INTERACTIVE SESSION: ORGANIZATIONS

HOW MUCH DO CREDIT CARD COMPANIES KNOW ABOUT YOU?

When Kevin Johnson returned from his honeymoon, a letter from Am erican Express was waiting for him. The letter informed Johnson that AmEx was slash ing his cre dit limit by 60 percent. Why ? Not b ecause Johnson mi ssed a payment or had bad credit. The letter stat ed: "Other custom ers who have used th eir card at establishments where you recently shopped , ha ve a poor repayment history with American Express ." J oh ns on had started sh opping at Walmart. Welcome to th e new era of cre dit card profiling. Every time yo u m ake a pu rchase with a cre dit card, a record of th at sale is logged into a massive data repository maintained by th e card issuer. Each purchase is assigned a four-digit category code that describes the type of purchase tha t was made. There are separat e codes for groce ry stores, fast food re staura nts, do ctors, bars, bail and bond payments, and dating and esco rt services. Taken together, th es e cod es allow cre dit card compan ies to learn a great deal about each of its custom ers at a glance. Credit card com panies us e th es e data for multiple purposes. First, th ey use th em to target future promotions for additional products more accurately.. Users that purchase airline tickets might re ceive pro motions for frequent flyer mil es , for example. The data h elp card issuers guard against credit card fraud by identifyin g purchases that appear unusual compa re d to a cardholder 's no rmal purchase hi story. The card compa n ies also flag use rs who frequently charge more th an th eir credit limit or demonstrate erratic sp ending hab its. Lastly, these records are us ed by law en forcem ent agencies to track down crim inals. Credit card holders with debt, th e on es who n ever fully payoff th eir balances entire ly and thus ha ve to pay monthly interest ch arges and other fees, h ave b een a major source of pro fit for credit card issu ers. How ever, th e recent financial crisis and cre dit cru nch have turned th em into a mounting liability .becaus e so many people are defaulting on th eir paym ents and even filing for bankruptcy. So th e cre dit card companies are now focusing on mining cre dit card data to predic t cardh olde rs posing th e high est risk. Using m athematical form ulas and insights from behavioral science, th ese companies are developing m ore fine-grained pro files to help th em get inside th e heads of th eir customers. The data provide n ew insights about th e relationship of certa in typ es of pur chases to a customer's ability or inability to payoff credit card balances and other debt. The card-issuing companies now use this information to deny cre dit card applications or shrink th e amount of credit avail able to high-risk custom ers. These compa n ies are gene ralizing based on certai n typ es of purchases th at may unfairly cha rac terize responsible cardh olde rs as risky. Purchases of secondh an d clothing, bail bond services, m assages, or gambling might cause card issu ers to identify you as a risk, eve n if you maintain your balance respon sibly from month to month. Other behaviors that raise suspicion: using your cre dit card to get your tires re-tre ade d, to pay for drinks at a bar, to pay for m arriage counseling, or to obtain a cash advance. Charged speeding tickets raise suspicion b ecau se th ey may indicat e an irrational or impulsive person ality . In light of th e sub -prime mortgage crisis, cre dit card compan ies h ave eve n begun to cons ider indi vidua ls from Florid a, Nevada, California, and othe r states hardest hit by foreclosures to be risks simply by virtue of th eir stat e of residence. The same fine-grained profiling also identifies th e most reliable cre dit-worthy cardholders. For exam ple, th e cre dit card companies found th at peopl e who buy high-quality bird seed an d snow rak es to swee p snow off of th eir roofs are very likely to pay th eir debts and n ever miss payments. Credit card com panies are eve n using th eir detail ed kn owledge of cardh olde r behavior to establish person al connec tions with th e clients that owe th em money an d convince th em to payoff th eir bal ances. One 49-year old woman from Missouri in th e throes of a divorce owed $40,000 to vario us cre dit card compan ies at one point, including $28,000 to Bank of Am eri ca . A Bank of Ameri ca customer ser vice rep resentative studied th e woman's profil e and spoke to h er numerous times , eve n pointing out on e instance whe re sh e was errone ously cha rged twice. The rep res entative forged a bond with th e card holder, and as a result she paid back th e entire $28,000 she owed, (eve n though she faile d to rep ay much of th e remainder that sh e owed to other cre dit card compa n ies.) This example illu strates something th e cre dit card compa nies now know: wh en cardholders feel m ore com fortable with compa nies, as a result of a good

relationship with a custom er service rep or for any other reason, th ey're more likely to pay their debts. It's common practice for credit card companies to use this information to get a better idea of consumer trends, but should th ey be able to us e it to preemp tively deny credit or adjust terms of agreements? Law en force m ent is not permitted to profile individu als, but it appears that cre dit card companies are doing just that. In June 2008, the FTC filed a lawsuit against CompuCredit, a sub-prime credit card marketer. CompuCredit had b een using a sophisticated behav ioral scoring model to identify customers who they consider ed to have risky purchasing behaviors and lower these customers' cre dit limits. CompuCredit settled th e suit by crediting $114 mill ion to the accounts of these supposedly risky customers and paid a $2.5 million penalty. Congress is investigating the extent to which credit card com panies us e profiling to determine interest rates and policies for their cardholders. The n ew cre dit card reform law signed by President

Bara ck Obama in May 2009 requires federal regula tors to in vestigate th is. Regulators must also deter mi n e whether minority cardholders were adversely pro filed by these criteria. The new legislation also bars card companies from raising interest rates at any time and for any reason on their customers. Going forward, you're likely to receive far fewer credit card solicitations in th e mail and fewer offers of interest-free cards with rat es that skyrocket after . an initial grace period. You'll also see fewer policies intended to trick or deceive customers, like cash back rewards for unpaid balances, whi ch actually encourage cardholders not to pay what they owe. But the credit card com panies say that to compen sate for th ese changes, they'll need to raise rates across th e board, even for good custom ers.
Sources : Betty Schiffman , "w h o Know s You Better? Your Cre dit Card Company or Your Spou se ?" Daily Fin ance, April 13, 2010; Ch arle s Duhigg, "Wh at Does Your Credit-Card Company Know ab ou t You?" The New York Times, June 17, 2009; and Cre dit Card s.com, "Can Y our Lifestyl e Hurt Your Cred it ?" MSN Mon ey, June 30,

CASE STUDY QUESTIONS

1. What compe titive strategy are th e credit card companies pursuing? How do information systems support th at strategy? 2. What ar e th e business b enefits of analyzing custom er purchase data and constru cting behavioral profil es ? 3 . Are these practices by cre dit card companies ethical? Are th ey an invasion of privacy? Why or why not?

MIS IN ACTION
1. . If yo u have a credit card, make a detailed list of all of your purch ases for the past six months. Then write a paragraph des cribing what credit card companies learned about your in terests and beh avior from these purchases. 2. How would this information benefit the credit card companies? What other companies would be interested?