white paper

Managing Credit Line Increase Strategies

with Opt-In Requirements

»» Summary
In many countries, card issuers are now required to obtain express consent from
FICO has used customers for credit line increases. This opt-in requirement is already in place in
client engagements to countries such as South Africa, Ireland, the Netherlands and Australia, and Canada
build opt-in requirements is next in line. This requirement places a new constraint on issuers, and naturally
into our Credit Line raises the question: What impact will the opt-in requirement have on my credit line
Management Optimization increase program? And: How do I continue to target customers optimally while
methodology. We can help complying with the new regulations?
you identify the impacts of
This white paper explores the key issues for card issuers bound by opt-in
opt-in requirements and
requirements. It discusses:
develop strategies that can
increase the profitability of • Multiple impacts of opt-in requirements on credit line
your credit line increase programs
increase programs. • An analytic approach for optimizing line increases in opt-in situations
• Early results from FICO clients who have used optimization to handle
this challenge

www.fico.com Make every decision countTM

Managing Credit Line Increase Strategies with Opt-In Requirements

»» Opt-In Requirement In working with issuers across the globe, including those in opt-in countries, FICO has gained insights
for Credit Line Increase into the ways in which credit line increases—and the corresponding profit dynamics—change, given
the switch from automated to opt-in line increases.
Programs
In weighing the impact of credit line increase opt-in requirements, it’s important to consider:

• Lack of data. For countries new to the opt-in requirement, or without sufficient data to estimate
the response element, there’s no time like the present to implement a test and gather that data.
Luckily, response data can be gathered in as little as 1–3 months. FICO can help you design a test
that will gather the maximum amount of information for modeling purposes. We also have the
expertise to get you started immediately, and in compliance with risk and regulatory requirements,
while you are waiting on data.
• Revenue and profit impact. Despite lower volumes of line increases, and the corresponding
impact on revenue generation, many of the principles of credit line increase targeting still apply.
Even with automated line increases, not all customers “respond” by actually using the new line
assigned. With opt-in, the customers who accept a line increase are more likely to use that new
line. As such, per responder profit is relatively the same between an automated strategy and an
opt-in strategy. So, the impact of an opt-in requirement on revenue may be lower than what
many issuers might expect. The impact on profit and/or volumes can be offset by targeting more
accounts that will respond.
• Targeting for response. In addition to the usual targeting of accounts that are most likely to use
the new line and least likely to default, we must introduce a new component into our targeting,
i.e., who is most likely to opt-in or respond.
• Possible adverse selection. Those customers most likely to opt-in can have a higher level of
risk, so we must be able to measure this and account for it in our strategies. The fact is that the
challenge of adverse selection is not new to credit line increases. Accounts in the past that were
more likely to use the new line tended to be of higher risk. The requirement of customer opt-in for
line increases does not introduce the adverse selection issue, rather extends it given the necessary
new processes to comply with the regulation (making the offer and capturing response).
• Use of optimization. Decision modeling and optimization are ideally suited for situations with
multiple, often conflicting, goals and constraints. With the added complexities introduced by the
opt-in requirement, and the increasingly difficult task of finding good, profitable customers, opti-
mization brings more value than ever before. The FICO approach (outlined below) can help your
organization quantify and trade off the potential changes to your credit line increase program,
and determine where you want to operate in the opt-in environment. Issuers can, therefore, turn
the opt-in requirement to their advantage by establishing better controls over who is offered line
increases, and therefore, establishing further control over contingent liability and use of capital.

»» Analytic Design with FICO has experience developing decision models and optimizing strategies for decision areas that
Opt-In Requirement require opt-in consent from the borrower. Specifically, FICO has developed both optimal strategies for
credit line increase cases requiring opt-in, as well as strategies to cross-sell shadow lines of credit for
credit card portfolios. We have developed optimized strategies in the Australian market, where credit
line increases require written acceptance by the borrower.

In these cases, the analytic design for the decision model focuses on response analytics as the starting
point for the dependent probabilities that capture the borrower’s expected reaction to the specific
offer. The following diagram, which represents an example decision model, illustrates the relation-
ships among components of a decision model and highlights the addition of a response component
to a typical credit line increase decision model for cases where opt-in consent is required.

© 2011 Fair Isaac Corporation. All rights reserved. page 2

Managing Credit Line Increase Strategies with Opt-In Requirements

The additional response component used to

INFLUENCE DIAGRAM: CREDIT LINE INCREASE WITH OPT-IN COMPONENT model an opt-in requirement is designed to
rank-order accounts using the likelihood that
they will respond positively to the increase or
Behavior Score offer. The profile of accounts considered for
Attrition
optimal action during the optimization stage
Current Utilization is dependent on the likelihood of response.
This interaction, therefore, becomes part of a
Response Revenue trade-off analysis—optimization problem—
Attrition Score
alongside other critical components, such as
Profit risk and revenue.
Delinquency L 6 Months Credit Line
Increase Offer
FICO’s experience to date, from live strategy
Losses
Number of Products tracking, has shown response rates to credit
line increase offers meet and exceed the ex-
Risk pectation set during strategy development.
Credit Bureau Score
Typical response rates for countries optimiz-
ing credit line increases with opt-in require-
ments range between 15% to 30%, depend-
ing on the frequency and type of offer
campaign. The fact that our optimization solution has achieved the expected accuracy for response
is reassuring given the nature and focus of the optimization—to maximize profit by selecting those
accounts that will respond to the line increase offer and generate revenue as a result. With response
rates and other key metrics meeting or exceeding expectations, we are confident the expected ROI
will be achieved.

Furthermore, internal analysis by FICO has shown that the addition of a response component to
the decision model does not substantially affect the profile of accounts being targeted. Our decision
models still target the most profitable accounts (accounts with profiles that show a balance
between risk and revenue potential) when each account’s response rate is accounted for in the
decision model.

»» Potential Impacts Based on FICO’s experience, the following are expected outcomes of having an opt-in requirement
for credit line Increases:
on Credit Line Increase
Program Results
1. Impact to Penetration Rates
There will be fewer increases taken up by borrowers when they are required to explicitly
opt-in, which leads to lower penetration rates. This creates an opportunity for an optimization
environment to target customers who are likely to opt-in. The objectives of the credit line increase
strategy are therefore transformed to obtain the set of actions that yield maximum returns while
accounting for each account’s likelihood of response. Penetration, or acceptance of a credit line
increase offer, is only the first step in realizing the benefit of a line increase. The efficiency rate on
credit line increase offers, a measure of how much of the offered credit line increase is actually used,
becomes an increasingly relevant metric with opt-in requirements; optimization is ideally suited to
achieve higher increase efficiency rates.

© 2011 Fair Isaac Corporation. All rights reserved. page 3

Managing Credit Line Increase Strategies with Opt-In Requirements

2. Impact to Profit per Increased Account

Profit returns from an increase program can suffer, given the lower volumes of increases
expected to be taken up. In reality, however, the drivers for profitable line increase programs
remain relevant despite the lower penetration rates, and opt-in requirements do not have strong
adverse effects on profit per increased account (accounts that received an increase and used the
additional line). FICO has observed an average incremental profit over business as usual strategies
of USD$8 per increased account resulting from strategies delivered to clients across the globe. We
expect this per account average to hold steady in cases where opt-in is required, subject
to volume targets and operational constraints.

The fundamental driver of profit, therefore, remains targeting increases at accounts that will achieve
the right balance between risk and reward for a credit line increase strategy. As mentioned above,
adding a response component to the decision model serves to refine FICO’s methodology and allow
for modeling of response rates, but does not significantly change the profit profile of accounts being
offered a credit line increase.

3. Impact to Offer Cost

As a result of the opt-in requirement, additional costs may be incurred to process the
credit line increase offer, to capture the opt-in response, and to comply with any policy
requirements. This will result in operational cost pressures to the overall line management program
bottom line. For the purposes of optimization, FICO considers this cost pressure a constraint that
can be neutralized in a trade-off assessment. By targeting accounts that have a high likelihood of
response, our methodology will yield high increase efficiency ratios while controlling the cost
pressures to process the actions taken.

»» Making Opt-In FICO believes that having a response component helps further refine the process of optimally
Requirements Work selecting accounts for action. The true value of an optimized credit line increase program comes
from those account holders who actually use the increase in credit lines. Adding this opt-in response
component to the line increase offer is a natural extension of an increase program. The response
component is implemented in a way such that we do not substantially alter which accounts are
targeted for a credit line increase; we continue to target the accounts that drive profit.

In countries where opt-in to credit line increases is required, FICO not only has been able to apply
its optimization methodology to accommodate this requirement, but has also observed positive
results during early live tracking. We invite card issuers to discuss their programs and goals with us.

Visit www.fico.com/insights for more white papers, including:

• A Recipe for Right-Sizing Credit Facilities

© 2011 Fair Isaac Corporation. All rights reserved. page 4

Managing Credit Line Increase Strategies with Opt-In Requirements

about FICO

FICO (NYSE:FICO) delivers superior predictive analytics solutions that drive smarter decisions. The
company’s groundbreaking use of mathematics to predict consumer behavior has transformed entire
industries and revolutionized the way risk is managed and products are marketed. FICO’s innova-
tive solutions include the FICO® Score—the standard measure of consumer credit risk in the United
States—along with industry-leading solutions for managing credit accounts, identifying and minimiz-
ing the impact of fraud, and customizing consumer offers with pinpoint accuracy. Most of the world’s
top banks, as well as leading insurers, retailers, pharmaceutical companies and government agencies,
rely on FICO solutions to accelerate growth, control risk, boost profits and meet regulatory and com-
petitive demands. FICO also helps millions of individuals manage their personal credit health through
www.myFICO.com. Learn more at www.fico.com. FICO: Make every decision count™.

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FICO and “Make every decision count” are trademarks or registered trademarks of Fair Isaac Corporation in the United States and in other countries. Other product and company names herein may be trademarks of their respec-
tive owners. © 2011 Fair Isaac Corporation. All rights reserved.

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