Issuers Reaching Out to Immigrants

  Many of the millions of Hispanics who have arrived in the United States in recent years want a credit card just as much as any U.S. citizen. But because there are little historic data about new immigrants, issuers usually classify them as higher-risk customers who require laborious, case-by-case evaluation.
  That has not stopped Bank of America Corp. or Wells Fargo & Co., which are test-marketing credit cards to consumers in this market. Though neither institution would provide more details, more issuers are expected to follow their lead this year if legislators do not block them from doing so (see sidebar page 40).
  Seeking profitable customers among these higher-risk prospects is a new challenge for many credit card issuers, and it calls for new business processes. It also demands a new breed of credit-evaluation data, which may be on the horizon.
  "Many nonprime customers-including immigrants and young adults with no credit histories, plus those in the subprime segment-present significant revenue opportunities for issuers," says Ezra Becker, senior business consultant in the solutions and business development group at TransUnion LLC, a Chicago-based credit bureau. "These customers tend to carry balances longer, they make occasional late payments and they tend to be more loyal when you offer them a credit line because they have not yet experienced the glut of offers routinely presented to prime customers."
  Identifying the best prospects within these higher-risk pools is more time-consuming and expensive than it is in the general credit card market, says Becker. But issuers are accomplishing that task using a combination of the credit bureaus' alternative credit scoring services combined with their own, customized models.
  Some issuers, including HSBC Bank USA and First Premier Bank, have reported success in evaluating thin-file credit card applicants, including immigrants and young adults, using Fair Isaac Corp.'s FICO Expansion score.
  Introduced in 2004, FICO Expansion gives a prospect a score within a range between 300 and 850, the same as the classic FICO score used by issuers for prime credit prospects. However, the FICO Expansion score primarily is based on negative events in a prospect's recent history to predict the likelihood of delinquency, as opposed to positive payment events.
  "The big challenge for credit card issuers is finding more automated solutions for evaluating these prospects versus manual processes, and the Expansion score is helping them do that," says Tom Quinn, Fair Isaac vice president of systems integration.
  In a study of the FICO Expansion score among the product's financial-services users last year, 35% of consumers considered to be "credit-underserved" earned Expansion scores above 640, which satisfied most lenders' requirements, Fair Isaac reported.
  The third version of the FICO Expansion score will be released this summer, Quinn says. Although he would not disclose Fair Isaac's proprietary data sources, he says the new Expansion version will include such new data sources as histories of record-of-the-month club payments, phone service payments and possibly cellular telephone payments, which are becoming increasingly useful in helping to predict credit risk.
  VantageScore, another alternative credit-scoring product introduced last year as a joint venture between the credit bureaus Equifax, Experian Information Solutions and TransUnion, also is said to be getting traction among a number of issuers that are using it to prescreen subprime and higher-risk credit card prospects on a mass scale. However, the parties will not say how many issuers are using the product.
  VantageScore aggregates data from different credit bureaus and ranks each prospect on a basis between 501 and 990; a range of 750 to 900 is acceptable for many lenders. "Using VantageScore, issuers can extend offers to a broader range of customers in a very streamlined manner," says TransUnion's Becker.
  But industry analyst Craig Focardi, research area director of consumer lending for Needham, Mass.-based TowerGroup, which studies credit-evaluation services, says that major credit card issuers have been slow to adopt these alternative scoring systems on a widespread basis because of the cost to retool their back-office systems to accommodate them.
  A new breed of data sources now in development may prove to be more promising in helping to score "credit-underserved" consumers. Experian, which has been testing different methods of predicting the credit risks of Hispanic consumers, says that within a year it will unveil an exclusive new product that grew out of a pilot centered on Hispanic consumers in the Los Angeles area.
  NEW DATA SOURCES
  In the six-month pilot, Experian sought out new sources of financial data that could be reported efficiently and used to predict credit risk among "emerging market" consumers who had no traditional banking relationships or credit histories. The group included Hispanic immigrants, young adults, and individuals who recently were widowed or divorced.
  The data that proved most useful in predicting credit risk among emerging-market consumers during the pilot were recurring payments to financial-service companies, retailers and utilities, including telecommunications providers, says Zaydoon Munir, senior vice president of marketing, product and data development at Costa Mesa, Calif.-based Experian.
  "We learned a great deal from the pilot, and we cannot disclose the findings yet because we're using the data to develop a product we plan to roll out within a year," says Munir.
  Experian also cosponsored two studies that took place in 2005 and 2006 that measured the usefulness of consumers' utility payments to predict credit risk. The data included payments to telecommunications companies and cellular-telephone providers.
  "The research shows that utilities are an excellent source of data about credit-risk prediction, but there still are some enhancements that need to happen before utilities feel they have the freedom from regulators to report their full files," Munir says. "This data, which include telecommunications payments, are gradually becoming available and are already finding their way into the streams of data we offer about consumers on a routine basis."
  LexisNexis, a long-time supplier of consumer data used for debt collection and fraud deterrence, says one of its fastest-growing customer segments is composed of large credit card issuers. Issuers are using LexisNexis data to create customized credit-scoring models for unbanked and subprime prospects.
  BROADER LOOK
  LexisNexis recently enhanced one of its core products, called RiskView, to be more useful for bankcard issuers examining credit worthiness among the unbanked, says Tom Brown, vice president of financial services solutions at Boca Raton, Fla.-based LexisNexis Risk & Information Analysis Group.
  Beginning with the name and address of a prospect, RiskView can be used to search for data in three-dozen categories, including property transfers, professional and personal licensing events, vehicle purchases and sales, driver's licenses, and such life events as births, deaths, marriages, bankruptcies, tax liens, judgments and, in some cases, cell-phone account activity, Brown says.
  "Aggregating public records, we're able to put together a fairly full picture of an individual's financial activities independent of a traditional credit report," he says.
  The wireless carriers have not yet released substantial data accessible for those seeking credit information, according to Brown. But he predicts that cell-phone carriers' payment data from customers will become increasingly valuable in this area within the next couple of years.
  To minimize losses with customers lacking credit histories, issuers must follow the rules of dealing with subprime borrowers and keep a tight rein on higher-risk cardholders' behaviors, says Marianne Berry, managing associate at Auriemma Consulting, Westbury, N.Y.
  "One approach is to begin the relationship by extending a low line of credit and expanding it gradually with good behavior," Berry says. "The other is to start a customer off with a higher line of credit, but at the first sign of trouble, shut the account down, pull back the credit line or go directly to collections."
  A very short window between the first past-due date and collections-often just a few business days-usually is necessary to achieve profitability in the higher-risk sector, she says.
  "We hear from issuers that subprime customers are more interested in credit line than in price," Berry says. "Most offers to this sector provide a low credit line at a high [annual percentage rate], so there is a lot of opportunity in giving these shakier customers a bigger line of credit and letting them begin to revolve it in a responsible pattern, and build a positive relationship that way."
  Craig Focardi of TowerGroup says that although the cost of changing business processes can be steep, credit card issuers have a great deal to gain by exploring alternative approaches to granting credit and managing portfolios. "Even incremental improvements in those decisions can mean huge differences for major issuers in profit or loss," he says.
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