How wide should credit card lenders open the gates to borrowers after slamming them shut during the recession when losses soared? It depends on their analytics.
Despite the temptation to get a jump on the competition and loosen up underwriting standards as the lending climate begins to thaw, risk managers should be "careful and cautious" going into the New Year, says Stan Oliai, senior vice president and general manager of Experian's newly launched North American global consulting practice.
"It's a very interesting time for lenders because, while there is opportunity for growth as credit quality improves, in the wake of new regulations the burden falls more than ever on issuers to make smart credit decisions," Oliai says.
Oliai alludes to the Credit Card Accountability, Responsibility and Disclosure Act, which went into effect in 2010. One of the most far-reaching effects of the law was its ban on increasing interest rates except when a customer's card payment is more than 60 days past due. As such, card issuers no longer may jack up cardholders' interest rates when credit bureaus signal a borrower is in trouble. It has forced issuers to be more cautious when extending credit to potentially shaky borrowers.
"Card issuers are operating in a time of unprecedented regulations, which constrains their options," Oliai says.
Experian launched its new operation Dec. 6. The unit packages together a variety of the credit-scorer's U.S.-based risk-management products and tools with more than 20 consultants who have expertise in broad financial services lending, including general-purpose bankcards and private-label retail cards, Experian says.
"Coming out of the downturn, it's becoming clear that just focusing on advanced credit-scoring and analytics is not enough," Oliai says. "Lenders need to take a more holistic approach to prospecting for new customers. That requires drawing on a broader range of consumer data sources with advanced consumer analytics and doing it quickly while complying with all these new regulations."
Equally challenging is the task of finding growth opportunities among a mass of consumers that seem reluctant to borrow.
Federal Reserve data shows consumer revolving debt ticked up slightly in October, but consumers overall during the past two years steadily have paid off debt and borrowed less. Moreover, competition to land affluent borrowers is particularly fierce this year.
But savvy lenders still can find growth opportunities even among the heavily pursued affluent sector, Oliai says.
"The affluent segment could be further dissected," he says. "Clearly, these are not folks that are routinely revolving a balance, but there are profits to be made on customers that use cards for convenience and generate purchase volume."
Offering credit cards to consumers with lower average credit scores presents another growth opportunity, as long as issuers use data-analytics tools effectively in lending decisions, Oliai says.
"Lenders digging a little deeper into creditworthiness when making card offers need to keep an eye on borrowers' ability to repay, and that calls for detailed data analysis and forecasting," he says. "With the newest data-analytics tools available, lenders can zero in on their prospecting strategies to expand their marketing universe and make sure their underwriting standards are not knocking people out of the process for no reason."
Using a combination of such tools, lenders can test offers and within a day or two see the response rate and refine their offers accordingly, Oliai says.
"Obviously there is a need for lenders to be aggressive in order to beat the competition, but there is also a need to move cautiously, which is why underwriting is becoming more scientific and strategic."