1. Confidential. This presentation is provided for the recipient only and cannot be reproduced or shared without Fair Isaac Corporation's express consent. © 2010 Fair Isaac Corporation. 1 Leveraging Data Through Optimisation 16 November, 2010 Neill Crossley Consulting Director, Analytic Solutions FICO

2. © 2010 Fair Isaac Corporation. Confidential. 2 2 Agenda »Beyond Basel II - Optimisation »Optimisation?? »FICO Decision Modelling & Optimisation »Latest DM&O Developments »What’s Next?

3. © 2010 Fair Isaac Corporation. Confidential. 3 3 Beyond Basel II - Optimisation

4. © 2010 Fair Isaac Corporation. Confidential. 4 Basel II Analytic Adoption Curve Many of you will have gone through this process Discovery Model Development Decision to adopt Basel IRB Approval Independent Validation Stress Testing TIME % ADOPTION Use Test

5. © 2010 Fair Isaac Corporation. Confidential. 5 »© 2010 Fair Isaac Corporation. Confidential. »5»5 FICO Connected Decisions Decision Management Applications MarketingOriginations Customer Management Collections & Recovery Fraud Manage Strategies and Make Connected Decisions Across Products and Lifecycle Basel 2 Calculation Platform Analytic Platform Other Decision Management Tools

6. © 2010 Fair Isaac Corporation. Confidential. 6 Using Basel II Parameters to improve business decisions Basel II Infrastructure EAD PD LGD Provides Framework for Risk Adjusted Capital and Profit Calculations Optimise Business Decisions Incorporate Other Factors: Economic Changes Stress Tests Strategic Customer Capital Loan Amount

7. © 2010 Fair Isaac Corporation. Confidential. 7 7 Optimisation??

8. © 2010 Fair Isaac Corporation. Confidential. 8 »© 2010 Fair Isaac Corporation. Confidential. »8»8 Optimisation Optimization Optimisation Optimization Optimisation

9. © 2010 Fair Isaac Corporation. Confidential. 9 Dictionary Enhance Effectiveness Make Something Function at its best In Mathematics & Operations Research Optimization, or mathematical programming, refers to choosing the best element from some set of available alternatives. Optimisation??

10. © 2010 Fair Isaac Corporation. Confidential. 10 FICO - What is Optimization? Optimization is a mathematical process of finding the “best” decision for a given business problem By "best" we usually mean highest profit, or lowest cost, within a defined set of constraints (= restrictions on possible values) Objective Function Decision Variables Constraints Algorithm Data

11. © 2010 Fair Isaac Corporation. Confidential. 11 © 2010 Fair Isaac Corporation. Confidential. 11 FICO Decision Modelling & Optimization Key concepts

12. © 2010 Fair Isaac Corporation. Confidential. 12 Summary Decision Modelling & Optimisation is about developing better decision strategies Decision Modelling & Optimisation is about developing better decision strategies Using an Open Framework & Methodology Refined on over 100+ projects That builds on existing Scores & Systems Focused on Business Goals & Constraints Provides Business Insight & Understanding With proven Business Benefits

13. © 2010 Fair Isaac Corporation. Confidential. 13 Proven Development Methodology Provides Decision Making and Learning Environment DECISION MODELING Establish mathematical relationships between Actions, Reactions and Profitability SIMULATION & OPTIMISATION Identify best strategy scenarios subject to multiple business goals, constraints and forecasts Accelerated Learning DEPLOYMENT Engineer final strategy and deploy challengers as Decision Trees or Rule Sets INPUTS Customer & Bureau Data Segmentations & Scores Product Metrics Design Framework Optimisation Software Reporting & Analysis

14. © 2010 Fair Isaac Corporation. Confidential. 14 Decision Model Design Provides A Complete Profit Framework Offer Take Up Loan Amount Application Data Credit Bureau Data Early Repayment Bad / Charge- off Time to early-repay Time to charge-off Revenue Loss Cost Profit InputsDecisions Predictions / Outcomes Objectives Who to Accept Loan Requested Goals & Constraints Subject To.. Regulatory Capital Economic Scenario

15. © 2010 Fair Isaac Corporation. Confidential. 15 Observation Data Performance Objective DecisionPredictions / Outcomes Customer A Application Score Cr Bureau Score Customer History …… Offer Take Up Margin Bad Debt Capital Attrition Profit / Loss Profit / Loss Profit / Loss Revenue - Costs Minimize Loss but Revenue has to be above £x Maximise Profit but no increase in loss or capital requirements Revenue - Costs Customer B Customer C ….. Offer Take Up Margin Bad Debt Capital Attrition Offer Take Up Margin Bad Debt Capital Attrition £1000 Loan £2000 Loan £3000 Loan Decision Modelling & Optimization Example Loan Originations Decision Model

16. © 2010 Fair Isaac Corporation. Confidential. 16 Key Decision Modelling Feature Capture the effect of different decisions on different segments ActionReaction Credit Card £1000 Limit Offer Offer #1 Action Effect Models Free Income = £100 Risk Score = 650 CB Balances = £2,250 Segment = D Free Income = £100 Risk Score = 650 CB Balances = £2,250 Segment = D E(Profit) = £-50 P (Take Up) = 40% P (Bad) = 5.5% E(Revenue) = £100 E(Loss) = £55 P (Take Up) = 40% P (Bad) = 5.5% E(Revenue) = £100 E(Loss) = £55 E(Profit) = £45 Customer Offer #2 Credit Card £3000 Limit Offer Credit Card £7000 Limit Offer Offer #3 P (Take Up) = 80% P (Bad) = 6.0% E(Revenue) = £225 E(Loss) = £160 P (Take Up) = 80% P (Bad) = 6.0% E(Revenue) = £225 E(Loss) = £160 P (Take Up) = 83% P (Bad) = 8.0% E(Revenue) = £400 E(Loss) = £450 P (Take Up) = 83% P (Bad) = 8.0% E(Revenue) = £400 E(Loss) = £450 E(Profit) = £65

17. © 2010 Fair Isaac Corporation. Confidential. 17 STANDARDIZED RELATIVE TO BASELINE EFFICIENT FRONTIER Profit v Loss for Different Levels of Risk-Based Pricing Baseline Simulation & Optimization Compare different scenarios to current actions

18. © 2010 Fair Isaac Corporation. Confidential. 18 STANDARDIZED RELATIVE TO BASELINE EFFICIENT FRONTIER Profit v Loss for Different Levels of Risk-Based Pricing Baseline Vary losses where Non Std Pricing < 28% Accepts Simulation & Optimization Compare different scenarios to current actions

19. © 2010 Fair Isaac Corporation. Confidential. 19 STANDARDIZED RELATIVE TO BASELINE EFFICIENT FRONTIER Profit v Loss for Different Levels of Risk-Based Pricing Baseline Vary losses where RBP < 33% Vary losses where RBP < 28% Simulation & Optimization Compare different scenarios to current actions

20. © 2010 Fair Isaac Corporation. Confidential. 20 STANDARDIZED RELATIVE TO BASELINE EFFICIENT FRONTIER Profit v Loss for Different Levels of Risk-Based Pricing Baseline Vary losses where RBP < 28% (Stressed) Vary losses where RBP < 28% Simulation & Optimization Compare different scenarios to current actions

21. © 2010 Fair Isaac Corporation. Confidential. 21 Things to think about ….. if you’re considering using an DM&O approach Data: » Breadth of data is important – range of different actions » If you’ve run challenger strategies then great » Ensure you are capturing relevant data – non financial? » Have range of techniques to help make most of data » Or as 1 st Phase we can help design learning strategies You may be more ready than you think! Business Problem: » Focus on a current business pain or opportunity » Optimisation can actually help with new regulations » Work with Finance to agree Profit metrics Systems: » Don’t have to be FICO or the latest versions – although it helps » Ability to champion/challenge and deploy rules / trees

22. © 2010 Fair Isaac Corporation. Confidential. 22 © 2010 Fair Isaac Corporation. Confidential. 22 Latest Decision Modelling & Optimisation Developments

23. © 2010 Fair Isaac Corporation. Confidential. 23 Credit Line Optimization Starter Kit The Power of Credit Line Optimization – Now Available in TRIAD 8.5 ! Credit Line Optimization Starter Kit is also available for TRIAD versions: 8.1.2, 8.2.2, 8.3 and 8.4 Take your strategies to the next level of performance with FICO’s Decision Modeling & Optimization capabilities embedded in a Credit Line Optimization Application »Make the best use of limited exposure »Find profitable customers while limiting losses, with precision analytics »Configure to your portfolio and business constraints »Tap into FICO’s best practices for optimizing credit lines

24. © 2010 Fair Isaac Corporation. Confidential. 24 Efficient Frontier Assess Impact of Losses with efficient frontier report This efficient frontier allows us to understand the trade-offs between Loss and Profit Baseline Strategy Unconstrained Resource Constrained Treatments £10.00 £7.50 £5.00 £2.50 £0 -£2.50 -£5.00 £85 £86 £87 £88 £89

25. © 2010 Fair Isaac Corporation. Confidential. 25 Efficient Frontier Assess Impact of Collection Expenses This efficient frontier allows us to understand the trade-offs between Collection Expenses and Profit Significant profit improvement can be obtained by maintaining (or decreasing) collection expenses Baseline Strategy Unconstrained £8.00 £7.00 £6.00 £5.00 £4.00 £3.00 £2.00 £1.00 £0.00

26. © 2010 Fair Isaac Corporation. Confidential. 26 Loan Modification Decision Modelling & Optimisation Inputs Modifications Predictions Business Metrics Objective Change in Monthly Payment and LTV Through Loan Modification* P(Self-cure) Future Value of Home Cost of Liquidation, e.g., Short Sale, Foreclosure, etc. NPV FICO ® Score Loan Behavior: Delinquency Cycle, Time-on-books, relationship indicators Property: LTV, HPI, BPO Demographic: State/MSA, owner-occupied Historical changes in HPI Time to Foreclosure/REO Economic Forecast P(Redefault) *Changes are made via interest rate reduction, term extension and principal forbearance

27. © 2010 Fair Isaac Corporation. Confidential. 27 Real time Optimization Problem Debt Consolidation: Real Time

28. © 2010 Fair Isaac Corporation. Confidential. 28 Debt Consolidation: Dashboard

29. © 2010 Fair Isaac Corporation. Confidential. 29 Data for the individual Customer Credit Card A — owe $2000 Annual Interest 12.5% Credit Card B — owe $1000 Annual Interest 15% Credit Card C — owe $5000 Annual Interest 17.5% Debt Consolidation: Data

30. © 2010 Fair Isaac Corporation. Confidential. 30 Objectives for the Customer »Reduce monthly payment »Shorten repayment period »Reduce Closing costs Debt Consolidation: Customer’s Goals

31. © 2010 Fair Isaac Corporation. Confidential. 31 Analytic Functions »Ability to Repay »Response functions »Competition Data Debt Consolidation: Analytics

32. © 2010 Fair Isaac Corporation. Confidential. 32 Rules for generation of eligible products Debt Consolidation: Rules

33. © 2010 Fair Isaac Corporation. Confidential. 33 Eligible products Debt Consolidation: Eligible Products

34. © 2010 Fair Isaac Corporation. Confidential. 34 »Optimal Solution »Show also optimal solution for the customer »Negotiation tool Debt Consolidation: Decisions

35. © 2010 Fair Isaac Corporation. Confidential. 35 OD Decision Model Design - Customer Level High Level Design Loss Revenue Profit Total Profit CC PL MG Loss Revenue Profit Loss Revenue Profit Loss Revenue Profit Free Income Customer Limits 1.OD, CC, PL, MG 2.OD, CC, PL, MG 3.OD, CC, PL, MG 4.............................

36. © 2010 Fair Isaac Corporation. Confidential. 36 »© 2009 Fair Isaac Corporation. »36 Test-Learn-Adapt Prediction Engine Know which products each consumer is most likely to buy, and when Rules Engine Achieve optimal results while managing business constraints Optimization Engine The Retail Action Manager from FICO™ Deliver consistent and precise messages across the enterprise

37. © 2010 Fair Isaac Corporation. Confidential. 37 © 2009 Fair Isaac Corporation. 37 FICORetail Client Client Data EDW 3 rd Party PIM Prediction Engine Retail Action Manager Datamart Campaign Business Rules Optimization Engine Campaign Management Purchases Test-Learn-Adapt Reporting Customized Product Offers

38. © 2010 Fair Isaac Corporation. Confidential. 38 »© 2009 Fair Isaac Corporation. »38 Optimisation is starting to hit the news!

39. © 2010 Fair Isaac Corporation. Confidential. 39 © 2010 Fair Isaac Corporation. Confidential. 39 What’s Next?

40. © 2010 Fair Isaac Corporation. Confidential. 40 FICO Technology & Innovation Methodology Innovation » Causal Modelling – Enhanced Action Effect Assessments » Rapid Development & Roll Out Approaches » Methodology Transfer Projects Software Innovation (already in place) » Industry Leading solvers – Xpress Optimisation Suite » Patented Algorithms & Heuristics » Developer & Business User Interfaces Software Innovation (already used in R&D) » Optimised Decision Tree Output » Interactive Decision Model Design Interface » Additional Optimisation Frameworks – Xpress based

41. Confidential. This presentation is provided for the recipient only and cannot be reproduced or shared without Fair Isaac Corporation's express consent. © 2010 Fair Isaac Corporation. 41 Q&A THANK YOU 16th November, 2010 Neill Crossley

42. © 2010 Fair Isaac Corporation. Confidential. 42 »© 2009 Fair Isaac Corporation. Confidential. »42 Sa mple Client Results Xpress - MPDecision Optimizer Suite of Flexible Optimization Tools Financial Services Focused Packaged Software and Methodology Flexibility Solver Power Solver Speed Ease of Use Interconnectivity ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ Flexibility Solver Power Solver Speed Ease of Use Interconnectivity ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ Software Professional Services SoftwareProfessional Services Model Development Interface Range of Solvers Custom User Interface Developer Deployment APIs Custom Developments Software Training Design Interface & Scenario Interface Integrated OLAP Reporting Xpress Solvers (LP) + other Algorithms Custom Strategy Developments Custom Pre Configured Software Developments Methodology Transfer – Detailed and Quick Start options Software Training FICO Optimization Software Solutions Overview