Digital Strategies Revolutionizing Collections

Blog author Daniel Melo discusses how digital strategies are revolutionizing collections in a new article for InsideARM. Here's an excerpt:

It’s fair to say that consumers don’t like dealing with collections agents. That’s not to say that most of them don’t or won’t pay their bills, but rather that they simply don’t like getting the collection calls.

Providing the means for customers to get up to date without dealing with an agent can be far more effective than traditional methods in terms of both collection rates and costs. Being able to pay over the Internet, through a mobile app, or via text message are very important ways to enable customers to manage their payment plans, especially for customers who are embarrassed and don’t want to speak to agents.

Today, however, very few lenders offer digital solutions that enable their customers to manage their payments via alternate channels such as mobile payments. But digital strategies can dramatically improve collections performance. While providing a more personal channel that gives customers more control, an integrated digital strategy delivers significantly better results, including reductions in call center volume, faster customer response, increases in collection rates, higher customer satisfaction, and lower costs.

Read the full InsideARM article, "Digital Strategies Revolutionizing Collections."

Balancing risk and growth in APAC

I've been blogging about FICO’s most recent quarterly survey of U.S. bank risk professionals, which included questions about global issues that could put pressure on the U.S. economic recovery. In my last post, I highlighted a noteworthy finding from respondents about China's economic growth as it relates to the future influence of U.S. consumers.

Over 72% felt that the global influence of Chinese consumers has either overtaken that of U.S. consumers or will do so within 5-10 years.   

Interesting, but perhaps not terribly surprising. One hears and reads daily about China’s rapidly expanding consumer credit industry, infrastructure development, and visible role in major political and economic discussions. China, the confident, fast-emerging global powerhouse.

Yet, it marches forward with prudent caution that often goes unmentioned.

I recently returned from Asia, where FICO hosted a gathering of 30+ senior risk officers from banks in China and other Asia Pacific countries. They are carefully watching where world economic events are headed. The theme of uncertainty prevails, as it does in boardrooms in more troubled regions like the U.S. and Europe.

But it’s not a hand-wringing, helpless sense of uncertainty. They’re actively working to understand two critical things: 1) growing indebtedness, particularly understanding any one consumer’s situation, and 2) consumer resilience to what might be coming, and how to estimate the impact of various economic situations on their lending policies.

The good news is that Chinese banks, and many others in Asia Pacific, are still focused on growth. However, growing concerns about the consumer make the path to growth more challenging. In the depths of the financial crisis, banks in many countries stuck by an easy credit policy – just say no. However, if you want more growth, more subtlety is required.

We heard many of the region’s banks express an ardent desire to try to understand the complete customer.

A better understanding of existing customers goes right to the heart of the indebtedness question. Full-service retail banks have a sort of advantage if they can effectively interpret the information they get from both card and deposit-based products. This is especially important in a region like Asia Pacific, where there is a lack of reliable central data or credit bureau.

In more advanced countries, we have a growing emphasis on formalizing the impact of macroeconomic variables on credit risk. This goes to the heart of the Basel capital calculations and problem of pro-cyclicality that many say was exacerbated by Basel II, but it’s also relevant for day-to-day lending. We have been working with a major Korean credit card lender to use this approach in helping them refine limit and pricing policies based on different assumptions on the Korean economy. We are also helping them understand how a given consumer will react to a particular price or limit. Modeling that action and that effect goes to the heart of the subtlety that APAC risk officers were talking about. The Korean lender expects to see an increase of $4 per customer and about $30 million more in revenue. So done right, there are still opportunities to find ways to balance prudent risk policies and growth.

So does this mean banks in Asia Pacific will be more profitable than their peers around the world?

It’s a simple question with a complicated answer. APAC banks understand the need to adapt faster and smarter. They’re generally not encumbered by legacy systems and decades-old culture and habits. China and other growing countries are in the midst of change – they get that change is now the new normal.

And more gratifyingly, they get that analytics play a critical role in helping banks determine the healthiest consumers, how their portfolios will react to new economic stresses and how to comply with regulation profitably. I plan to spend more time there this year, so expect to hear more from me on these issues.

Global concerns impacting U.S. economy

In my last post, I shared the results of our quarterly survey of U.S. bankers that showed serious concerns about delinquencies on student loans, mortgages and credit cards.  In that same survey, we asked about global issues that could put pressure on the U.S. economic recovery.

When asked about the most likely trigger for a possible double dip in the U.S. economy, the Eurozone debt crisis was cited most often (38.8%), just edging out U.S. government policies (38.4%).  Another 19% of bankers were most concerned about the lack of spending and investment by U.S. companies.

However, it’s important to note that nearly 60% of the bankers we polled believe that a U.S. recession in 2012 is unlikely.  So we shouldn’t interpret these results as an indication that your peers are expecting the economy to fall apart this year.  But it is quite interesting to see what worries them.

Another noteworthy survey result dealt with China.  Survey respondents were asked about the economic growth of China as it relates to the future strength of U.S. consumers.  Over 72% of respondents felt that the global influence of Chinese consumers has either overtaken that of U.S. consumers or will do so within 5-10 years.  By contrast, 28% felt that U.S. consumers would continue to wield more influence for another 20 years or longer. (My colleague Dan McConaghy shared an interesting perspective on this issue previously on the blog.)

Whether it’s debt trouble in Europe or economic growth in Asia, there are significant implications for the near-term and long-term strength and health of the U.S. economy.  Without trying to preach to the choir, I think these survey results explain why so many of you and your peers are embracing analytics.  Predictive analytics are vital to making sense of all the risks, challenges and opportunities in our increasingly complex and interconnected global environment.

Fraudsters refocus on retail POS

2011 was transitional year for card and PIN skimming.  High-profile PIN points of compromises at a major US craft store chain and a popular Northern California grocery chain brought our focus back to point-of-sale (POS) terminals at retail locations.   

Previously in 2010, financial institutions struggled with increases in card skimming at their own ATMs as organized criminals in the Northeastern US targeted bank-owned ATMs spanning from Washington, DC to Rhode Island. It seems that with each spring/summer for the last 3-4 years, there has been at least one significant POS compromise that involves the capture of both payment card and PIN.  

 

The chart above shows how PIN point-of-compromise trends have shifted over the past decade. What's causing this shift? 

• Technology is the largest influence of how fraud scams are perpetrated and prevented.  Criminals tend to adopt the usage of new technology very quickly so that exploitable weaknesses can be identified during the early adopter phase.
• Publicity is a huge factor in influencing how long a fraud trend sticks around.  The more the public knows about a fraud scam, the less likely it will be successful in the long term.
• Higher rates of arrest and prosecution activity by law enforcement quickly forces criminals to change up their game plan by adopting new fraud scams.
• Last but not least, fraud prevention tools, such as FICO® Falcon Fraud Manager, and ATM fraud monitoring services, such as FICO® Card Alert Service, play a critical role in identifying and preventing fraud.  Remember: Criminals quickly move on to the next vulnerable institution when they are unable to victimize you.    

So what can we expect in 2012? There's a strong probability that some US retailer is already in the midst of an undetected payment card compromise as you are reading this blog post.  In addition, financial institutions will likely continue to deal with the recurring risk of card and PIN skimming at the ATM but with less frequency than in 2011.  The predicted dips in ATM fraud are largely tied to the fact that law enforcement task forces continue to successfully arrest and prosecute ATM skimming criminals with greater frequency, and increasingly more financial institutions are investing in stronger fraud prevention tools to thwart criminals. 

FICO CEO discusses risk survey on Yahoo! Daily Ticker (video)



More than two-thirds of US risk managers are seriously concerned about the debt loads held by students, according to FICO's new quarterly survey of bank risk officers. Watch FICO CEO Mark Greene discuss survey results on Yahoo!'s The Daily Ticker.

Read the full article from The Daily Ticker, Student Loan Crisis Looms: FICO Risk Survey, and learn more about survey results.

Sharp drop in European counterfeit card fraud

A recent blog post commented on the opportunity for the US to adopt chip and PIN technology to fight fraud. For a great endorsement of the benefits, you only need to look at today’s news release from FICO on fraud patterns seen in Europe.

By studying 55 million active European credit cards in the FICO® Falcon Fraud Manager Consortium, we can see that counterfeit fraud fell 60 percent between March 2009 and March 2011. And the remaining counterfeit fraud proceeds are now mainly being taken out in countries where chip technology has not been embraced. As my colleague Martin Warwick notes, this is largely due to chip and PIN adoption in major markets like the UK.

Fraud is like a balloon, unfortunately — reduce it one place and it pops up somewhere else. Fraudsters foiled in counterfeiting schemes have turned to card-not-present fraud. But by systematically tightening the net — using technology such as chip and PIN, as well as strong anti-fraud systems like FICO Falcon Fraud Manager — card issuers have seriously cut back on their vulnerability, slashed their losses, and given their customers greater protection.

Student Loans Seen as Next Casualty of Sluggish Economy

The results of our quarterly survey of U.S. bank risk professionals are in.  The number that really jumps out to me is 67%.  That’s how many of our respondents expect delinquencies on student loans to rise.  In the nearly two years we’ve been conducting these surveys, expectations for delinquencies on student loans have been pretty stable.  But this quarter we saw a jump of 19 percentage points.

With student loan debt now exceeding credit card debt in the U.S., this result is a big deal for banks and taxpayers.  Evidence is mounting that student loans could be the next trouble spot for lenders.  Just as the challenging economy has forced many people to make tough choices about their mortgages and other bills, it appears that many Americans are now taking a hard look at their student loan debt. 

Our survey results also offered sobering (although not unexpected) insights about other types of consumer debt.  Regarding mortgages, 47% of respondents expected mortgage delinquencies to rise, and 13% expected delinquencies to decrease.  That is slightly more pessimistic than last quarter.  When asked about credit cards, 45% expected delinquencies to rise while 21% expected a decline.  That is also more pessimistic than last quarter and another sign of weak confidence among bankers.

In addition, 54% of respondents expected credit card balances to increase.  While this could be seen by an optimist as a sign that some consumers are finally ready to loosen their purse strings, it is also highly likely that financial stress for many consumers is making it difficult for them to pay down their balances.

A detailed report of our survey—which we conduct and analyze in partnership with PRMIA and the Columbia Business School—is available at http://www.prmia.org/PRMIA-News/FICO_Survey_2011Qtr4.pdf.

Chip and PIN in the US?

For years, UK banks and their customers have had a leg up on Americans when it comes to avoiding certain common types of payment card fraud.

Credit and debit cards with embedded microchips, standard in the UK and several other European countries, significantly enhance fraud prevention over traditional magnetic stripe cards—at least for domestic point-of-sale retail transactions where the combination of the microchip card and the enabling point-of-sale hardware put the brakes on counterfeit card fraud.  The embedded chip is authenticated in a merchant’s reader and must match a customer’s PIN (punched into a keypad), otherwise the transaction is rejected.  The chip technology is known as E.M.V. (for Europay, MasterCard and Visa), and has substantially reduced counterfeit card fraud in those regions where it has been broadly adopted.

In the US, the magnetic stripe system only requires a signature to authenticate a purchase (and as you have likely experienced yourself, many merchants have opted to forego the signature for transactions under a certain value, choosing to absorb the fraud risk rather than carry the cost of procuring and storing the signature).  For that reason, US banking customers are easier targets for fraudsters from abroad who have targeted US-issued mag stripe cards as a better way to make a quick buck.

In the past 18 months, FICO has seen an increased interest in fraud management as struggling banks look to avoid losses and stay ahead of the fraudsters by preventing and identifying fraud more effectively.   There has also been increased interest from European banks, who have seen fraud losses shift from traditional counterfeiting schemes to cross-border or card-not-present transactions, where the protection offered by the microchip does not currently extend.  

Since conversion to a chip-and-PIN system is a daunting infrastructure challenge, US banks, retailers and the large card brands (MasterCard and Visa) have not yet found the collective willpower to undertake a large-scale switch.  Changing out millions of point-of-sale devices to accommodate chip-and-PIN technology requires not only consensus, but a serious investment.   Additionally, the cost to produce and distribute a chip card can be 10X that of a traditional card. 

However, there is growing interest in the more secure cards. Wells Fargo and Chase announced test roll-outs of chip cards earlier this year.  Banks are issuing the cards to select customers, particularly those who travel abroad frequently.  And Visa has recently added to the momentum, calling for accelerated adoption of chip-and-PIN technology, as well as rule changes that would shift liability for fraud as an “incentive” to secure the needed investment.   

Radio-frequency identification (RFID) technology, not the same as chip and PIN, has been embedded in some payment cards in the US. The American Express Blue card, for example, allows customers to pay by waving their cards in front of a scanner. But most merchants do not have scanners, and without the twofold PIN protocol, the security status is really no better than that of a mag stripe transaction.  

That said, the promise of RFID technology, and the ability to pay through devices such as your mobile phone, may also serve as the catalyst for chip-and-PIN investment.  If the banks, retailers, and other interested parties find the economic incentive to invest in RFID technologies, it provides an opportunity for chip and PIN to “piggy back” on the new point-of-sale infrastructure required to enable it.  

Currently, those US banks issuing chip cards are doing so mainly to provide a convenience to customers who are frustrated by not having their mag stripe cards accepted abroad. Wide-scale US adoption of chip and PIN will certainly take a while, but as fraudsters continue to increase their activity here, US banks and their payment industry counterparts are moving closer to seriously considering it. 

Webinar: Post-Crisis Analytics – 6 Imperatives for Raising Performance

In dynamic markets, there’s direct relationship between profitable portfolio growth and a bank’s ability to quickly understand and adapt to changing consumer behavior. At next week's free webinar "Post-Crisis Analytics – 6 Imperatives for Raising Performance," FICO will explore how card issuers can build competitive advantage by cultivating analytic learning to know how customers and their preferences are changing over time.

Presenter: Eric Wells, Sr. Director Analytic Science

Americas
Wednesday, January 11, 2012
10:00 AM PT/12:00 PM CT/1:00 PM ET
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EMEA
Wednesday, January 11, 2012
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Managing Predictive Models (video)

Banks can increase the value they get from their predictive models by changing the way they manage those models. New OCC and Basel regulations make improving model management more important than ever. Hear more on this topic from Mike Gordon, FICO senior vice president and banking practice manager, in this Tech Talk interview. 

If you have difficulties with the video above, view it here.