This is the next article in our series about how to handle the economic downturn – this time focusing on how to prevent fraud in the new economic environment. We tapped two new experts—Chris Ryan, Market Lead, Fraud and Identity and Tischa Agnessi, Go-to-Market Lead, Decisioning Software—to share their thoughts on how to keep fraud out of your portfolio while continuing to lend. Q: What new fraud trends do you expect during the economic downturn? CR: Perhaps unsurprisingly, we tend to see high volumes of fraud during economic downturn periods. First, we anticipate an uptick in third-party fraud, specifically account takeover or ATO. It’ll be driven by the need for first-time users to be forced online. In particular, the less tech-savvy crowd is vulnerable to phishing attacks, social engineering schemes, using out-of-date software, or landing on a spoofed page. Resources to investigate these types of fraud are already strained as more and more requests come through the top of the funnel to approve new accounts. In fact, according to Javelin Strategy & Research’s 2020 Identity Fraud Study, account takeover fraud and scams will increase at a time when consumers are feeling financial stress from the global health and economic crisis. It is too early to predict how much higher the fraud rates will go; however, criminals become more active during times of economic hardships. We also expect that first party fraud (including synthetic identity fraud) will trend upwards as a result of the deliberate abuse of credit extensions and additional financing options offered by financial services companies. Forced to rely on credit for everyday expenses, some legitimate borrowers may take out loans without any intention of repaying them – which will impact businesses’ bottom lines. Additionally, some individuals may opportunistically look to escape personal credit issues that arise during an economic downturn. The line between behaviors of stressed consumers and fraudsters will blur, making it more difficult to tell who is a criminal and who is an otherwise good consumer that is dealing with financial pressure. Businesses should anticipate an increase in synthetic identity fraud from opportunistic fraudsters looking to take advantage initial financing offers and the cushions offered to consumers as part of the stimulus package. These criminals will use the economic upset as a way to disguise the fact that they’re building up funds before busting out. Q: With payment stress on the rise for consumers, how can lenders manage credit risk and prevent fraud? TA: Businesses wrestle daily with problems created by the coronavirus pandemic and are proactively reaching out to consumers and other businesses with fresh ideas on initial credit relief, and federal credit aid. These efforts are just a start – now is the time to put your recession readiness plan and digital transformation strategies into place and find solutions that will help your organization and your customers beyond immediate needs. The faceless consumer is no longer a fraction of the volume of how organizations interact with their customers, it is now part of the new normal. Businesses need to seek out top-of-line fraud and identity solutions help protect themselves as they are forced to manage higher digital traffic volumes and address the tough questions around: How to identify and authenticate faceless consumers and their devices How to best prevent an overwhelming number of fraud tactics, including first party fraud, account takeover, synthetic identity, bust out, and more. As time passes and the economic crisis evolves, we will all adapt to yet another new normal. Organizations should be data-driven in their approach to this rapidly changing credit crisis and leverage modern technology to identify financially stressed consumers with early-warning indicators, predict future customer behavior, and respond quickly to change as they deliver the best treatment at the right time based on customer-specific activities. Whether it’s preparing portfolio risk assessment, reviewing debt management, collections, and recovery processes, or ramping up your fraud and identity verification services, Experian can help your organization prepare for another new normal. Experian is continuing to monitor the updates around the coronavirus outbreak and its widespread impact on both consumers and businesses. We will continue to share industry-leading insights to help financial institutions differentiate legitimate consumers from fraudsters and protect their business and customers. Learn more About Our Experts [avatar user="ChrisRyan" /] Chris Ryan, Market Lead, Fraud and Identity Chris has over 20 years of experience in fraud prevention and uses this knowledge to identify the most critical fraud issues facing individuals and businesses in North America, and he guides Experian’s application of technology to mitigate fraud risk. [avatar user="tischa.agnessi" /] Tischa Agnessi, Go-to-Market Lead, Decisioning Software Tischa joined Experian in June of 2018 and is responsible for the go to market strategy for North America’s decisioning software solutions. Her responsibilities include delivering compelling propositions that are unique and aligned to markets, market problems, and buyer and user personas. She is also responsible for use cases that span the PowerCurve® software suite as well as application platforms, such as Decisioning as a ServiceSM and Experian®One.

The coronavirus (COVID-19) outbreak is causing widespread concern and economic hardship for consumers and businesses across the globe – including financial institutions, who have had to refine their lending and downturn response strategies while keeping up with compliance regulations and market changes. As part of our recently launched Q&A perspective series, Shannon Lois, Experian’s Head of DA Analytics and Consulting and Bryan Collins, Senior Product Manager, tackled some of the tough questions for lenders. Here’s what they had to say: Q: What trends and triggers should lenders be prepared to react to? BC: Lenders are still trying to figure out how to assess risk between the broader, longer-term impacts of the pandemic and the near-term Coronavirus Aid, Relief, and Economic Security (CARES) Act that extends relief funds and deferment to consumers and small businesses. Traditional lending processes are not possible, lenders will have to adjust underwriting strategies and workflows as they deploy hardship programs while complying with the Act. From a utilization perspective, lenders need to look for near-term trends on payments, balances and skipped payments. From an extension standpoint, they should review limits extended or reduced by other lenders. Critical trends to look for would be missed or late auto payments, non-traditional credit shopping and rental payment delinquencies. Q: What should lenders be doing to plan for an uptick in delinquencies? SL: First, lenders should make sure they have a complete picture of how credit risk and losses are evolving, as well as any changes to their consumers’ affordability status. This will allow a pointed refinement of their customer management strategies (I.e. payment holidays, changing customer to cheaper product, offering additional services, re-pricing, term amendment and forbearance management.) Second, given the increased stress on collection processes and regulations guidelines, they should ensure proper and prepared staffing to handle increased call volumes and that agency outsourcing and automation is enabled. Additionally, lenders should migrate to self-service and interactive communication channels whenever possible while adopting new segmentation schemas/scores/attributes based on fresh data triggers to queue lower risk accounts entering collections. Q: How can lenders best help their customers? SL: Lenders should understand customers’ profiles with vulnerability and affordability metrics allowing changes in both treatment and payment. Payment Holidays are common in credit card management, consider offering payment freezes on different types of credit like mortgage and secured loans, as well as short term workout programs with lower interest rates and fee suppression. Additionally, lenders should offer self-service and FAQ portals with information about programs that can help customers in times of need. BC: Lenders can help by complying with aspects of the CARES Act guidance; they must understand how to deploy payment relief and hardship programs effectively and efficiently. Data integrity and accuracy of loan reporting will be critical. Financial institutions should adjust their collection and risk strategies and processes. Additionally, lenders must determine a way to address the unbanked population with relief checks. We understand how challenging it is to navigate the changing economic tides and will continue to offer support to both businesses and consumers alike. Our advanced data and analytics can help you refine your lending processes and better understand regulatory changes. Learn more About Our Experts: Shannon Lois, Head of DA Analytics and Consulting, Experian Data Analytics, North America Shannon and her team of analysts, scientists, credit, fraud and marketing risk management experts provide results-driven consulting services and state-of-the-art advanced analytics, science and data products to clients in a wide range of businesses, including banking, auto, credit, utility, marketing and finance. Shannon has been a presenter at many credit scoring and risk management conferences and is currently leading the Experian Decision Analytics advisory board. Bryan Collins, Senior Product Manager, Experian Consumer Information Services, North America Bryan is a member of Experian's CIS product management team, focusing on the Acquisitions suite and our evolving Ascend Identity Services Platform. With more than 20 years of experience in the financial services and credit industries, Bryan has established strong partnerships and a thorough understanding of client needs. He was instrumental in the launch of CIS's segmentation suite and led product management for lender and credit-related initiatives in Auto. Prior to joining Experian, Bryan held marketing and consumer experience roles in consumer finance, business lending and card services.

  Many small businesses in the hardest-hit states missed out on the first round of federal relief through the recently created Paycheck Protection Program (PPP). The Coronavirus Aid, Relief, and Economic Security (CARES) Act established the PPP in order to disburse $349 billion in forgivable loans to small businesses hurt by the COVID-19 outbreak. However, the program’s funding limit and first-come, first-serve method for accepting loan applications put an immense strain on the financial institutions tasked with getting the money out the door. This resulted in many small businesses unable to get their applications submitted, approved, and funded before the program ran out of money after only two weeks. Where did the money go? The latest data from the Small Business Administration shows that the most populous states received the largest number of PPP loans. This is unsurprising, as states with higher populations tend to have a greater number of small businesses. One way to get a better picture of the impact of PPP loans on communities is to examine what percentage of a state’s small businesses received PPP loans (Figure 1). When viewed through this lens, the results are a quite striking - many of the coastal areas and larger markets missed out, while the rural, north-central states won out. Less than 4% of small businesses in California, Florida, and New York – three of the top five largest markets – were approved for PPP loans. While more than 12% of small businesses in North Dakota, Nebraska, and South Dakota received support.       What happened? There are several factors that could have played a part in the uneven distribution of PPP loans. One explanation may be that some financial institutions in highly populated urban areas did not have the capacity to process such a large volume of loan applications in such a short amount of time. There may also be an urban-rural divide to how relationship banking occurs. Rural communities and small businesses with close-knit ties to area financial institutions may have had easier access to getting their PPP applications submitted and approved. In line with this, Figure 2 shows the top five and bottom five states in terms of financial institutions (banks and credit unions) per 100,000 people. The states with the highest prevalence of financial institutions were also the top states for PPP small business loan share. While the states with the lowest prevalence of financial institutions were the states with the smallest share. Another factor may have been the extent that shelter-in-place rules were being enforced. North Dakota, Nebraska, and South Dakota – the three top states for loan share – are part of the handful of states that still do not have statewide lockdowns. California, on the other hand, was the first state in the country to issue shelter-in-place measures. Why it matters The first round of stimulus through the Paycheck Protection Program provided relief for many small businesses around the country. However, the first-come, first-serve method of distributing loans may have resulted in some small business communities having easier access to the program than others. Insights as to why these differences occurred and why small businesses in the larger markets received a lower share of PPP loans can inform future stimulus efforts and ensure that recovery among the states is as even and broad as possible.   Figure 1 Sources: Small Business Administration Paycheck Protection Program Report 4/16/2020, Census Bureau SUSB and NES Statistics. Author’s calculations. Figure 2 Sources: Experian data on financial institutions, Census Bureau population estimates. Author's calculations.

The response to the coronavirus (COVID-19) health crisis requires a brand-new mindset from businesses across the country. As part of our recently launched Q&A perspective series, Jim Bander, Market Lead of Analytics and Optimization and Kathleen Peters, Senior Vice President of Fraud and Identity, provided insight into how businesses can work to mitigate fraud and portfolio risk. Q: How can financial institutions mitigate fraud risk while monitoring portfolios? JB: The most important shift in portfolio monitoring is the view of the customer, because it’s very different during times of crisis than it is during expansionary periods. Financial institutions need to take a holistic view of their customers and use additional credit dimensions to understand consumers’ reactions to stress. While many businesses were preparing for a recession, the economic downturn caused by the coronavirus has already surpassed the stress-testing that most businesses performed. To help mitigate the increased risk, businesses need to understand how their stress testing was performed in the past and run new stress tests to understand how financially sound their institution is. KP: Most businesses—and particularly financial institutions—have suspended or relaxed many of their usual risk mitigation tools and strategies, in an effort to help support customers during this time of uncertainty. Many financial institutions are offering debt and late fee forgiveness, credit extensions, and more to help consumers bridge the financial gaps caused by the economic downturn. Unfortunately, the same actions that help consumers can hamstring fraud prevention efforts because they impact the usual risk indicators. To weather this storm, financial institutions need to pivot from standard risk mitigation strategies to more targeted fraud and identity strategies. Q: How can financial institutions’ exposure to risk be managed? JB: Financial institutions are trying to extend as much credit as is reasonably possible—per government guidelines—but when the first stage of this crisis passes, they need to be prepared to deal with the consequences. Specifically, which borrowers will actually repay their loans. Financial institutions should monitor consumer health and use proactive outreach to offer assistance while keeping a finger on the pulse of their customers’ financial health. For the foreseeable future, the focus will be on extending credit, not collecting on debt, but now is the time to start preparing for the economic aftermath. Consumer health monitoring is key, and it must include a strategy to differentiate credit abusers and other fraudsters from overall good consumers who are just financially stressed. KP: As financial institutions work to get all of their customers set up with online and mobile banking and account access, there’s an influx of new requests that all require consumer authentication, device identification, and sometimes even underwriting. All of this puts pressure on already strained resources which means increased fraud risk. To manage this risk, businesses need to balance customer experience—particularly minimizing friction—with vigilance against fraudsters and reputational risk. It will require a robust and flexible fraud strategy that utilizes automated tools as much as possible to free up personnel to follow up on the riskiest users and transactions.   Experian is closely monitoring the updates around the coronavirus outbreak and its widespread impact on both consumers and businesses. We will continue to share industry-leading insights to help financial institutions manage their portfolios and protect against losses. Learn more About Our Experts: [avatar user="jim.bander" /] Jim Bander, Market Lead, Analytics and Optimization, Experian Decision Analytics, North America Jim joined Experian in April 2018 and is responsible for solutions and value propositions applying analytics for financial institutions and other Experian business-to-business clients throughout North America. He has over 20 years of analytics, software, engineering and risk management experience across a variety of industries and disciplines. Jim has applied decision science to many industries, including banking, transportation and the public sector. [avatar user="kathleen.peters" /] Kathleen Peters, Vice President, Fraud and Identity, Experian Decision Analytics, North America Kathleen joined Experian in 2013 to lead business development and international sales for the recently acquired 41st Parameter business in San Jose, Calif. She went on to lead product management for Experian’s fraud and identity group within the global Decision Analytics organization, launching Experian’s CrossCore® platform in 2016, a groundbreaking and award-winning new offering for the fraud and identity market. The last two years, Kathleen has been named a “Top 100 Influencer in Identity” by One World Identity (OWI), an exclusive list that annually recognizes influencers and leaders from across the globe, showcasing a who’s who of people to know in the identity space.

As financial institutions and other organizations scramble to formulate crisis response plans, it’s important to consider the power of data and analytics. Jim Bander, PhD, Experian’s Analytics and Optimization Market Lead discusses the ways that data, analytics and models can help during a crisis. Check out what he had to say: What implications does the global pandemic have on financial institutions’ analytical needs?  JB: COVID-19 is a humanitarian crisis, one that parallels Hurricanes Sandy and Katrina and other natural disasters but which far exceeds their magnitude. It is difficult to predict the impact as huge parts of the global economy have shut down. Another dimension of this disaster is the financial impact: in the US alone, more than 17 million people applied for unemployment in the first 6 weeks of the COVID-19 crisis. That compares to 15 million people in 18 months during the Great Recession. Data and analytics are more important than ever as financial institutions formulate their responses to this crisis. Those institutions need to focus on three key things: safety, soundness, and compliance. Safety: Financial institutions are taking immediate action to mitigate safety risks for their employees and their customers. Soundness: Organizations need to mitigate credit and fraud risk and to evaluate capital and liquidity. Some executives may need a better understanding of how their bank’s stress scenarios were calculated in the past to understand how they must be updated for the future. Important analytic functions include performing portfolio monitoring and benchmarking—quantifying the effects not only of consumer distress, but also of low interest rates. Compliance: Understanding and meeting complex regulatory and compliance requirements is crucial at this time. Companies have to adapt to new credit reporting guidelines. CECL requirements have been relaxed but lenders should assess the effects of COVID, and not only during their annual stress tests. As more consumers seek credit, from an analytics perspective, what considerations should financial institutions make during this time?  JB: During this volatile time, analytics will help financial institutions: Identify financially stressed consumers with early warning indicators Predict future consumer behavior Respond quickly to changes Deliver the best treatments at the right time for individual customers given their specific situations and their specific behavior. Financial institutions should be reevaluating where their organizations have the most vulnerability and should be taking immediate action to mitigate these risks. Some important areas to keep an eye on include early warning indicators, changes in fraudulent behavior (with the increase in digital engagements), and changes in customer behavior. Banks are already offering payment flexibility, deferments, and credit reporting accommodations. If volatility continues or increases, they may need to offer debt forgiveness plans. These organizations should also be prepared to understand their own changing constraints—such as budget, staffing levels, and liquidity requirements— especially as consumers accelerate their move to digital channels. In the near future, lenders should be optimizing their operations, servicing treatments, and lending policies to meet a number of possibly conflicting objectives in the presence of changing constraints and somewhat unpredictable transaction volumes.   What is the smartest next play for financial institutions?  JB: I see our smartest clients doing four things: Adapting to the new normal Maintaining engagement with existing customers by refreshing data that companies have on-hand for these consumers, and obtain additional views of these customers for analytics and data-driven decisioning Reallocating operational resources and anticipating the need for increased capacity in various servicing departments in the future Improving their risk management practices   What is Experian doing to help clients improve their risk management? JB: During this time, banks and other financial institutions are searching for ways to predict consumer behavior, especially during a crisis that combines aspects of a natural disaster with characteristics of a global recession. It is more important than ever to use analytics and optimization. But some of the details of the methodology is different now than during a time of economic expansion. For example, while credit scores (like FICO® and VantageScore® credit scores) will continue to rank consumers in terms of their probability to pay, those scores must be interpreted differently. Furthermore, those scores should be combined with other views of the consumer—such as trends in consumer behavior and with expanded FCRA-compliant data (data that isn’t reported to traditional credit bureaus). One way we’re helping clients improve their credit risk management is to provide them with a list of 140 consumer credit data attributes in 10 categories. With this list, companies will be able to better manage portfolio risk, to better understand consumer behavior, and to select the next best action for each consumer. Four other things we’re doing: We’re quickly updating our loss forecasting and liquidity management offerings to account for new stress scenarios. We’re helping clients review their statistical models’ performance and their customer segmentation practices, and helping to update the models that need refreshing. Our consulting team—Experian Advisory Services—has been meeting with clients virtually--helping them update, execute their crisis and downturn responses, and whiteboard new or updated tactical plans. Last but not least, we’re helping lenders and consumers defend themselves against a variety of fraud and identity theft schemes. Experian is committed to helping your organization during these uncertain times. For more resources, visit our Look Ahead 2020 Hub. Learn more Jim Bander, PhD, Analytics and Optimization Market Lead, Decision Analytics, Experian North America Jim Bander, PhD joined Experian in April 2018 and is responsible for solutions and value propositions applying analytics for financial institutions and other Experian business-to-business clients throughout North America. Jim has over 20 years of analytics, software, engineering and risk management experience across a variety of industries and disciplines. He has applied decision science to many industries including banking, transportation and the public sector. He is a consultant and frequent speaker on topics ranging from artificial intelligence and machine learning to debt management and recession readiness. Prior to joining Experian, he led the Decision Sciences team in the Risk Management department at Toyota Financial Services.

This is the second in a series of blog posts highlighting optimization, artificial intelligence, predictive analytics, and decisioning for lending operations in times of extreme uncertainty. The first post dealt with optimization under uncertainty. The word "unprecedented" gets thrown around pretty carelessly these days. When I hear that word, I think fondly of my high school history teacher.  Mr. Fuller had a sign on his wall quoting the philosopher-poet George Santayana: "Those who cannot remember the past are condemned to repeat it." Some of us thought it meant we had to memorize as many facts as possible so we wouldn't have to go to summer school. The COVID-19 crisis--with not only health consequences but also accompanying economic and financial impacts--certainly breaks with all precedents.  The bankers and other businesspeople I've been listening to are rightly worried that This Time is Different. While I'm sure there are history teachers who can name the last time a global disaster led to a widescale humanitarian crisis and an economic and financial downturn, I'm even more sure times have changed a lot since then. But there are plenty of recent precedents to guide business leaders and other policymakers through this crisis. Hurricanes Katrina and Sandy impacted large regions of the United States, with terrible human consequences followed by financial ones. Dozens of local disasters—floods, landslides, earthquakes—devastated smaller numbers of people in equally profound ways. The Great Recession, starting in 2008, put millions of Americans and others around the world out of work. Each of those disasters, like this one, broke with all precedents in various ways. Each of those events was in many ways a dress rehearsal, as bankers and other lenders learned to provide assistance to distressed businesses and consumers, while simultaneously planning for the inevitable changes to their balance sheets and income statements. Of course, the way we remember the past has changed. Just as most of us no longer memorize dates--we search for them on the web--businesspeople turn to their databases and use analytics to understand history. I've been following closely as the data engineers and data scientists here at Experian have worked on perhaps their most important problem ever. Using Experian's Ascend Analytical Sandbox--named last year as the Best Overall Analytics Platform, they combed through over eighteen years of anonymized historical data covering every credit report in the United States. They asked--using historical experience, wisdom, time-consuming analytics, a little artificial intelligence, and a lot of hard work--whether predicting credit performance during and after a crisis is possible. They even considered scenarios regarding what happens as creditors change the way they report consumer delinquencies to the credit bureaus. After weeks of sleepless nights, they wrote down their conclusions.  I've read their analysis carefully and I’m pleased to report that it says…Drumroll, please…Yes, but. Yes, it's possible to predict consumer behavior after a disaster. But not in precisely the same way those predictions are made during a period of economic growth. For a credit risk manager to review a lending portfolio and to predict its credit losses after a crisis requires looking at more data--and looking at it a little differently--than during other periods. Yes, after each disaster, credit scores like FICO® and VantageScore® credit scores continued to rank consumers from most likely to least likely to repay debts. But the interpretation of the score changes. Technically speaking, there is a substantial shift in the odds ratio that is particularly pronounced when a score is applied to subprime consumers. To predict borrower behavior more accurately, our scientists found that it helps to look at ten additional categories of data attributes and a few additional types of mathematical models. Yes, there are attributes on the credit report that help lenders identify consumer distress, willingness, and ability to pay. But, the data engineers identified that during times like these it is especially helpful to look beyond a single point in time; trends in a consumer's payment history help understand whether that customer is changing their typical behavior. Yes, the data reported to the credit bureaus is predictive, especially over time. But when expanded FCRA data is available beyond what is traditionally reported to a bureau, that data further improves predictions. All told, the data engineers found over 140 data attributes that can help lenders and others better manage their portfolio risk, understand consumer behavior, appreciate how the market is changing, and choose their next best action. The list of attributes might be indispensable to a credit data specialist whose institution needs to weather the coming storm. Because Experian knows how important it is to learn from historical precedents, we're sharing the list at no charge with qualified risk managers. To get the latest Experian data and insights or to request the Crisis Response Attributes recommendation, visit our Look Ahead 2020 page. Learn more

With new legislation, including the Coronavirus Aid, Relief, and Economic Security (CARES) Act impacting how data furnishers will report accounts, and government relief programs offering payment flexibility, data reporting under the coronavirus (COVID-19) outbreak can be complicated. Especially when it comes to small businesses, many of which are facing sharp declines in consumer demand and an increased need for capital. As part of our recently launched Q&A perspective series, Greg Carmean, Experian’s Director of Product Management and Matt Shubert, Director of Data Science and Modelling, provided insight on how data furnishers can help support small businesses amidst the pandemic while complying with recent regulations. Check out what they had to say: Q: How can data reporters best respond to the COVID-19 global pandemic? GC: Data reporters should make every effort to continue reporting their trade experiences, as losing visibility into account performance could lead to unintended consequences. For small businesses that have been negatively affected by the pandemic, we advise that when providing forbearance, deferrals be reported as “current”, meaning they should not adversely impact the credit scores of those small business accounts. We also recommend that our data reporters stay in close contact with their legal counsel to ensure they follow CARES Act guidelines. Q: How can financial institutions help small businesses during this time? GC: The most critical thing financial institutions can do is ensure that small businesses continue to have access to the capital they need. Financial institutions can help small businesses through deferral of payments on existing loans for businesses that have been most heavily impacted by the COVID-19 crisis. Small Business Administration (SBA) lenders can also help small businesses take advantage of government relief programs, like the Payment Protection Program (PPP), available through the CARES Act that provides forgiveness on up to 75% of payroll expenses and 25% of other qualifying expenses. Q: How do financial institutions maintain data accuracy while also protecting consumers and small businesses who may be undergoing financial stress at this time? GC: Following bureau recommendations regarding data reporting will be critical to ensure that businesses are being treated fairly and that the tools lenders depend on continue to provide value. The COVID-19 crisis also provides a great opportunity for lenders to educate their small business customers on their business credit. Experian has made free business credit reports available to every business across the country to help small business owners ensure the information lenders are using in their credit decisioning is up-to-date and accurate. Q: What is the smartest next play for financial institutions? GC: Experian has several resources that lenders can leverage, including Experian’s COVID-19 Business Risk Index which identifies the industries and geographies that have been most impacted by the COVID crisis. We also have scores and alerts that can help financial institutions gain greater insights into how the pandemic may impact their portfolios, especially for accounts with the greatest immediate exposure and need. MS: To help small businesses weather the storm, financial institutions should make it simple and efficient for them to access the loans and credit they need to survive. With cash flow to help bridge the gap or resume normal operations, small businesses can be more effective in their recovery processes and more easily comply with new legislation. Finances offer the support needed to augment currently reduced cash flows and provide the stability needed to be successful when a return to a more normal business environment occurs. At Experian, we’re closely monitoring the updates around the coronavirus outbreak and its widespread impact on both consumers and businesses. We will continue to share industry-leading insights to help data furnishers navigate and successfully respond to the current environment. Learn more About Our Experts Greg Carmean, Director of Product Management, Experian Business Information Services, North America Greg has over 20 years of experience in the information industry specializing in commercial risk management services. In his current role, he is responsible for managing multiple product initiatives including Experian’s Small Business Financial Exchange (SBFE), domestic and international commercial reports and Corporate Linkage. Recently, he managed the development and launch of Experian’s Global Data Network product line, a commercial data environment that provides a single source of up to date international credit and firmographic information from Experian commercial bureaus and Tier 1 partners across the globe. Matt Shubert, Director of Data Science and Modelling, Experian Data Analytics, North America Matt leads Experian’s Commercial Data Sciences Team which consists of a combination of data scientists, data engineers and statistical model developers. The Commercial Data Science Team is responsible for the development of attributes and models in support of Experian’s BIS business unit. Matt’s 15+ years of experience leading data science and model development efforts within some of the largest global financial institutions gives our clients access to a wealth of knowledge to discover the hidden ROI within their own data.  

In the face of severe financial stress, such as that brought about by an economic downturn, lenders seeking to reduce their credit risk exposure often resort to tactics executed at the portfolio level, such as raising credit score cut-offs for new loans or reducing credit limits on existing accounts. What if lenders could tune their portfolio throughout economic cycles so they don’t have to rely on abrupt measures when faced with current or future economic disruptions? Now they can. The impact of economic downturns on financial institutions Historically, economic hardships have directly impacted loan performance due to differences in demand, supply or a combination of both. For example, let’s explore the Great Recession of 2008, which challenged financial institutions with credit losses, declines in the value of investments and reductions in new business revenues. Over the short term, the financial crisis of 2008 affected the lending market by causing financial institutions to lose money on mortgage defaults and credit to consumers and businesses to dry up. For the much longer term, loan growth at commercial banks decreased substantially and remained negative for almost four years after the financial crisis. Additionally, lending from banks to small businesses decreased by 18 percent between 2008-2011. And – it was no walk in the park for consumers. Already faced with a rise in unemployment and a decline in stock values, they suddenly found it harder to qualify for an extension of credit, as lenders tightened their standards for both businesses and consumers. Are you prepared to navigate and successfully respond to the current environment? Those who prove adaptable to harsh economic conditions will be the ones most poised to lead when the economy picks up again. Introducing the FICO® Resilience Index The FICO® Resilience Index provides an additional way to evaluate the quality of portfolios at any point in an economic cycle. This allows financial institutions to discover and manage potential latent risk within groups of consumers bearing similar FICO® Scores, without cutting off access to credit for resilient consumers. By incorporating the FICO® Resilience Index into your lending strategies, you can gain deeper insight into consumer sensitivity for more precise credit decisioning. What are the benefits? The FICO® Resilience Index is designed to assess consumers with respect to their resilience or sensitivity to an economic downturn and provides insight into which consumers are more likely to default during periods of economic stress. It can be used by lenders as another input in credit decisions and account strategies across the credit lifecycle and can be delivered with a credit file, along with the FICO® Score. No matter what factors lead to an economic correction, downturns can result in unexpected stressors, affecting consumers’ ability or willingness to repay. The FICO® Resilience Index can easily be added to your current FICO® Score processes to become a key part of your resilience-building strategies. Learn more

This is the first to a series of blog posts highlighting optimization, artificial intelligence, predictive analytics, and decisioning for lending operations in times of extreme uncertainty.   Like all businesses, lenders are facing tremendous change and uncertainty in the face of the COVID-19 crisis.  While focusing first on how to keep their employees and customers safe during the new normal, they are asking how to make data-driven decisions in this new environment.  It’s only natural that business people are skeptical about whether analytics will work in a situation like today's – in which the data deviate from all historical precedents.  Certainly, nobody predicted, for example, that the number of loans with forbearance requests would increase by over 1000% during each two-week period in March. Can anyone possibly make an optimized decision when things are changing so quickly and when so many things are unknown?   Prescriptive analytics – also known as mathematical optimization – is the practice of developing a business strategy to achieve a business objective subject to capacity and other constraints, often using a demand forecast. For example, banks use optimization software to develop marketing and debt management strategies to run their lending operations.  But what happens when the demand forecast might be wrong, when the constraints change quickly, and when decision-makers cannot agree on a single objective? The reality is that decisionmakers have to balance multiple competing objectives related to many different stakeholders. And, especially during the COVID-19 crisis and the period of change that will certainly follow, they have to do so in the face of uncertainty.   Let's discuss some of the methods that analysts use to control risk while optimizing lending practices during times like these. These techniques, collectively known as robust optimization and robust statistics, help lenders and other business people deal with the uncomfortable reality that we do not know what the future holds.     Consider a hypothetical bank or other lender servicing a portfolio of consumer loans and forecasting its loss performance in this environment. Management probably has several competing objectives: they want to improve service levels on their digital channel, they want to minimize credit and fraud losses, they're facing a reduced operating budget, and they're not certain how many employees they will have and which vendors will be able to provide adequate service levels. Furthermore, they anticipate new and unpredicted changes, and they need to be able to update their strategies quickly.   The mathematics can be quite technical, but Experian’s Marketswitch Optimization is user-friendly software to help businesspeople--not engineers--design and deploy optimal strategies for practices such as Account Management and Loan Originations while facing such a dynamic and uncertain environment. The bank's business analysts (not computer specialists or mathematicians) will use techniques such as these:   With Sensitivity Analysis, the analysts will explore the performance of their optimized Account Management, Collections, and Loan Originations strategies while considering possible changes in input variables.   Optimization Scenarios with Uncertainty (technically known as Stochastic Optimization) allow the managers and analysts to design operational strategies that control risk, particularly the bank’s exposure to probabilistic and worst-case scenarios.   Using Scenario Performance Analysis, the lender's team will validate and test their optimization scenarios against a variety of different data sets to understand how their strategies would perform in each case.   Model Quality Evaluation techniques help the credit risk managers compare model predictions against actual performance during a quickly changing economy.   Model impact analysis (related to Model Risk Management) helps senior leadership assess when it is time to invest in improving its statistical models.   Robust Model Calibration Analysis removes unjustifiable variations in the lender's predictive models to make their predictions more valid as things change over time.   These six advanced analytics techniques are especially helpful when developing business strategies for a time in which some values are unknown—including future unemployment levels, staffing budgets, data reporting practices, interest rates, and customer demands.  Business decisions can—and arguably must—be optimized during times of uncertainty. But during times like these, it is especially important that the analysts understand how and why to account for the uncertainty in both the data and the models.   Lenders, are you optimizing your servicing and debt management strategies? It has never been more important than now to do so--using the advanced techniques available to manage uncertainty mathematically. Learn more about how Marketswitch can help you solve complex business problems and meet organizational objectives. Learn more

Article written by Alex Lintner, Experian's Group President of Consumer Information Services and Sandy Anderson, Experian's Senior Vice President of Client and Sales Operations Many consumers are facing financial stress due to unemployment and other hardships related to the COVID-19 pandemic. Not surprisingly, data scientists at Experian are looking into how consumers’ credit scores may be impacted during the COVID-19 national emergency period as financial institutions and credit bureaus follow guidance from financial regulators and law established in Section 4021 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). In a nutshell, Experian finds that if consumers contact their lenders and are granted an accommodation, such as a payment holiday or forbearance, and lenders report the accommodation accordingly, consumer scores will not be materially affected negatively. It’s not just Experian’s findings, but also those of the major credit scoring companies, FICO® and VantageScore®. FICO has reported that if a lender provides an accommodation and payments are reported on time consistent with the CARES Act, consumers will not be negatively impacted by late payments related to COVID-19. VantageScore® has also addressed this issue and stated that its models are designed to mitigate the impact of missed payments from COVID-19. At the same time, if as predicted, lenders tighten underwriting standards following 11 consecutive years of economic growth, access to credit for some consumers may be curtailed notwithstanding their score because their ability to repay the loan may be diminished. Regulatory guidance and law provide a robust response Recently, the Federal Reserve, along with the federal and state banking regulators, issued a statement encouraging mortgage servicers to work with struggling homeowners affected by the COVID-19 national emergency by allowing borrowers to defer mortgage payments up to 180-days or longer. The Federal Deposit Insurance Corporation stated that financial institutions should “take prudent steps to assist customers and communities affected by COVID-19.” The Office of the Comptroller of the Currency, which regulates nationally chartered banks, encouraged banks to offer consumers payment accommodations to avoid delinquencies and negative credit bureau reporting. This regulatory guidance was backed by Congress in passing the CARES Act, which requires any payment accommodations to be reported to a credit bureau as “current.” The Consumer Financial Protection Bureau, which has oversight of all financial service providers, reinforced the regulatory obligation in the CARES Act. In a statement, the Bureau said “the continuation of reporting such accurate payment information produces substantial benefits for consumers, users of consumer reports and the economy as a whole.” Moreover, the consumer reporting industry has a history of successful coordination during emergency circumstances, like COVID-19, and we’ve provided the support necessary for lenders to report accurately and consistent with regulatory guidance. For example, when a consumer faces hardship, a lender can add a code that indicates a customer or borrower has been “affected by natural or declared disaster.” If a lender uses this or a similar code, a notification about the disaster or other event will appear in the credit report with the trade line for the customer’s account and will remain on the trade line until the lender removes it. As a result, the presence of the code will not negatively impact the consumer credit score. However, other factors may impact a consumer’s score, such as an increase in a consumer’s utilization of their credit lines, which is a likely scenario during a period of financial stress. Suppression or Deletion of late payments will hurt, not help, credit scores In response to the nationwide impact of COVID-19, some lawmakers have suggested that lenders should not report missed payments or that credit bureaus should delete them. The presumption is that these actions would hold consumers harmless during the crisis caused by this pandemic. However, these good intentions end up having a detrimental impact on the whole credit ecosystem as consumer credit information is no longer accurately reflecting consumers’ specific situation. This makes it difficult for lenders to assess risk and for consumers to obtain appropriately priced credit. Ultimately, the best way to help is a consumer-specific solution, meaning one in which a lender reaches an accommodation with each affected individual, and accurately reflects that person’s unique situation when reporting to credit bureaus. When a consumer misses a payment, the information doesn’t end up on a credit report immediately. Most payments are monthly, so a consumer’s payment history with a financial institution is updated on a similar timeline. If, for example, a lender was required to suppress reporting for three months during the COVID-19 national emergency, the result would be no data flowing onto a credit report for three months. A credit report would therefore show monthly payments and then three months of no updates. The same would be true if a credit reporting agency were required to suppress or delete payment information. The lack of data, due to suppression or deletion, means that lenders would be blinded when making credit decisions, for example to increase a credit limit to an existing customer or to grant a new line of credit to a prospective customer. When faced with a blind spot, and unable to assess the real risk of a consumer’s credit history, the prudential tendency would be to raise the cost of credit, or to decrease the availability of credit, to cover the risk that cannot be measured. This could effectively end granting of credit to new customers, further stifling economic recovery and consumer financial health at a time when it’s needed most. Beyond the direct impact on consumers, suppression or deletion of credit information could directly affect the safety and soundness of the nation’s consumer and small business lending system. With missing data, lenders and their regulators would be flying blind as to the accurate information about a consumer’s risk and could result in unknowingly holding loan portfolios with heightened risk for loss. Too many unexpected losses threaten the balance of the financial system and could further seize credit markets. Experian is committed to helping consumers manage their credit and working with lenders on how best to report consumer-specific solutions. To learn more about what consumers can do to manage credit during the COVID-19 national emergency, we’ve provided resources on our website. For individuals looking to explore options their lenders may offer, we’ve included links to many of the companies and update them continuously. With good public policy and consumer-specific solutions, consumers can continue to build credit and help our economy grow.  

This is the final part of a three part series of blog posts highlighting key focus areas for your response to the COVID-19 health crisis: Risk, Operations, Consumer Behavior, and Reporting and Compliance. For more information and the latest resources, please visit Look Ahead 2020, Experian’s COVID-19 resource center with the latest news and tools for our business partners as well as links to consumer resources and a risk simulator. To read the first post, click here. To read the second post, click here.  Consumer Behavior Changes Consumers will be hit hard by the economic fallout from the virus. They’ll need to manage available credit and monthly income to bridge the gap when many people are faced with lost wages, tips and the ability to work. Often, the only way to monitor these short-term risks is with trended credit attributes, from both traditional and alternative data sources. These attributes were developed to provide additional insights into how consumer credit usage is trending over time. Is their debt and spending increasing? Have their credit lines been reduced? Have they historically been a transactor but have now started revolving balances? Could the account be a synthetic identity, set up for intentional misuse of credit? The most predictive attributes available in these times can transform how you can identify and respond to risk.   Reporting and Compliance The regulatory environment is continuing to shift. There are continuous changes to compliance in the digital space for emerging channels and applications. There will be impacts to credit reporting and processes that may echo the response from other major natural disasters. The good news is that the framework developed for Comprehensive Capital Analysis and Review (CCAR) stress testing can be used to run scenarios and understand impacts. Although bank capital is very strong, additional regulation, such as the Current Expected Credit Losses (CECL), with all the latest shifts around compliance, may continue to increase the pressure on financial institutions. Having an adaptable process to forecast and stress-test scenarios to adjust capital requirements, especially in light of government fiscal and monetary stimulus measures, will be at the core of managing financial stability during a period of changes.   Conclusion We need to brace for the pending recession after the longest economic expansion in our lifetimes. These are the times where organizations may struggle to survive or thrive in the face of adversity. This is the time to act on your strategic plan, lean on your strategic partners, and leverage industry leading data and capabilities to soften the landing and thrive in the next phase of growth. Let’s prepare and get through this, together.   Learn More

In today’s rapidly changing economic environment, the looming question of how to reduce portfolio volatility while still meeting consumers' needs is on every lender’s mind. So, how can you better asses risk for unbanked consumers and prime borrowers? Look no further than alternative credit data. In the face of severe financial stress, when borrowers are increasingly being shut out of traditional credit offerings, the adoption of alternative credit data allows lenders to more closely evaluate consumer’s creditworthiness and reduce their credit risk exposure without unnecessarily impacting insensitive or more “resilient” consumers. What is alternative credit data? Millions of consumers lack credit history or have difficulty obtaining credit from mainstream financial institutions. To ease access to credit for “invisible” and subprime consumers, financial institutions have sought ways to both extend and improve the methods by which they evaluate borrowers’ risk. This initiative to effectively score more consumers has involved the use of alternative credit data.1 Alternative credit data is FCRA-regulated data that is typically not included in a traditional credit report and helps lenders paint a fuller picture of a consumer, so borrowers can get better access to the financial services they need and deserve. How can it help during a downturn? The economic environment impacts consumers’ financial behavior. And with more than 100 million consumers already restricted by the traditional scoring methods used today, lenders need to look beyond traditional credit information to make more informed decisions. By pulling in alternative credit data, such as consumer-permissioned data, rental payments and full-file public records, lenders can gain a holistic view of current and future customers. These insights help them expand their credit universe, identify potential fraud and determine an applicant’s ability to pay all while mitigating risk. Plus, many consumers are happy to share additional financial information. According to Experian research, 58% say that having the ability to contribute positive payment history to their credit files makes them feel more empowered. Likewise, many lenders are already expanding their sources for insights, with 65% using information beyond traditional credit report data in their current lending processes to make better decisions. By better assessing risk at the onset of the loan decisioning process, lenders can minimize credit losses while driving greater access to credit for consumers. Learn more 1When we refer to “Alternative Credit Data,” this refers to the use of alternative data and its appropriate use in consumer credit lending decisions, as regulated by the Fair Credit Reporting Act. Hence, the term “Expanded FCRA Data” may also apply in this instance and both can be used interchangeably.

For the last several years, as the global economy flourished, the opportunities created by removing friction and driving growth guided business strategies governing identity and fraud. The amount of profitable business available in a low-friction environment simply outweighed the fraud that could be mitigated with more stringent verification methods. Now that we’re facing a global crisis, it’s time to reconsider the approach that drove the economic boom that defined that last decade. Recognizing how economic changes impact fraud At the highest level, we separate fraud into two types; third party fraud and first party fraud. In simple terms, third party fraud involves the misuse of a real customer’s identity or unauthorized access to a real customer’s accounts or assets. First party fraud involves the use of an identity that the fraudster controls—whether it’s their own identity, a manipulated version of their own identity, or a synthetic identity that they have created. The important difference in this case is that the methods of finding and stopping third party fraud remain constant even in the event of an economic downturn – establish contact with the owner of the identity and verify whether the events are legitimate. Fraud tactics will evolve, and volumes increase as perpetrators also face pressure to generate income, but at the end of the day, a real person is being impersonated, and a victim exists that will confirm when fraud is taking place. Changes in first party fraud during an economic downturn are dramatically different and much more problematic. The baseline level of first party fraud using synthetic, manipulated and the perpetrator’s own identity continue, but they are augmented by real people facing desperate circumstances and existing “good” customers who over-extend while awaiting a turn-around. The problem is that there is no “victim” to confirm fraud is occurring, and the line between fraud (which implies intent) and credit default (which does not) becomes very difficult to navigate. With limited resources and pressures of their own, at some point lenders must try to distinguish deliberate theft from good customers facing bad circumstances and manage cases accordingly. The new strategy When times are good, it’s easier to build up a solid book of business with good customers. Employment rates are high, incomes are stable, and the risks are manageable. Now, we’re experiencing rapidly changing conditions, entire industries are disrupted, unemployment claims have skyrocketed and customers will need assistance and support from their lenders to help them weather the storm. This is a reciprocal relationship – it behooves those same lenders to help their customers get through to the other side. Lenders will look to limit losses and strengthen relationships. At the same time, they’ll need to reassess their existing fraud and identity strategies (among others) as every interaction with a customer takes on new meaning. Unexpected losses We’ve all been bracing for a recession for a while. But no one expected it to show up quite like it did. Consumers who have been model customers are suddenly faced with a complete shift in their daily life. A job that seemed secure may be less so, investments are less lucrative in the short term, and small business owners are feeling the pressure of a change in day-to-day commerce. All of this can lead to unexpected losses from formerly low-risk customers. As this occurs, it becomes more critical than ever to identify and help good customers facing grim circumstances and find different ways to handle those that have malicious intent. Shifting priorities When the economy was strong, many businesses were able to accept higher losses because those losses were offset by immense growth. Unfortunately, the current crisis means that some of those policies could have unforeseen consequences. For instance – the loss of the ability to differentiate between a good customer who has fallen on hard times and someone who’s been a bad actor from the start. Additionally, businesses need to revise their risk management strategies to align with shifting customer needs. The demand for emergency loans and will likely rise, while loans for new purchases like cars and homes will fall as consumers look to keep their finances secure. As the need to assist customers in distress rises and internal resources are stressed, it’s critical that companies have the right tools in place to triage and help customers who are truly in need. The good news The tools businesses like yours need to screen first party fraud already exist. In fact, you may already have the necessary framework in place thanks to an existing partnership, and a relatively simple process could prepare your business to properly screen both new and existing customers at every touchpoint. This global crisis is nowhere near over, but with the right tools, your business can protect itself and your customers from increased fraud risks and losses of all sorts – first party, stolen identities, or synthetic identities, and come out on the other side even stronger. Contact Experian for a review of your current fraud strategy to help ensure you’re prepared to face upcoming challenges. Contact us

This is the second of a three part series of blog posts highlighting key focus areas for your response to the COVID-19 health crisis: Risk, Operations, Consumer Behavior, and Reporting and Compliance. For more information and the latest resources, please visit Look Ahead 2020, Experian’s COVID-19 resource center with the latest news and tools for our business partners as well as links to consumer resources and a risk simulator. To read the introductory post, click here.  Strategic Focus on Risk The last recession spurred an industry-wide systemic focus on stressed scenario forecasting. Now’s the time to evaluate the medium- to long-term impacts of the downturn response on portfolio risk measurement. The impact will be wide ranging, requiring recalibration of scorecards and underwriting processes and challenging assumptions related to fees, net interest income, losses, expenses and liquidity. There are critical inputs to understand portfolio monitoring and benchmarking by account types and segments.   Higher unemployment across the country is likely. You need a thorough response to successfully navigate the emerging risks. Expanding credit line management efforts for existing accounts is critical. Proactively responding to the needs of your customers will demand a wide range of data and analytics and more frequent and active processes to take action. Current approaches and tools with increased automation may need to be reevaluated. When sudden economic shocks occur, statistical models may still rank-order effectively, while the odds-to-score relationships deteriorate. This is the time to take full advantage of explainable machine learning techniques to quickly calibrate or rebuild scorecards with refreshed data (traditional and alternative) and continue the learning cycle.   As your risk management tools are evaluated and refreshed, there are many opportunities to target your servicing strategies where they can produce results. This may take the form of identifying segments exhibiting financial stress that can benefit from deferred payments, loan consolidation or refinancing. It might also involve more typical risk mitigation strategies, such as credit line reduction. There are several scenarios that may emerge over the next nine to 12 months that can offer opportunities to deepen relationships with your customers while managing long-term risk exposure. Optimizing Business Operations One of the most significant impacts to your business is the increase in transaction volumes as a result of the economic shock. We expect material increases in collections, refinancing and hardship programs. These increases are arriving at a time when many businesses have streamlined their teams in concert with periods of low delinquency and credit losses. Additional strain from call center shutdowns and limited staffing can easily overwhelm operations and cause business continuity plans to breakdown.   More than ever, the use of digital channels and self-servicing technology are no longer nice-to-haves. Customers expect online access, and efficiency demands automation, including virtual assistants. As more volume migrates to these channels, it’s critical to have the right customer experience and fraud risk controls deployed through flexible, cloud-based systems.   Learn More

This is the introduction to a series of blog posts highlighting key focus areas for your response to the COVID-19 health crisis: Risk, Operations, Consumer Behavior, and Reporting and Compliance. For more information and the latest resources, please visit Look Ahead 2020, Experian's COVID-19 resource center with the latest news and tools for our business partners as well as links to consumer resources and a risk simulator. Responding to COVID-19 The response to COVID-19 is rolling out across the global financial system and here in North America. Together, we’re adapting to working remotely and adjusting to our “new normal.” It seems the long forecasted economic recession is finally and abruptly on our doorstep. Recession planning has been a focus for many organizations, and it’s now time to act on these contingency plans and respond to the downturn. The immediate effects and those that quickly follow the pandemic will widely impact the economy, affecting businesses of all sizes, employment and consumer confidence. We learned from the housing crisis and Great Recession how to identify and adapt to emerging risks. We can apply those skills while rebuilding the economy and focusing on the consumer. How should you respond? What strategies should you deploy? How can you balance emerging risks, changing consumer expectations and regulatory impacts? First, let's draw upon the best knowledge we gained from the last recession and apply those learnings. Second, we need to understand the current environment including the impact of major changes in technology and consumer behavior over the last few years. This approach will allow us to identify key themes to help build-out strategies to focus resources, respond successfully and deliver for stakeholders.   Anticipate the pervasive and highly impactful market dynamics and trends The impact of this downturn on the consumer, on businesses and on financial institutions will be very different to that of the Great Recession. There will be a complete loss of income for many workers and small businesses. In a survey conducted by the Center for Financial Services Innovation (CFSI), more than 112 million Americans said that they don’t have enough savings to cover three months of living expenses*. These volatile market conditions and consumer insecurity will cause changes to your business models. You must prepare to manage increased fraud attacks, continue to push toward digital banking and understand regulatory changes.   Learn More   *U.S. Financial Health Pulse, 2018 Baseline Survey Results. https://s3.amazonaws.com/cfsi-innovation-files-2018/ wp-content/uploads/2018/11/20213012/Pulse-2018- Baseline-Survey-Results-11-16.18.pdf