AUGUST 2004

New Scoring Solutions

At the end of July, Fair Isaac Corporation unveiled an extension of its FICO credit score product to cover "historically credit-underserved U.S. customers." This segment of the U.S. population typically has limited credit information on file and includes young adults, those with lower incomes, recent immigrants, and women recently widowed or divorced. Estimates put the number of consumers without a credit score at approximately 50 million. Fair Isaac hopes to generate scores for 50 to 60 percent of this emerging market.

The company set up a subsidiary, Fair Isaac Credit Services, Inc., to generate and deliver the new score. Equifax, Experian, and TransUnion furnish the data that produce the traditional FICO score. However, the data needed to generate the new score are not collected by the three major credit bureaus. Fair Isaac Credit Services will gather six or seven classes of "...payment performance data on financial activities such as deposit accounts, pay day loans, and product purchase payment plans" from "non-traditional data sources" numbering in the tens of thousands of small businesses. Craig Dillon, vice president of scoring solutions for Fair Isaac Corporation told the American Banker that "[p]art of the challenge of building a new scoring product is making sure there's data available upon which to build the score. Even if the data [do] not exist in a convenient place for us, we're now of a sufficient size to make a market for that data ourselves."

While the new FICO score will range from 150 to 950 and "should show a somewhat lower distribution curve than a typical FICO score," Dillon added that the new score should not be considered a subprime product and will serve "...a very wide and disjointed population."

In efforts to reach consumers without credit histories, lenders are increasingly using demographic data such as ZIP codes to identify prospects for credit solicitations. Invitation-to-apply (ITA) offers are the product of choice for marketing to those with limited credit experience. In comparison to preapproved offers, ITAs are cheaper, produce a higher response rate, and generate higher revenue producing customers. ITAs also differ from preapproved offers and applications in that they "...rely on marketing data rather than credit information..." and therefore are not subject to the federal regulations that govern preapproved offers and applications. Fair Isaac "...expects [ITAs] to grow from 10% to nearly 30% of credit solicitations, or 1.5 billion offers, over the next 18 months..."

There is room for improvement to the invitation-to-apply product, however. According to Fair Isaac's director of analytic scoring products, Michael Blix, "the historical problem with invitations to apply has been that the people most likely to respond are also the ones most likely to be turned down." Several firms offer products to assist lenders in addressing this adverse selection problem. In late June, Fair Isaac introduced the Qualify marketing score. Using "traditional and non-traditional data sources," Blix described Qualify as "...an analytic tool that will help lenders suppress both non-responders and unlikely approvals" by generating a delinquency-adjusted response score and a delinquency suppression score. In a research simulation, Fair Isaac showed that "...the Qualify score can improve booking rate by 20%, improve booked portfolio quality by 15%, reduce mailing and underwriting costs, and increase the lifetime value of the booked portfolio by 40%." Later this year, Acxiom Corporation will introduce a product called Ranking Invitation-to-Apply Approvals (RITAA) that uses demographic and marketing information such as ZIP codes and buying patterns to screen prospects for invitational campaigns. Experian, Inc.'s VeriScore product has been on the market for five years and helps companies to "target emerging customers" (those with little or no credit history) and to identify those most eligible for offers and most likely to respond to offers. Predictive models based on data from non-traditional sources are the latest tools that lenders are using to reach more potential borrowers. Marc Fanelli, Experian's vice president for customer insights, told the American Banker that "[w]hen market conditions are such that people aren't being terribly responsive to preapproval, ITA can hit parts of the market that you're missing."