Credit Lending
We recently issued our Q4 2014 Experian-Oliver Wyman Market Intelligence Report that covers consumer economic trends and found that overall bankcard delinquencies (60 days past due (DPD) and greater) came in at a low 1.79% for Q4 2014. It is interesting to note the disparity when analyzing delinquency by annual spend level. Those spending $100,000 or more per year on credit cards had the lowest delinquency rate at 0.43%, while those spending $5,000 or less annually had the highest delinquency rate at 3.58%. Percent of balances 60+ DPD delinquent by annual credit card spend level* $100,000+ 0.43% $50,001—$100,000 0.51% $25,001—$50,000 0.75% $10,001—$25,000 1.23% $5,001—$10,000 1.87% <= $5,000 3.58% Overall 1.79% Card issuers can target the right customers with the right offer and drive increased portfolio profitability by using unique tools that provide insight into consumer preferences, income profiles and spend metrics. Find out more on how to discover key steps to developing a profitable bankcard campaign.
By: Scott Rhode This is the third and last of a three-part blog series focused on the residential solar market looking at; 1) the history of solar technology, 2) current trends and financing mechanisms, and finally 3) overcoming market and regulatory challenges with Experian’s help. As we’ve discussed in the two previous blogs, the residential solar industry in the US has experienced tremendous growth and much of that growth is attributed to financing. As the financing offers continue to evolve and mature, there are challenges that the industry faces. The first, and most obvious challenge, is that the Solar Investment Tax Credit is set to expire on December 31st, 2016. (To be clear, the credit is not eliminated on Dec. 31, 2016, it is simply planned to be reduced to 10%) Given the state of affairs in Washington, it is unlikely that the tax credit will get extended. This is unfortunate since this tax credit has been a catalyst for investment in this industry, greatly increasing affordability and adoption from the public. Once this incentive expires, the solar companies will need to acquire capital from more traditional sources (Debt markets, securitization, or other third party financing) to fund their growth since the Tax Equity community may no longer be willing to invest. In addition, the expiration of the credit means that panel manufactures must find ways to reduce the cost of production and that finance and installation companies must lower their customer acquisition cost since they are unsustainable in a post-ITC world. A benefit of moving towards other means of funding is that the sophistication level of pre-screening, scoring, and portfolio management should improve dramatically. Today, the Tax Equity community drives all of the credit strategies and those strategies are actually holding solar companies back because of their simplicity. For example, most of the TE investors require that the customer have a 680 FICO score or better in order to get approval. They do not require a debt to income threshold to be met, nor do they look at other attributes or data points. This overly simplistic approach is meant to keep the TE investor out of difficult conversations of being in the “sub-prime” space; however, it greatly limits growth and it turns away good customers. Additionally, this approach does not consider the “essential use” nature of the product. When a customer becomes seriously delinquent, their panels get disconnected and their costs for energy go up more than the cost of their monthly lease payment. This ensures that, unlike an unsecured loan or credit card, the customer is more likely to pay this obligation since it is actually saving them money. This does not mean that the industry can approve everyone; however, it does mean that, with the right decisioning logic and scorecards, they can go much deeper into the credit pool without taking on huge risks. Another challenge for the industry is the shear rate of growth. There are new players in the market every day and even established firms have a hard time keeping up with the growth. This leaves the individual organization and industry at risk for missing critical compliance steps in their operations. Given that these financial instruments are long term in nature and more consumers are adopting this as a means to get solar, it is only a matter of time before the regulators start to look into the practices and operating processes to ensure that all of the applicable regulations are being followed. The industry, as a whole, needs to ensure that they spend a little money now shoring up their compliance instead of paying a hefty fine later. Finally, what happens at the end of the lease? Many of the large players have taken a conservative approach as to how they price the residual amount at the end of term; however, no one really knows what these assets will be worth in 20 years. While many of the panel manufacturers warrant performance for 25, many panels have a shelf-life of 40 years, so how will consumers and the industry behave? What happens if there is a technological breakthrough in 10 years and those old panels are obsolete? At the moment, the industry’s answer to these questions is to set a very low residual which carries risk. Being too conservative here means that your customer’s payment is higher than it needs to be, pricing yourself out of certain markets where the cost of power is less than 20 cents / kwh. As the lease product continues to mature, more focus and emphasis on residual pricing will need to take place to find the right balance for the Consumer and the finance company. It should be said that while there are risks associated with this industry, all markets and new financing products carry risks. The goal of this particular blog is to highlight some of the larger risks that this industry faces. As these are identified, it is incumbent on the industry and partners of the industry to mitigate these risks so that consumers can continue to realize the power of solar. To close this series, I would be remiss if I didn’t offer up Experian’s Global Consultancy solutions to help address the challenges that the industry faces. Our knowledge of best practices in the financial services industry allows us to help those companies in the solar market grow originations responsibly, meet their regulatory requirements, and manage their long term risks with customers. While we cannot solve the funding issues, we can work with organizations and the tax equity community to educate them on the power of decisioning beyond a simple “one-size fits all” score. In addition, our products and data allow for flexibility and certainty, giving the industry an edge in acquiring new customers in a more efficient and less expensive manner. Finally, we can help provide advice and best practices in decisioning, risk management, and regulatory compliance so that the industry can continue to grow and thrive. All in all, we are advocates for the industry and can bring tremendous expertise and experience to help ensure continued success. Solar Financing – The current and future catalyst behind the booming residential solar market (Part II) Solar Financing — The current and future catalyst behind the booming residential solar market (Part I)
By: Mike Horrocks I was raised in an underbanked home! I have known this for a long time, but it feels great to say it and be proud of it. I was raised in Neola, Utah, a small cattle ranching community of at the time 500 or so people. I don’t recall as a kid ever feeling poor or on the edge financially, in fact it was quite the opposite. When I was a freshman in college I got my own banking accounts and my first major credit card that gave cash back, it all just seemed normal. I recall showing my dad my new found financial life. The concept of getting cash back for purchases was something he wanted in on. He made the call to get his own card and within minutes the representative on the other end of the call asked if I was willing to co-sign for my dad because he did not have a thick enough credit file. At this point of my dad’s life, he had developed and sold a couple of businesses, bought and managed a successful angus cattle ranch - but he had done most of it in cash and so he was “off the grid”. When I co – signed for my dad, it hit me, in terms of the banking system that I was studying at the university, we were an underbanked family! So what are the lessons learned here for a banker today: Underbanked does not equal poor. I never felt poor, the family business was going great, and my dad was always able to meet any obligation or need for the ranch and us kids. Bankers need to know their customers. When my dad did need access to more capital, there was a great banker at Zions Bank that knew my dad and stood by him even though the traditional file was thin. So know your customers by all means (traditional credit, alternative data, etc.) Don’t forget the family. By this I mean the associated products and what they can mean to the overall customer picture and relationship. Know what risks and opportunities are there as you try to optimize the relationship. If you want to read some more, American Banker just published a great set of articles on including consumers and how to retain them - it is worth a quick review. Don’t let great customers like my dad go through your business development net. Attract them, nurture them and build great relationships with them.
By: Scott Rhode This is the second of a three-part blog series focused on the residential solar market looking at; 1) the history of solar technology, 2) current trends and financing mechanisms, and finally 3) overcoming market and regulatory challenges with Experian’s help. Lets discuss the current trends in solar and, more importantly, the mechanisms used to finance solar in the US residential market. As I discussed in the last blog, the growth in this space has been astronomical. To illustrate this growth, there was a recent article in The Washington Post by Matt McFarland, highlighting that solar-related jobs are significantly outpacing the rest of labor market in terms of year over year growth. The article states that since 2010 the number of solar-related jobs has doubled in the US, bring the total number of jobs in this industry to 173,807. While this is still smaller in comparison to other sectors of our economy, it underscores how much growth has occurred in a short amount of time. So what is driving this explosive growth? There are a few factors that should be considered; however, in the residential solar market, financing, is the main catalyst. As you might expect, there are a variety of financial products in the market giving the consumer lots of choices. First, there are traditional loans like home improvement loans, home equity loans, or energy efficiency loans offered by a bank, credit union, or specialty finance company. For homeowners that do not choose to secure their loan against their property, there are a variety of specialty lenders that will offer long-term, unsecured loans that only file a UCC against the panels themselves. For these types of offerings, some specialty lenders will even have special credit plans for the 30% Solar Investment Tax Credit so that the homeowner can have a deferred interest plan with the expectation that once they get the tax credit from the federal government, they will pay off the special plan and all of the deferred interest will be waived. If the customer does not pay in full, the plan rolls to their regular loan plan and the customer has a higher cost of financing. Second, there is a lease product which offers zero to little down and a monthly payment that is less than the savings that the homeowner will experience on their utility bill. Of all the financing options, the lease has been the biggest driver of growth since it offers an inexpensive, no-hassle way to get all the benefits of going solar without breaking the bank. What is unusual to most people that are unfamiliar with this concept is the term of the lease, which is typically 20 years. However, when you consider that most manufacturers warrant their panels for 25 and many have a usable life of 40 years, this term does not seem all that unusual. The benefits of this program look something like this: The homeowner has an average electric utility bill of $350 / month A solar company quotes a customer a savings of $200 / month in the form of a net metering energy credit, so their bill after solar is now $150 / month The lease payment for the installed solar array, metering equipment, and monitoring software is $150 / month The homeowner’s net saving is an average of $50 / month with nothing out of pocket Over the life of the lease, energy prices will increase which will mean more savings over time so long as there are not escalators in the contract that exceed the increase in energy prices The lessor “owns” the equipment and is responsible for maintenance, performance, and insurance With this product comes complexity. Many companies offering this program do not have the cash or the appetite to take on massive debt, so they partner with Tax Equity investors to make this transaction possible. Because of the 30% ITC and accelerated depreciation, this transaction is very favorable for a Tax Equity investor like Google, US Bank, or Bank of America Merrill Lynch. There are a number of structures they can use; however, the Sale-Leaseback structure is the easiest and most efficient way to fund the transaction. While this is not “known” to the end customer, it is important because the Tax Equity Investor effectively owns the asset and has the final say in setting credit policy. This transaction does require that the developer have a stake as well; however, many of the developers go to the debt market for “back leverage” on their stake so that they can reduce the impact to their balance sheet. This complexity carries a cost, as the cost of capital is higher than most traditional loan products from established financial services firms. That said, the fact that the lease allows the customer to monetize the tax credit and accelerated depreciation in the amount financed, balances out the higher costs of capital. In the next blog we will touch more on the challenges this product, in particular, has in the market. Last, but not least, there is another mechanism gaining popularity in the market. This concept is known as community solar. One of the obstacles of the lease and Tax Equity arrangement is that the lease is only available to single family residence homeowners and, if they have multiple homes, only the homeowner’s primary residence. That means that people who rent, own a condo, own a vacation home, or own a small business do not qualify for this type of lease. As a result, community solar has become a great option. With community solar, the panels are put in an ideal location for maximum exposure to the sun and they often produce 10-15% more power than panels on a rooftop. Portions of this solar farm can be sold, rented, or sublet to consumers regardless of their living situation. As the panels produce electricity, that power gets sold to the local utility and the customer gets money from that utility that shows up as a credit on their next bill. In this structure, the customer is not required to put money down in most cases and they are signing up for a specific term. Like a rooftop lease, this structure often has a Tax Equity investor that funds the project. Again, this allows them to take the 30% ITC and accelerated depreciation which, in turn, gets monetized and lowers the costs of construction. In the final installment of this blog series, I will discuss some of the challenges that this market faces as the ITC expiration date approaches and the market becomes more mature. Leasing is driving the market, so if the ITC does not get renewed, the market will need to have a plan in place to find other innovative ways to keep solar affordable so more consumers can realize the benefits of going solar. Solar Financing — The current and future catalyst behind the booming residential solar market (Part 1)
Customer experience strategies for success Sometimes it’s easier to describe something as the opposite of something else. Being “anti-” something can communicate something meaningful. Cultural movements in the past have taken on these monikers: consider the “anti-establishment” or “anti-war” movements. We all need effective anti-virus protection. And there are loads of skin products marketed as “anti-aging”, “anti-wrinkle”, or “anti-blemish.” But when you think about a vision for the customer experience that your company aspires to deliver, this approach of the “anti-X” falls flat. Would you want to aspire to basically “not stink?” Would that inspire you and your team to run through walls to deliver on that grand aspiration? Would it motivate customers to stick with you, buy more of what you sell, and tell others about you? I think not…But it sure seems like many out there indeed do aspire to “not stink.” Sure, there are great companies out there who have a set a high standard for customer experience, placing it at the center of their strategies and their success. Some, like Zappos, started that way from the beginning. Others, like The Ritz-Carlton, realized that they had lost their way and made the commitment to do the hard work of reaching and sustaining excellence. On the other hand, there are hundreds of firms who have a weak commitment to or even understanding of the importance of customer experience to their strategy and performance. Their leaders may give lip service or just pay attention for a few days or hours following the release of reports from leading analysts and firms. They may have posters and slogans that talk about putting the customer first or similar platitudes. These companies probably even have talented and passionate professionals working tirelessly to improve the customer experience in spite of the fact that nobody seems to care much. What these firms lack is a clear customer experience strategy. As nature abhors a vacuum, customers and employees are free to infer or just guess at it. Focusing on customer experience only when a report comes out – and paying special attention only when weak results put the firm near the bottom of the ranking leads people to conclude that all that really matters is to “not stink.” In other words, don’t stand out for being bad…but don’t worry much about being good as it is not important to the company’s strategy or results. I think that this “don’t stink” implicit strategy helps explain a fascinating insight from a Forrester survey in 2013: “80% of executives believe their company is delivering a superior customer experience, yet in 2013 only 8% of companies surveyed received a top grade from their customers.” Many leaders simply have not invested the energy and commitment necessary to define a real customer experience vision that reflects a deep understanding of the role that it plays in the company’s strategy. Beyond setting that vision, there is a big and sustained commitment required to deliver on the vision, measure results, and continuously adjust as customer needs evolve. Like all journeys, a great customer experience starts with one step. Establishing a customer experience strategy is the first one – and “don’t stink” simply stinks as a strategy. Download our recent perspective paper to learn how exceptional customer experience can give companies the competitive edge they need in a market where price, products and services can no longer be a differentiator.
This is the third post in a three-part series. Experian® is not a doctor. We don’t even play one on TV. However, because of our unique business model and experience with a large number of data providers, we do know data governance. It is a part of our corporate DNA. Our experiences across our many client relationships give us unique insight into client needs and appropriate best practices. Note the qualifier — appropriate. Just as every patient is different in his or her genetic predispositions and lifestyle influences, every institution is somewhat unique and does not have a similar business model or history. Nor does every institution have the same issues with data governance. Some institutions have stabile growth in a defined footprint and a history of conservative audit procedures. Others have grown quickly through aggressive acquisition marketing plans and unique channels and via institution acquisition/merger, leading to multiple receivable systems and data acquisition and retention platforms. Experian has provided valuable services to both environments many times throughout the years. As the regulatory landscape has evolved, lenders/service providers demand a higher level of hands-on experience and regulatory-facing credibility. Most recently, lenders have required assistance on the issues driven by mandates coming from the Comprehensive Capital Analysis and Review (CCAR), Office of the Comptroller of the Currency (OCC) and the Consumer Financial Protection Bureau (CFPB) bulletins and guidelines. Lenders are best served to begin their internal review of their data governance controls with a detailed individual attribute audit and documentation of findings. We have seen these reviews covering fewer than 200 attributes to as many as more than 1,000 attributes. Again, the lender/provider size, analytic sophistication and legacy growth and IT issues will influence this scope. The source and definition of the attribute and any calculation routines should be fully documented. The life cycle stage of attribute acquisition and usage also is identified, and the fair lending implication regarding the use of the attribute across the life cycle needs to be considered and documented. As part of this comprehensive documentation, variances in intended definition and subsequent design and deployment are to be identified and corrective action guidance must be considered and documented for follow-up. Simultaneously, an assessment of the current risk governance policies, processes and documentation typically is undertaken. A third party frequently is leveraged in this review to ensure an objective perspective is maintained. This initiative usually is a series of exploratory reviews and a process and procedures assessment with the appropriate management team, risk teams, attribute design and development personnel, and finally business and end-user teams, as necessary. From these interviews and the review of available attribute-level documentation, documents depicting findings and best practices gap analysis are produced to clarify the findings and provide a hierarchy of need to guide the organization’s next steps: A more recent evolution in this data integrity ecosystem is the implication of leveraging a third party to house and manipulate data within client specifications. When data is collected or processed in “the cloud,” consistent data definitions are needed to maintain data integrity and to limit operational costs related to data cleansing and cloud resource consumption. Maintaining the quality of customer personal data is a critical compliance and privacy principle. Another challenge is that of maintaining cloud-stored data in synchronization with on-premises copies of the same data. Delegation to a third party does not discharge the organization from managing risk and compliance or from having to prove compliance to the appropriate authorities. In summary, a lender/service provider must ensure it has developed a rigorous data governance ecosystem for all internal and external processes supporting data acquisition, retention, manipulation and utilization: A secure infrastructure includes both physical and system-level access and control. Systemic audit and reporting are a must for basic compliance standards. If data becomes corrupted, alternative storage, backup or other mechanisms should be available to protect the information. Comprehensive documentation must be developed to reveal the event, the causes and the corrective actions. Data persistence may have multiple meanings. It is imperative that the institution documents the data definition. Changes to the data must be documented and frequently will lead to the creation of a new data attribute meeting the newer definition to ensure that usage in models and analytics is communicated clearly. Issues of data persistence also include making backups and maintaining multiple archive copies. Periodic audits must validate that data and usage conform to relevant laws, regulations, standards and industry best practices. Full audit details, files used and reports generated must be maintained for inspection. Periodic reporting of audit results up to the board level is recommended. Documentation of action plans and follow-up results is necessary to disclose implementation of adequate controls. In the event of lost or stolen data, appropriate response plans and escalation paths should be in place for critical incidents. Throughout this blog series, we have discussed the issues of risk and benefits from an institution’s data governance ecosystem. The external demands show no sign of abating. The regulators are not looking for areas to reduce their oversight. The institutional benefits of an effective data governance program are significant. Discover how a proven partner with rich experience in data governance, such as Experian, can provide the support your company needs to ensure a rigorous data governance ecosystem. Do more than comply. Succeed with an effective data governance program.
By: Scott Rhode This is the first of a three-part blog series focused on the residential solar market looking at; 1) the history of solar technology, 2) current trends and financing mechanisms, and finally 3) overcoming market and regulatory challenges with Experian’s help. Most people tend to think of the solar industry as a recent, and not so stable, market phenomenon. However, the residential solar industry is still gaining traction as component prices come down. For more than two thousand years man has been trying to harness the sun’s energy and power. In fact, architects and city planners in early civilizations would also look to the sun when designing dwellings, buildings and bathhouses, so that they could capture as much of the sun’s energy to heat their homes and the water they used. Our ancestors knew that the sun, unlike any other resource, was a consistent and powerful source of energy that fueled life. Fast forward to the late 19th and early 20th centuries where renowned scientists in the US and across the globe started looking at ways to harness the sun’s energy to generate electricity, and the birth of the modern solar industry was here. By the mid 1950’s, US architects were trying to incorporate the power of the sun in their designs so that heating the water and commercial office space could be done without heavy use of electricity. One architect, Frank Bridgers, was so successful in using this technology that his building still continues to operate this way today. In addition, many companies like Bell Labs, Western Electric, and the US Signal Corp Laboratories started to develop photovoltaic cells that power the panels that we use today. These early cells, operating at 7-11% efficiency (This is the measurement of how efficient the cell is at converting solar radiation to electricity), gave life to solar powered electronics, lights, and panels used by the burgeoning space program to power satellites orbiting earth. In reaction to the growing possibilities and the broader oil crisis in the late 1970’s, the US Department of Energy created what would later become the National Renewable Energy Laboratory enabling the federal government to use its resources to help grow the industry and foster technological innovations to improve cell efficiency. Throughout the 1980’s, 90’s, and early 2000’s, the industry starts to take root with utilities and mainstream energy providers as they look to the sun to diversify their energy sources away from coal, gas, and oil. This adoption leads to a push by the US Department of Energy to have “One million Solar Roofs” in the US so that individual home owners can realize the benefits of going solar. Soon, retailers like Home Depot started selling panels in their stores for customers to install themselves for “off-grid” properties or other uses. While this allowed a homeowner to use solar, costs are still so high that solar is only available to a select few and, as a result, not competitive with traditional methods of producing energy. In order to incent homeowners to invest in solar, the US Government created the Solar Investment Tax Credit in 2005. This tax credit allows homeowners to get a credit of 30% of the fair market value of the system they have installed on their roof. As a result of this and local incentives from municipalities and utility companies, residential solar installations have grown 1,600% over the last ten years, representing an annual CAGR of 76%. In fact, through the first half of 2014, 53% of all new electric capacity is from solar, making it the fastest growing source of energy in the market.* Since this tax incentive is unlikely to be renewed after it expires, the industry set out to solve the cost issue in order to manufacture and produce highly efficient and durable panels for individual Consumers that could bring the costs to produce down to parity with traditional power. In this endeavor, the manufactures have poured significant resources into research and development, pushed their manufacturing processes towards ever higher levels of efficiency, and used the latest technology to significantly reduce costs to produce panels that now range from 18-23% cell efficiency. Since 2010 the average price of a panel has come down by 64% and the industry continues to push to find ways to make solar more affordable. This is especially important given that the tax credit expires on December 31st of 2016. In the next blog in the series, I will talk about solar financing and the current industry trends. Financing, as you would expect, has been and will continue to be critical to growth in this space so that more homeowners can afford to move to solar as their primary energy source. As such, the methods used to acquire, originate, and serve these customers must evolve in order for the industry to sustain the impressive growth rates mentioned earlier in this blog. Solar Financing – The current and future catalyst behind the booming residential solar market (Part II)
By: Mike Horrocks Managing your portfolio can be a long and arduous process that ties up your internal resources but without it, there’s an increase of additional risk and potential losses. The key is to use loan automation to pull together data in a meaningful manner and go from a reactive to proactive process that can: Address the overall risks and opportunities within your loan portfolio Get a complete view of the credit and operational risk associated with a credit relationship or portfolio segment Monitor and track actionable steps by leveraging both internal and external data Watch how to avoid the 5 most common mistakes in loan portfolio management to help you reduce overall risk, but also identify cross sell and upsell opportunities. With a more automated process your lending staff can focus on bringing in new business rather than reacting to delinquencies and following up on credit issues.
The availability and opportunities for customers to conduct business through mobile devices continues to multiply, challenging organizations to protect customers without impacting their experience. Our infographic highlights five challenges of customer authentication that businesses face and what customers feel in an increasingly mobile world. Personally Identifiable Information (PII) is more available, but less reliable, than ever before. 35% performance improvement using models built with attributes beyond simple identity element validation. More transactions are taking place in an omnichannel environment. 36% of organizations interact with their customer in five or more channels. Diversity of devices and technology complicates customer authentication. 85% of consumers use online or mobile to conduct business. 17% of consumers reported having an online transaction declined when device information was not available. Increased online transactions have multiplied fraud opportunities, resulting in more false positives. Of those surveyed who have had Card Not Present (CNP) transactions declined: 31% blame the merchant 38% blame the credit card network 83% felt embarassed or angry Stringent requirements change the way organizations interact with customers. 80% expect the focus on managing regulatory risk to be more than it is today Download our fraud prevention perspective paper to gain more insight on how you can prepare your business.
There are two sides to every coin and in banking the question is often to you want to chase the depositor of that coin, or lend it out? Well the Federal Reserve’s decision to hold interest rates at record lows since the economic downturn gave the banks’ in the United States loan portfolios a nice boost from 2010-2011, but the subsequent actions and banking environment resulted in deposit growth outpacing loans – leading to a marked reduction in loan-to-deposit ratios across banks since 2011. In fact currently there is almost $1.30 in deposits for every loan out there today. This, in turn, has manifested itself as a reduction in net interest margins for all U.S. banks over the last three years – a situation unlikely to improve until the Fed hikes interest rates. Additionally, the banks’ have found that while they are now holding on to more of these deposits that additional regulations in the form of the CFPB looking to evaluate account origination processes, Basel III Liquidity concerns, CCAR and CIP & KYP have all made the burden of holding these deposits more costly. In fact the CFPB suggests four items they believe will improve financial institution’s checking account screening policies and practices: Increase the accuracy of data used from CRA’s Identify how institutions can incorporate risk screening tools while not excluding potential accountholders unnecessarily Ensure consumers are aware and notified of information used to decision the account opening process Ensure consumers are informed of what account options exist and how they access products that align with their individual needs Lastly, to add to this already challenging environment, technology has switched the channel of choice to your smartphone and has introduced a barrage of risks associated with identity authentication – as well as operational opportunities. As leaders in retail banking and in addressing the needs of your customers, I would like to extend an invitation on behalf of Experian for you to participate in our latest survey on the changing landscape of DDA opportunities. How are regulations changing your product set, what role does mobile play now and in the future, and what are your top priorities for 2015 and beyond? These are just a few of the insights we would like to gain from experts such as you. To access our survey, please click here. Our brief survey should take no more than seven minutes to complete and your insights will be highly valued as we look to better support you and your organization’s demand product needs. Our survey period will close in three weeks, so please respond now. As a sign of our appreciation for your insights, we will send all participants an anonymous aggregation of the responses so that you can see how others view the retail banking marketplace. So take advantage of this chance to learn from your peers and participate in this industry study and don’t leave your strategy to a flip of a coin.
“Building a better mousetrap merely results in smarter mice” – Charles Darwin Credit card issuers in general have a good handle on fraud. They manage it under 10bps (i.e. losses of $0.10 or less per $100 of transactions) on transactions made with a \"dumb\" plastic card lacking any additional context. So Issuers wishing for Apple Pay fraud to fall between 2-3bps was not totally out of character, considering the protections in place by Apple and Networks to keep fraud away – including issuer support during provisioning, NFC, Tokenization, a tamper proof Secure Element and TouchID. But fraud seems to have followed a different trajectory here. About a month post-launch, it seems like fraud has come to Apple Pay. (in one case – as high as 600bps for an issuer that I cannot name). Though what follows was written in the context of Apple Pay, much of it translates to any other competitor – irrespective of origin, scale, intent, or patron saint. Apple Pay and the Yellow Path: All Apple Pay participating card issuers are required to build a “Yellow Path” for when card provisioning in to Apple Pay requires additional bank verification. Implementation of the “Yellow Path” and corresponding customer experience has varied per Card Issuer. Today, depending on your card issuer – you could expect much variance – such as being directed to their call center, being asked to authenticate via the bank’s mobile app, or an entirely other 2FA verification. As one can expect – each has varying levels of success and friction – with just a couple of banks opting to authenticate via their mobile apps, that would have provided a far easier and customer friendly provisioning experience. Where as, those that opted for call center verification traded efficiency for friction and by most reports – the corresponding experience has been subpar. In fact initially “Yellow Path” was marked optional for card issuers by Apple – which meant that only a couple of Issuers directed much focus at it. Apple reversed its decision and made it mandatory less than a month before launch – which led to issuers scrambling to build and provide this support. Why any bank would consider this optional is beyond me. Either way, Card issuer implementations of the Apple Pay Yellow Path have proved to be inadequate – as I am willing to bet that most of the fraud in Apple Pay came by stolen identities. For all the paranoia around elevating your phone to be the container for all your credit cards – fraud in Apple Pay has assumed more traditional and unsophisticated ways. No, iPhones weren’t stolen and then used for unauthorized purchases, TouchID was not compromised, Credentials weren’t ripped out of Apple’s tamper proof secure element – nor the much feared but rarely attempted MITM attacks(capture and relay an NFC transmission at a different terminal). Instead fraudsters bought stolen consumer identities complete with credit card information, and convinced both software and manual checks that they were indeed a legitimate customer. Fraud on Apple Pay is somewhat unique – as the Pay setup is one of the first things one would do upon getting their iPhone 6. At which point – the device will have little to no background or context with the bank. Further, the customer most likely haven’t had the time to install the bank app or login. It is no wonder then that a number of banks defaulted to “Call our call center” as the default Yellow path. In an earlier post on ISIS (Softcard) I did write how the vast retail network coupled with visibility in to customer identity positioned Carriers as a trusted partner for banks to do secure provisioning. But ISIS had other (yet unrealized) aspirations. For all the focus in protecting transactions and plastic – for e.g. via EMV and Tokenization – issuance and provisioning remains the soft underbelly – under protected and easily compromised. And this should concern all – because the strongest chain is only as good as its weakest link – and those with malice are almost always the first to find it. Fraud in Apple Pay will in time, come to be managed – but the fact that easily available PII can waylay best in class protection should give us all pause. Make sure to download our fraud prevention whitepaper to gain more insight on how you can prepare your business. This post originally appeared here.
41st Parameter, a part of Experian, surveyed 250 marketers to understand the relationship between omnichannel retailing, fraud prevention and the holiday shopping season. The findings show that few marketers understand the full benefit of fraud-prevention systems on their activities as 60% of marketers were unsure of the cost of fraud to their organization. The survey also indicated that 40% of marketers said their organization had been targeted by hackers or cybercriminals. Download the Holiday Marketing Fraud Survey: http://snip.ly/JoyF With holiday shopping in full stride, 35% of businesses said they planned to increase their digital spend for the 2014 holiday season. Furthermore, Experian Marketing Services reported that during 2014, 80%t of marketers planned on running cross-channel marketing campaigns. As marketers integrate more channels into their campaigns, new challenges emerge for fraud-risk managers who face continuous pressure to adopt new approaches. Here are three steps to help marketers and risk managers maintain a frictionless experience for customers: Marketers should communicate their plans early to the fraud-risk team, especially if they are planning to target a new or unexpected audience. Making this part of the process will reduce the chances that risk management will stop or inhibit customers. Ensure that marketers understand what the risk-management department is doing with respect to fraud detection. Chances are risk managers are waiting to tell you. Marketers shouldn’t assume that fraud won’t affect their business and talk to their risk-management division to learn how much fraud truly costs their company. Then they can understand what they need to do to make sure that their marketing efforts are not thwarted. “Marketers spend a great deal of time and money bringing in new customers and increasing sales, especially this time of year, and in too many cases, those efforts are negated in the name of fraud prevention,” said David Britton, vice president of industry solutions, 41st Parameter. “Marketers can help an organization’s bottom line by working with their fraud-risk department to prevent bad transactions from occurring while maintaining a seamless customer experience. Reducing fraud is important and protecting the customer experience is a necessity.” Few marketers understand the resulting impact of declined transactions because of suspected fraud and this is even more pronounced among small businesses, with 70% saying they were unsure of fraud’s impact. Fifty percent of mid-sized business marketers and 67% of large-enterprise marketers were unsure of the impact of fraud as well An uncoordinated approach to new customer acquisition can result in lost revenue affecting the entire organization. For example, the industry average for card-not-present declines is 15%. However, one to three percent of those declined transactions turn out to be valid transactions, equating to $1.2 billion in lost revenue annually. Wrongfully declined transactions can be costly as the growth of cross-channel marketing increases and a push towards omnichannel retailing pressures marketers to find new customers. “Many businesses loosen their fraud detection measures during high peak time because they don’t have the tools to review potentially risky orders manually during the higher-volume holiday shopping period,” said Britton. “Criminals look to capitalize on this and exploit these gaps in any way possible, taking an omnifraud approach to maximizing their chances of success. Striking the right balance between sales enablement and fraud prevention is the key to maximizing growth for any business at all times of the year.” Download Experian’s fraud prevention report to learn more about how businesses can address these new marketing challenges.
Opening a new consumer checking account in the 21st century should be simple and easy to understand as a customer right? Unfortunately, not all banks have 21st century systems or processes reflecting the fact that negotiable order of withdrawal (NOW) accounts, or checking accounts, were introduced decades ago within financial institutions and often required the consumer to be in person to open the account. A lot has changed and consumers demand simpler and transparent account opening processes with product choices that match their needs at a price that they’re willing to pay. Financial institutions that leverage modernized technology capabilities and relevant decision information have the best chance to deliver consumer friendly experiences that meet consumer expectations. It is obvious to consumers when we in the financial services industry get it right and when we don’t. The process to open a checking account should be easily understood by consumers and provide them with appropriate product choices that aren’t “one size fits all”. Banks with more advanced core-banking systems incorporating relevant and compliant decision data and transparent consumer friendly approval processes have a huge opportunity to differentiate themselves positively from competitors. The reality is that banking deposit management organizations throughout the United States continue to evolve check screening strategies, technology and processes. This is done in an effort to keep up with evolving regulatory expectations from the consumer advocacy regulatory bodies such as the Consumer Financial Protection Bureau (CFPB) and designed to improve transparency of checking account screening for new accounts for an increased number of consumers. The CFPB advocates that financial institutions adopt new checking account decision processes and procedures that maintain sound management practices related to mitigating fraud and risk expense while improving consumer transparency and increasing access to basic consumer financial instruments. Bank shareholders demand that these accounts be extended to consumers profitably. The CFPB recognizes that checking accounts are a basic financial product used by almost all consumers, but has expressed concerns that the checking account screening processes may prevent access to some consumers and may be too opaque with respect to the reasons why the consumer may be denied an account. The gap between the expectations of the CFPB, shareholders and bank deposit management organization’s current products and procedures are not as wide as they may seem. The solution to closing the gap includes deploying a more holistic approach to checking account screening processes utilizing 21st century technology and decision capabilities. Core banking technology and checking products developed decades ago leave banks struggling to enact much needed improvements for consumers. The CFPB recognizes that many financial institutions rely on reports used for checking account screening that are provided by specialty consumer reporting agencies (CRAs) to decision approval for new customers. CRAs specialize in checking account screening and provide financial institutions with consumer information that is helpful in determining if a consumer should be approved or not. Information such as the consumer’s check writing and account history such as closed accounts or bounced checks are important factors in determining eligibility for the new account. Financial institutions are also allowed to screen consumers to assess if they may be a credit risk when deciding whether to open a consumer checking account because many consumers opt-in for overdraft functionality attached to the checking account. Richard Cordray, the CFPB Director, clarified the regulatory agency’s position as to how consumers are treated in checking account screening processes within his prepared remarks at a forum on this topic in October 2014. “The Consumer Bureau has three areas of concern. First, we are concerned about the information accuracy of these reports. Second, we are concerned about people’s ability to access these reports and dispute any incorrect information they may find. Third, we are concerned about the ways in which these reports are being used.” The CFPB suggests four items they believe will improve financial institution’s checking account screening policies and practices: Increase the accuracy of data used from CRA’s Identify how institutions can incorporate risk screening tools while not excluding potential accountholders unnecessarily Ensure consumers are aware and notified of information used to decision the account opening process Ensure consumers are informed of what account options exist and how they access products that align with their individual needs Implementing these steps shouldn’t be too difficult to accomplish for deposit management organizations as long as they are fully leveraging software such as Experian’s PowerCurve customized for deposit account origination, relevant decision information such as Experian’s Precise ID Platform and Vantage Score 3.0 combined with consumer product offerings developed within the bank and offered in an environment that is real-time where possible and considers the consumer’s needs. Enhancing checking account screening procedures by taking into account consumer’s life-stage, affordability considerations, unique risk profile and financial needs will satisfy expectations of the consumers, regulators and the financial institution shareholders. Financial institutions that use technology and data wisely can reduce expenses for their organizations by efficiently managing fraud, risk and operating costs within the checking account screening process while also delighting consumers. Regulatory agencies are often delighted when consumers are happy. Shareholders are delighted when regulators and consumers are happy. Reengineering checking account opening processes for the modern age results in a win-win-win for consumers, regulators and financial institutions. Discover how an Experian Global Consultant can help you with your banking deposit management needs.
Not long ago, I spoke at the eSign Records conference in NYC. During Q&A, someone asked a question that comes up often: What is the future of knowledge-based authentication (KBA)? It is no secret that there are people in the industry who believe the usefulness of KBA has run its course; however, I have to respectfully disagree. Industry guidance such as the FFIEC Guidance of Authentication in an Internet Banking Environment is a solid foundational direction that calls out the need for institutions to move beyond simple device to more complex device intelligence and more complex out-of-wallet identity verification procedures. Institutions across all markets, both private and public sectors, should be exploring all available services and technologies in an effort to reduce reliance on one or only a few methods of authentication and identity management. Particularly, again, assuming that the one method an institution may rely on could be greatly weakened or without value if subject to mass compromise. KBA continues to be a valuable component in a layered authentication strategy as it effectively reduces both false positives and false negatives in the fast majority of authentication processes, leaving improved customer experience and better use of limited resources to treat true fraud risk. Experian has been hosting the Future of Fraud and Identity events discussing current fraud and authentication trends aimed at helping the industry. Make sure to download our fraud prevention protect whitepaper to gain more insight on regulations affecting financial institutions and how you can prepare your business.
By: John Robertson Capital is the life-blood of financial institutions and has become more readily scrutinized since the global credit crisis. How one manages their capital is primarily driven by how well one manages their risk. The use of economic capital in measuring profitability enhances risk management efforts by providing a common indicator for risk. It provides pricing metrics such as RAROC (risk adjusted return on capital) and economic value added which include expected and unexpected losses consequently broadening the evaluation of the adequacy of capital in relation to the bank\'s overall risk profile. The first accounts of economic capital date back to the ancient Phoenicians, who took rudimentary tallies of frequency and severity of illnesses among rural farmers to gain an intuition of expected losses in productivity. These calculations were advanced by correlations with predictions of climate change, political outbreak, and birth rate change. The primary value of economic capital is its application to decision-making and overall risk management. Economic capital is a measure of risk, not of capital held. It represents the amount of money which is needed to secure the survival in a worst case scenario; it is a buffer against expected shocks in market values. Economic capital measures risk using economic realities rather than accounting and regulatory rules, which can be misleading. The concept of economic capital differs from regulatory capital in the sense that regulatory capital is the mandatory capital the regulators require to be maintained while economic capital is the best estimate of required capital that financial institutions use internally to manage their own risk and to allocate the cost of maintaining regulatory capital among different units within the organization. The allocation of economic capital to support credit risk begins with similar inputs to derive expected losses but considers other factors to determine unexpected losses, such as credit concentrations and default correlations among borrowers. Economic capital credit risk modeling measures the incremental risk that a transaction adds to a portfolio rather than the absolute level of risk associated with an individual transaction. In a previous blog I restated a phrase I had heard long ago; “Margins will narrow forever”. How well you manage your capital will help you extend “forever”. Has your institution started using these types of risk measures? The Phoenicians did. Learn more about our credit risk solutions.
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