1. © 2014 Fair Isaac Corporation. Confidential. This presentation is provided for the recipient only and cannot be reproduced or shared without Fair Isaac Corporation’s express consent. Fundamentals Customer Management Best Practices Liz Ruddick Fair Isaac Advisors FICO

2. Agenda © 2014 Fair Isaac Corporation. Confidential. ► Customer Management Functions ► Customer vs. Account Emphasis ► Making Decisions Actionable ► Data ► Scores ► High Risk Recognition ► Exposure Management ► Authorizations and Fraud ► The Tie to Collections and Recovery 2

3. © 2014 Fair Isaac Corporation. Confidential. Key Concerns Within the Credit Customer Lifecycle Framework Location & geographic footprint Target prospect/ customer? Manage marketing campaigns? Tailor offer/message/ incentive? Tier pricing? Manage promotional expense and effect? Timing/ frequency of campaigns? Accept/reject? Deter fraud? Verify customer ID? Anti-money laundering? Affordability/suitability? Tier pricing? Initial line? Loan-to-value? Collateral value? Cross-sell? Upsell/downsell/offer alternative? Promote usage? Obtain payments? Manage exposure? Collateral tracking? Mitigate risk? Deter fraud? Marketing communications? Adjust pricing? Service level? Cross-sell? Stress testing? Data Client ProspectsClient Customers ActionsReactions Precision Marketing Customer Origination Customer Management Customer Collections External Data Internal Data Obtain payments? Allocate resource? Channel & contact strategy? Treatment strategy? Debt placement? Debt sale? Agency strategy? Collector skills? Legal/insolvent/ repo accounts? Workflow? Incentives? 3

4. © 2014 Fair Isaac Corporation. Confidential. ► Account management is a misnomer—customers drive behavior ► Where multiple product relationships exist, there is often a Halo Effect ► Customers with multiple product relationships perform better on each relationship, and more profitably in total ► Type of credit product and types of product combinations held by the customer drive differences in approach, represent opportunities for cross-selling and revenue expansion The Policy Focus on Managing Customers 0101010111010 1101001101001 0101110011010 1001010101001 A164CJ00Y8139PZ 537 - 616 429 - 588 278 - 783 690 - 631 454 - 166 583 - 926 4

5. © 2014 Fair Isaac Corporation. Confidential. Chief Challenges of CRM 0101010111010 1101001101001 0101110011010 1001010101001 A164CJ00Y8139PZ 537 - 616 429 - 588 278 - 783 690 - 631 454 - 166 583 - 926 Defining “Customer” Agreeing to “Bad” Definitions Aggregating Development Data Defining strategy ownership Coordinating product and customer issues Maintaining political will to manage the customer 5

6. © 2014 Fair Isaac Corporation. Confidential. Customer Management Goals Alter Approach Focus on Risk Minimization ► Restrictive view toward exposure ► Tight control of authorizations, credit extension ► Tight, sometimes aggressive approach to collections ► Recognizes ability to reward good customers while controlling bad ► Balanced approach to authorizations, credit extension ► Balanced approach to collections Focus on Expense Control ► Minimized customer service approach ► Tight standards for staff—customer contacts ► Treatment approach is to minimize cost rather than to maximize payment Focus on Profit Maximization 6

7. © 2014 Fair Isaac Corporation. Confidential. Customer View Creates Value across the Enterprise Risk Management ► Coincident loss rates are 14% lower on average for North American credit card issuers with customer views Fraud Management ► Using application data in conjunction with transaction data increases fraud detection rates by up to 25% Collections and Recovery ► Banks can achieve greater than 10% improvements in collections effectiveness by leveraging customer data across products Marketing ► Using customer level transaction data to target HELOC cross-sell offers provides over 200% increase in net conversion rates (response and approval) 0101010111010 1101001101001 0101110011010 1001010101001 A164CJ00Y8139PZ 537 - 616 429 - 588 278 - 783 690 - 631 454 - 166 583 - 926 7

8. © 2014 Fair Isaac Corporation. Confidential. Key Terms in Customer Management Monthly Billing Cycle and Cycle-Based Actions ► Assumes that each month at a defined time, the institution will age the account and may create a monthly billing statement ► Behavior scores are calculated during this monthly update ► If a statement is created, the lender may wish to incorporate specific statement messages to targeted customers—includes both promotions and reminders ► Sets and communicates the next “due date” to the customer Payment History ► Based on whether payment is received before, on or after the due date, history retained ► If payment has always been on time, an account is called “clean” ► If payment has sometimes been late, an account is called “dirty” ► A late payment is referred to as “delinquency” 8

9. © 2014 Fair Isaac Corporation. Confidential. Revolving Products Have More Options for Driving Customer Treatment ► Revolving products offer both bells and whistles that are not available for installment or fixed term products ► Credit line management ► Fee and interest rate adjustments ► Promotional pricing ► Merchant promotions ► Revolving products have transactions ► Purchases, cash transactions provide extra insight into customer behavior ► Authorizations strategy enables mid-cycle control 9

10. © 2014 Fair Isaac Corporation. Confidential. Existing Accounts Scoring Progression RecoveryLate-stage CollectionsDelinquentOn-time Bureau-based recovery score Custom collection score Behavior score Transaction score Account Status Specialty bureau or custom scores FICO ® Score Custom recovery score 10 Revolving Credit: Additional Precision Specialty Risk Assessment Secondary Decision: Risk-Related Primary Decision: Reduce Loss FICO ® PlacementsPlus ® service FICO ® Network FICO ® Debt Manager™ solution FICO® TRIAD ® Customer Manager

11. © 2014 Fair Isaac Corporation. Confidential. 360° Customer View Leverages Internal and External Data Master File Data ► Information from billing and posting systems within your organization ► Record how the customer uses his account(s) with you Transaction Data ► Record of individual account usage actions, the pattern of which can be highly predictive. ► Summaries of transactions create many of the master file data fields Credit Bureau Data ► Record of individual consumer and their interaction with multiple creditors ► Summarizing individual behavior against cumulative obligations ► Full positive bureau reports include reports of well-maintained payments and reports of derogatory performance ► Negative only reports - only information about customer late payments and defaults Demographic Data ► Includes information to use in skip tracing should customer contact be lost ► Data to use in promotional marketing campaigns, etc 11

12. © 2014 Fair Isaac Corporation. Confidential. ► A Transaction is a time stamped record of an event ► Purchases/authorizations/settlements ► Payments and payment reversals ► Cycle billing ► Collection activities ► Customer service records ► DDA debit and credit transactions ► Sorted and merged transactions provide a complete time series history ► Characteristics of transactions ► Transactions are heterogeneous ► Transaction volumes can be enormous ► Transaction timing is irregular ► An opportunity to change the outcome—real time decisions and triggered actions Notion of “Transactions” 12

13. © 2014 Fair Isaac Corporation. Confidential. Transaction Data Elements Who ► Account number, name, cardholder country When ► Transaction date and time Where ► Merchant location code, merchant country code What ► Merchant ID and description, MCC, transaction type How Much ► Amount Authentication ► PIN verified, CVV, card present ISO Response Code ► Approve/decline/referral ► Others—credit limit, available credit 13

14. © 2014 Fair Isaac Corporation. Confidential. Behavior Risk Score Usage:Customer management Tells You: Likelihood that an account will reach specified degree of delinquency (e.g., 60 days delinquent, more than twice 30 days) within the performance period, often 6 months from the date of scoring Based On: Analysis of masterfile data, sometimes supplemented by credit bureau or transaction data Decisions Supported: Reissue, authorizations, over limit, marketing communications, credit line management, early-stage collections Type Of Model/ Score: Custom model built from analysis of user’s customer data or pooled model built from analysis of data contributed by a closed user group. Highly robust. Delivery: Models embedded within account management software—scoring takes place on demand and within batch cycles Systems Used Within: FICO ® TRIAD ® Customer Manager, and other leading account management software 14

15. © 2014 Fair Isaac Corporation. Confidential. FICO ® Scores Usage:General risk prediction Tells You: Likelihood that a consumer will have an obligation reported on the credit bureau file that becomes 90 or more days delinquent within 24 months from the score date Based On:Credit Bureau data Decisions Supported: Contributes to all decisions across the customer credit lifecycle and in secondary markets. Limitations of use on severely delinquent accounts (past the “bad” standard) Type Of Model/ Score: General risk model built from analysis of national sample of credit bureau data Delivery: Classic or next generation FICO ® Scores; Proprietary algorithms defined by FICO for calculation by Credit Reporting Agencies (CRAs) on updated credit records, with distribution through CRAs, subscription to FICO ® PreScore ® Service or FICO ® Score Delivery Service; Versions offered internationally Systems Used Within: All credit, treasury and related systems 15

16. © 2014 Fair Isaac Corporation. Confidential. Risk-Reward Trade-Off Must Address Revenue Enhancement on Non-Delinquent Customers 16

17. © 2014 Fair Isaac Corporation. Confidential. Exposure Management © 1998 Fair, Isaac and Co., Inc. Individual Account Relationship ► Credit line increases encourage usage, balance build and revenue for revolving and line-based products ► Credit line decreases mitigate risk, reduce contingent liability Multiple-Account Customer Relationship ► Allocating exposure appropriately across multiple accounts can improve profitability, insure appropriate capital retention Exposure Management significantly impacts capital requirements Ability to pay/Affordability concerns make exposure management including Debt to Income and Loan to Value levels across the customer relationship even more critical 17

18. © 2014 Fair Isaac Corporation. Confidential. Typical Risk-Based Credit Line Strategy 18

19. © 2014 Fair Isaac Corporation. Confidential. ► For revolving accounts, customers sometimes seek to complete transactions that will take balances over the credit limit ► Authorization strategy can approve, reject or refer the individual transaction for review ► Approvals: consider permanent coordinated adjustment of credit line, in real-time; coordinate line increase with pricing review for greatest impact ► Rejections: consider more thorough risk review of overall customer exposure ► When accounts are allowed to go over limit, collection treatments may then be applied—if over limit collections volume grows, review authorizations strategy ► Coordinate credit authorizations with fraud authorizations Overlimit Accounts Provide Opportunity for Action, Should Coordinate with Authorizations Strategy 19

20. © 2014 Fair Isaac Corporation. Confidential. ► Organizations, markets not targeting fraud become the targets for transaction fraud ► Fraud Scores generated while customer is at point of sale trigger investigation of high fraud potential applications ► As with other transaction authorizations, result can be transaction approval, transaction decline or transaction referral ► Referrals and rejections risk loss of future transactions/share of wallet especially if based on false positives ► Referrals also have high cost in terms of both staff and investigation ► Account take-over and fake ID fraud increasingly prevalent ► Information verification as key ► Increases in “no contacts” in collection queues, early defaults could indicate First Party Fraud Customer Management and Fraud Deterrence 20

21. © 2014 Fair Isaac Corporation. Confidential. FICO ® Falcon ® Fraud Manager Scores Usage:Fraud detection and deterrence Tells You:Potential that an individual transaction is fraudulent Based On:Transaction data and profiles Decisions Supported: Investigation or authorization of individual transactions after determination of fraud potential Type Of Model/ Score: Specialized neural net model built from analysis of transaction data contributed by a closed user consortium and maintained by FICO Delivery:Delivered exclusively from FICO Systems Used Within: Virtually all authorization and posting systems 21

22. © 2014 Fair Isaac Corporation. Confidential. ► Behavior and transaction scores enable insight into changing risk patterns ► High risk accounts can be routed for pre-delinquent treatment, risk mitigation actions taken ► Early stage delinquency treatments typically established through use of behavior scoring ► Later stage delinquency treatments may require custom collection scores, more operational focus High Risk and Early Stage Delinquent Accounts 22

23. © 2014 Fair Isaac Corporation. Confidential. Preemptive Treatment: Customer Rehabilitation Plusses ► Customers see enterprise as helpful, problem solving ► Higher risk customers given more time to address budgeting, make arrangements to forestall delinquency and other “harmful consequences” ► Opportunity to educate less-experienced consumers in good practices ► Opens potential for restructuring or referring consumers for counseling Pre-Delinquency Calling of High Risk Customers being tested and utilized more widely Minuses ► For consumers already aware of risk status, may cause panic and stimulate insolvency and bankruptcy filing 23

24. © 2014 Fair Isaac Corporation. Confidential. Adaptive Control System Decision Tree: Behavior Risk and Origination Score as Focus Delinquency Level 0-29 DPD30 - 59 DPD60+ DPD Time on Books < 3 mos3+ mos< 3 mos Balance Amount LH Risk Score* L, MH 3+ mos FeeL L L, MHL - H Collection Strategy NC Strategy1 2 3 NC Strategy4 NC Strategy5 Any NC If < 3 months on books, origination risk score if > 3 months on books, behavior risk score Any 24

25. © 2014 Fair Isaac Corporation. Confidential. ► Evidence that payment hierarchy has evolved, making capture of payment share increasingly difficult Customers Payment Hierarchy Has Changed... Before Now ► Creditors using more detailed analytics and feedback to evaluate customers in context ► Earlier collections entry ► More consultative collection approach focused on problem-solving, payment alternatives 25

26. © 2014 Fair Isaac Corporation. Confidential. ► Creditors increasingly contacting customers on the basis of their preferences and convenience ► Calls, letters universal ► SMS text messaging, e-mail contact, e-statements, contact with cell phones increasingly seen ► Customer opt in, coordination with originations process creates clear customer consent ► Customer service tone for problem resolution vs. for quick call times ► Handling distressed debtors ► Options to avoid being trapped inside a VRU The Communication Channel Challenge 26

27. © 2014 Fair Isaac Corporation. Confidential. As Non-Competitive Product Offerings Can Create Adverse Selection, Look What Happens in the Existing Portfolio Keep your product offerings competitive Adverse Retention: High risk applicants lack other credit opportunities, while low risk applicants can discriminate between various credit offers High attrition and account dormancy should cause review of product competitiveness 27

28. © 2014 Fair Isaac Corporation. Confidential. This presentation is provided for the recipient only and cannot be reproduced or shared without Fair Isaac Corporation’s express consent. Liz Ruddick lizruddick@fico.com Thank You!

29. © 2014 Fair Isaac Corporation. Confidential. Learn More at FICO World Related Sessions ► Credit Boot Camp: Game On! How to Make Banking Training Fun ► Key Steps to Better Credit Line Management at CIBC ► Future of Customer Risk Strategies Products in Solution Center ► FICO ® TRIAD ® Customer Manager ► FICO ® Basel II Analytic Services ► FICO ® Portfolio Stress Testing ► FICO ® Segmentation Models ► FICO ® Master File Characteristics Library ► FICO ® Behavior Scores ► Analytic Service Offerings Experts at FICO World ► Sarah Murphy ► Miguel Cabezas ► Janice Horan ► Daniel Melo ► Mary Dupont ► Bruno Courbage White Papers Online ► Insights: Realize Profit Potential Already on Your Books ► Managing Credit Line Increase Strategies with Opt-in Requirements Blogs ► http://www.fico.com/en/blogs/category/marketing-customer-engagement/

30. © 2014 Fair Isaac Corporation. Confidential. Please rate this session online Liz Ruddick lizruddick@fico.com 30