How Much Is Your Credit Data Worth?

June 6, 2018

To the Victor Goes the Data

The digital age has seen, among many other things, the widespread adoption of a business model by which consumers get digital services they hugely value for severely discounted prices or, oftentimes, for free. These companies collect data on your goings-on, and they sell access of your individualized data to interested marketers who are trying to reach you with their own products and services.

More recently, this business model has spread from websites offering free digital services to companies offering discounted, more tangible services. For example, whereas one ticket to see a movie in theaters used to cost upwards of $10 per ticket, Movie Pass now lets you see unlimited movies in theaters for just $9.95 per month. How is that even possible? They, too, are monetizing our data.

Before I lose your interest, don’t worry: this isn’t a lecture on privacy—good luck finding an original take on that subject. Rather, it’s an APB to anyone in financial services about how this business model has already been in place in your industry for years and has yielded massive growth to the companies that have cracked it.

Aggregator or Affiliate Marketing sites—such as Credit Karma, Lending Tree, Nerd Wallet, CreditCards.com, Credit Sesame, Bankrate, and the list goes on—often offer consumers free finance-related services such as pulling credit reports or filing taxes. The sites then use this data to allow financial services companies to bid for marketing space to reach their ideal customers. In 2015, 17% of all general purpose credit card applications were submitted via these Aggregator sites; 2016 saw that number grow to 20%—that’s more than 5 million cards booked.

Before we talk about how Aggregator sites work, and how they could represent a huge step forward in solving your digital marketing woes, let’s quickly walk through the struggles that other digital marketing channels present.

 The Struggle Is Real

There are already many digital marketing channels to get your financial products in front of consumers, the most prominent of which include display ads, paid search ads, social media ads, and email, and these platforms usually charge per marketing impression or per click. How are you supposed to reconcile $2 per click of Google AdWords vs. the usual let’s say ~$200 per loan you’re more accustomed to paying? $2 is obviously orders of magnitude less than $200. Well, this isn’t exactly the no-brainer it appears to be, at least not in favor of the “cheaper” option.

There are several ways compensation can be set up for these marketing arrangements—as stated above, the most common are paying per impression or per click. The dangers of these for lending products is fairly apparent. These ads were originally built to move products where volume is the only goal and where quality is not a huge concern. If you were in the business of selling lawnmowers, then the person most likely to respond to your ad is probably the person you most want to target; you’re not terribly concerned with their credit quality, or really anything other than whether they will follow through and buy a lawnmower from you. When you are marketing lending products, there is an additional dimension: you not only need that consumer to be interested, but you also want them to continue down the somewhat onerous application process you have, plus they then need to pass your credit policy criteria. When you pay marketers for views and clicks, though, there is no consideration for how likely that consumer is to finish an application let alone to be approved.

Another more recent arrangement for lenders is to get paid per application. When an agency is getting paid per applications, it will try to drive as much application volume as possible. So they target customers who would be excited by your product, and oftentimes the populations who want your product the most are not necessarily the ones with the credit quality you wanted. What’s missing from the marketers’ equations is the likelihood that those applications would be approved because you didn’t pay them to care about that. The result is a low volume of underperforming loans.

It’s tempting to say that if you were the owner of one of these marketing campaigns, you’d pull the plug on this experiment based on the poor, preliminary results, but these are delayed outcome problems, both in the time it takes to see loan performance as well as in the time it takes to ramp up on a new marketing channel. Inevitably, at the end of six months, the marketing agency tells you that this sample size of applications is too small to infer anything from and that the only way to really confirm this channel can’t work is to continue to throw more money at it. And there you are another six months later, a year in total, and tens if not hundreds of thousands of marketing dollars invested into this strategy, with none of the growth or the learnings you’d been promised. You abandon digital channels because they just don’t seem to work.

Only The Smart Survive

Great, Bill. So you’ve covered the problems with digital marketing. Anything in the way of offering a solution?

What we really want is a marketing system that allows you to pay only for accounts you successfully booked, that way you only pay for those who view and click your marketing, complete an application, and fit the credit profile that you’re targeting.

This is where we return to the concept of those Aggregator sites. Let’s cover how they operate, what benefits they offer, and how to begin participating.

As we’ve alluded to, many of these Aggregator sites only charge in the case of a successfully booked loans. So you give the site a list of credit criteria for customers you would approve and a bid for what that customer is worth to you, and the site bounces that against their database of consumers’ individual creditworthiness data to decide who should receive the marketing. The Aggregators show yours and your competitors’ ads to the many consumers that visit their sites, and they optimize which ads they show based on their expected revenue, which boils down to:

Aggregator Revenue = Click Rate x Application Rate x Approval Rate x Bid Price

Finally, you’re free to only pay exactly what you think a customer is worth! Okay, so this seemingly magical channel will solve all of my digital marketing woes. So how does one begin to compete in this channel?

This channel isn’t without its own perils, particularly when you lack robust credit policy or sophisticated valuations. Let’s say you want to book more FICO 700+ customers. Based on the performance you’ve seen on your own book, you think these customers are worth $500; you expect other lenders to bid $350, and so you plan to bid $400. A competing, sophisticated lender who targets FICO 700+ may also overlay a simple credit bureau-based hardcut, such as declining applicants who appear to have utilized 90%+ of their total available credit; by removing these heavily indebted applicants, they think these customers are worth $600. They are therefore happy to bid $450 for these customers, leaving you to lose all bids for the high credit score, low debt customers, and instead to “win” by overbidding for the much more heavily indebted applicants. It’s plain to see how this dynamic could easily lead to another cautionary tale like the one I previously described for digital channels.

 

It is also tempting to look at the Expected Revenue equation above and rely more on a great product that will maximize consumer interest rather than worrying too much about credit policy and valuations. It’s worth noting, though, that position on the page matters: website visitors are between 66% and 102% more likely to view content above the fold vs. below. And because how much you bid is a major driver of your position on the page, you’ll still want to invest in the analytics to be displayed above the fold for the most desirable customers.

As this channel matures, only the smart will survive, specifically those with cutting-edge data infrastructure and analytical capabilities. The opportunity is great, but so are analytics investments that companies must make in order to compete in this space.

These Aggregator sites account for more of the lending products booked every year, their capabilities are only getting more advanced, and the competition to play in this space will only get more intense. Consumer finance organizations, from up-and-coming Fintechs to national-scale, Fortune 100 corporations, are taking notice, though, and capitalizing on this new dynamic.

Those who refuse to make the leaps in infrastructure and analytics will only fall farther behind in overall market share and profit margin. Not only that, but some of the world’s most ubiquitous, data-obsessed, and analytically sophisticated companies are starting to increase their focus in this space, such as Google and Facebook. How long will it be before these sleeping giants begin to use their massive amounts of data to help banks target consumers, and so how long until the majority of financial products are booked through these sites?

Bill Mergner is a Partner at Full Spectrum Analytics, an analytics and data science consultancy specializing in financial services.