Non-Prime Issuing Opportunities: Setting Multiple Bars for Diverse Segments

SUMMARY

This report examines the opportunities and tools available to credit card issuers and a few alternative lenders in the very broad non-prime consumer market. What emerges is a picture of an expanding frontier, with:

• subprime prospects well-covered by established decisioning and data tools
• thin credit bureau file prospects becoming increasingly well covered by established alternative data sources and scoring tools
• "no file" prospects remaining on the frontier of specialized, sometimes narrow data sources, specialized analytics, and alternative card products.

Competitively, the reasons for pursuing non-prime segments are readily apparent. Subprime consumers, while possessing a high risk of default, will likely bear a higher range of risk-based pricing (ARPs, fees) in order to gain access to credit, and skilled issuers can manage the portfolios to a higher overall return. Thin file or no-file consumers have less of a demonstrated credit track record, and may prove to be either good or bad credit risks. While some of these thin-file/no-file individuals can appropriately be called credit-underserved (i.e. they collectively represent a backlog of prospects who deserve credit consideration), these segments contain perennial new prospects as well: students, first time credit users, immigrants, etc...

Highlights of the report include:

• 1. None-prime consumers, defined by multiple segments delimited by bureau score ranges or lack of bureau files, represent 80 - 105 million credit prospects.
• 2. Subprime credit card prospects, defined by a demonstrated history of credit problems, are so far avoiding the drastic declines of subprime mortgage holders.
• 3. Thin file credit underwriting tools are rapidly maturing, with an ability to handle previously-unscorable individuals.
• 4. Remaining unscorable prospects with no bureau files reside on the frontier of underwriting tools. Specialized data sources and analytics are the tools of lenders wishing to address these remaining no-file prospects.

TABLE OF CONTENTS

TABLE OF FIGURES

Introduction

I. Defining The Non-Prime Opportunity

• Definitive Scores = Unclear Boundaries
• Just Part of a Long Term Trend

II. The Best/Worst of Times for Subprime

• Always Under the Microscope
• Which Way Is The Wind Blowing?
• Picking The Best Subprime Prospects

III. Thin File Comes Of Age

• FICO Expansion Score
• LexisNexis RiskView
• Link2Credit

IV. No-File Prospects: The Tough Get Tougher

• A Diversity of Circumstances
• A Payday In Payday Lending?
• Tapping The Power of Payroll Deduction

V. The Future Frontier

TABLE OF FIGURES

• Figure 1: Definitive Scores = Fuzzy Boundaries
• Figure 2: Non-Prime Segments
• Figure 3: Subprime Opportunities Were Being Tapped 15 Years Ago
• Figure 4 Even Before Thin-File Technologies, Issuers Were Moving Down-Market
• Figure 5: Issuers Supported New Cardholders' Lower Wealth and Income
• Figure 6: Overall Portfolio Management Trends Have Been Positive
• Figure 7: ABS Subprime Portfolio Trends Have Been Positive Through Mid-Year
• Figure 8: Improving FICO Expansion Score Scorability Results
• Figure 9: RiskView Data Sources
• Figure 10: Link2Credit Provides Thin-File/ No-File Prospect File Compilation and Marketing Applications
• Figure 11: A Qualitative Segmentation of Today's No-File Consumers