offers made to prospects and customers and a data aggregation process that collects consumer information from a vendor network of diverse data and service providers. Zoot believes that every bank customer will have unique business requirements best supported by a diverse network of third-party providers. Included in Zoot s data provider marketplace are alternative, non-credit data sources. This data is integrated into the account approval process to filter prospective customers prior to requesting the credit bureau file. This enables the end user to reduce acquisition costs and avoid prematurely triggering FCRA requirements that can delay the decisioning process. System Design Zoot software enables the end user to make the right product offering to the prospect optimizing not only for risk but also enterprise profitability. The end user has the option, with the exception of zacquire, to host all or some of the Zoot suite of solutions. zacquire supports instant prescreen and FCRA requirements prohibit the lender from viewing the data used for the prescreen without making a firm offer of credit. The prescreen may not include all the information the lender may require to make a credit offer. Therefore, extending a firm offer of credit during the prescreen process without complete credit information about the prospect would not be a prudent business strategy and would expose the lender to excessive risk of credit loss. Zoot resolves this problem by hosting zacquire, which allows the lender to request additional information from the prospect as necessary. More than 90% of Zoot customers choose to have Zoot host their z solutions. When Zoot hosts the solution, the end user can expect lower operating costs because Zoot eliminates end user duplication of vendor connection and maintenance costs and provides the end user easy and timely access to the system to independently control system parameters to complete their business analysis. Exhibit 7 is a summary of the base solution and optional components available within Zoot s zacquire instant prescreen decisioning solution. 13

Exhibit 7 Zoot Leverages Prescreen-of-One to Acquire New Accounts with zacquire Source: Zoot Summary Direct mail produced approximately 55% of new credit card accounts in 2007 and 38% of new accounts in second quarter 2011. This downward trend is expected to continue and real-time acquisition channels including point of sale and the internet will increase their contribution to new credit card accounts. Continued growth of internet offerings requires that banks adjust their credit card acquisition and marketing strategies to ensure they are reaching these potential credit card prospects. To succeed in this fast-paced split-second decisioning business environment requires sophisticated technology solutions. Equifax, Experian, TransUnion, FICO, and Zoot are five leading technology companies that can deliver the technology solutions to support instant decisioning, help manage credit risk, and optimize product selection and credit line. Successfully executing instant decisioning and product placement with the consumer will increase card usage and customer retention and increase credit card profits. 14