A six-month-old debit bureau from Experian Inc. which helps lenders assess the creditworthiness of consumers by how they have managed their checking accounts may be a bellwether for how much enthusiasm creditors still have for the subprime market.
The Orange, Calif., subsidiary of the U.K. company GUS PLC, says its debit reports and debit scores can predict credit behavior only about half as well as the more familiar credit reports and credit scores. However, they do make it easier to assess people who do not have credit histories such as students and recent immigrants, Experian says.
After several years of experimenting with different methods of gauging credit behavior (including looking at rental payments and phone bills), Experian now says it has found a way to make debit data a good, though not perfect, indicator of credit risk.
Experian is using the DebitBureau database maintained by eFunds Corp. of Scottsdale, Ariz., which is largely a transaction processor. Experian correlates debit data to credit behavior and repackages the results as a product called Cross View, which contains a report and a score. Experian says it has applied for a patent on Cross View.
Creditors have always been interested in what other types of information besides credit data can give them a good picture of a consumers behavior, said Laura Desoto, a vice president of product marketing at Experian. A consumer who has little or no credit history is not always a high credit risk, she said.
But so far, Experian has signed up just three customers for Cross View: a credit card company, a bank, and a telecommunications firm. Ten more companies are testing it, Experian said.
Many Experian customers are intrigued with the idea that debit data can open up a new universe of consumers for them, Ms. Desoto said. However, introducing a new kind of data into the decision-making process is a real change for many of our financial customers, she said.
The recession may have also dampened Cross Views adoption rate, she said. Many lenders are tightening their credit policies because delinquencies are up, so were imagining that as the backdrop to Experians sales pitch.
Though it is only half as predictive of creditworthiness as a standard credit score, which is based on a history of credit activity documented in a credit report, a debit score can still be useful for the consumer with a thin file, Experian says.
About 30% of all lender inquiries to Experian produce an insubstantial credit file, said Gloria Switzer, its marketing director. When that happens, lenders simply turn the applicant down, but the lenders say they would rather find a way to assess and approve such applicants, she said.
There is a segment of the population with little or no credit information, said Lisa Nelson, eFunds chief privacy officer. They might be young adults, recent divorcees, widows, or immigrants who havent participated in the credit world but have participated in the debit world, where they have opened checking accounts, written checks, and managed their bills.
Ms. Desoto said if lenders use only credit reports, those consumers would be turned down even if they were legitimate credit prospects.
For years banks and retailers have used debit databases to block fraudulent accounts and check payments. eFunds competitors are First Data Corp.s Telecheck subsidiary and the Equifax Inc. spinoff Certegy Inc.
According to eFunds, DebitBureau contains 2.7 billion records, 1.7 million more are added every day. Ms. Nelson described the database as a record of events in the life of a checking account. It includes initial inquiries to open a checking account, incidents of bounced checks, account closures, fund seizures, and even check reorders (an indicator that consumers are using their accounts).
Nikhil Sinha, the executive vice president of global sales and product management at eFunds, said DebitBureau verifies 45% of the checks used at the point of sale in the United States. Seventeen of the top 20 U.S. retailers subscribe to the database, as do over 80,000 bank branches, he said.
Cross View is the first use of DebitBureau for a purpose besides fraud detection, Mr. Sinha said.
Ms. Desoto said cellular telephone companies, which sign up a lot of young customers, have expressed interest in using debit data for credit decisions. In beta tests, cell phone companies that used the debit scores were able to sign up more new customers than they would have otherwise, she said.
Were definitely able to document that they are adding customers whom they otherwise would not have added, Ms. Desoto said. Well know the other part of the business story, about whether those people continue to be good customers or not, over the next year or two.
eFunds says its contract with Experian does not preclude the other two major credit bureaus, TransUnion and Equifax, from offering similar products.
We have an overall strategy of continuing to expand the use of debit data in the credit decision environment, Mr. Sinha said. Hopefully, well be sitting down to talk to TransUnion and Equifax as well.
