Noise in the Data, “Adverse Action” and Transaction ScoringWestley Koenen |
Here are two news items that, taken together, indicate pretty clearly—as far as seemingly contradictory data can—the challenges facing the U.S. credit card business as it seeks to recover and rebuild.
First, as everybody knows, the U.S. unemployment rate inched up to 9.2 percent in June; and, as everybody in the card business knows, Federal Reserve numbers released Friday, July 8, indicate that in the month previous, U.S. consumer spending was surprisingly strong—if that’s the right word—and (and this is a big “and”) consumers put more and more debt on plastic.
Unemployment is one of the two baseline metrics for the economy’s current state (the other is housing). At the very least these numbers mean issuers have to anticipate in the coming months taking adverse action, proactive or reactive, on at least some of the cardholders who are pushing up against their credit limits. It would stand to reason even in an “up” economy.
But “adverse action” is a term of art. Taken as part of a larger toolset of customer engagement strategies, adverse action is only the final line of what could otherwise be a fruitful dialogue.
What makes this possible is the existence of real-time scoring of transactions for credit risk, not just fraud risk. In the case of a compromised card, the decline is, in fact, in the cardholder’s best interests. In the case of risky behavior bubbling up before adverse action becomes necessary, and contacting the consumer before adverse action is taken, transaction scoring can furnish the pretext for initiating a dialogue on better and more sustainable use of the card. In other words a net positive for the bank—and for the consumer.
For many years credit risk management professionals have been talking about turning, say, collection calls, into “teachable moments” for troubled consumers. The appearance of new form factors—mobile, notably—makes this scenario not only more likely, but much more compelling.
Obviously, in certain extreme cases, the issuer may not have an alternative to immediate drastic action. But if the issuer keeps the lines of communication open with the cardholder, the prospect of “adverse action” may be an opportunity for consumer education, credit repair, and even cross- or up-sell.