Credit Cards Turn To Behavioral Analysis To Manage Risk

Credit card companies are looking for new ways to manage consumers’ risk of defaulting on balances.  Apparently, they now plan to review cardholders’ spending patterns, including which merchants they frequent, to determine build their risk model.

Credit card issuers are no strangers to using behavioral analysis to shape much of their business.  Trust me; I used to work for one.  I remember attending a number of meetings with marketing people arguing across the table from risk people about raising late fees from $25 to $29.

Marketing would point out that people may be less likely to sign up for the card, or cancel the card, if fees were increased.  Risk pointed out that the fees may deter people already on the edge from falling behind (assuming if the fee was higher for their card they would keep it current, and let the card charging a lesser late fee go past due.

The compromise reached involved risk-based pricing, a way of separating cardholders into various “buckets,” and each group being be charged different sets of punitive fees, interest rates, etc. But now it seems credit card companies are taking this idea a step further.

Attention Wal-mart Shoppers, Hide Your Credit Cards

Just the other day, Writer’s Coin passed along a story originally appearing on Good Morning America.  From the Writer’s Coin, a brief description of the video:

It featured Kevin Johnson, a responsible credit-card user that had recently seen the limit on his American Express Blue card go down by $7,000. What could possibly cause AmEx to lower his limit when he pays his card in full every month, has a 764 FICO score, and owns his own business?

When Johnson questions American Express to find out why his credit limit was decreased, he received the following response:

The answer: Kevin Johnson had recently visited a Wal-Mart that he doesn’t typically go to, and the reason AmEx gave him was:

“Other customers who have used their card at establishments where you recently shopped have a poor repayment history with American Express.”

Yikes!  So American Express is now determining credit worthiness based on where you shop?  If people use an American Express card at a Wal-mart where someone else used the same card and subsequently went bankrupt, does that mean Kevin Johnson will go bankrupt?

I don’t like the idea of being lumped in with others, but this bothers me on another level.  I wonder if Amex would do the same thing to a cardholder shopping at a swimming pool supply store?  One could assume that shoppers there are homeowners, and relatively affluent because the have a swimming pool.  Of course, that doesn’t tell the whole story.  They could be two months behind on their mortgage and buying pool supplies to get the water blue in time to show the house for a motivated sale!

The pool supply store example is just as flawed as the Wal-mart example.  Wealthy people may choose to shop at Wal-mart to save money, or search thrift shops because they are frugal.  It is not an indication of financial troubles. The end result of all this analysis by credit card issuers is that they will ultimately lose loyal customers.  The problem is there are hundreds of people ready and willing to take their place.

Leave a Comment

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>