Credit Risk: Who's Going To Go Bankrupt?

One could say the business of bankruptcy is booming, with the bankruptcy reform bill of a couple years back, the current mortgage meltdown, and the periodic use of the word recession by economic pundits.

Amid all of the talk about credit woes, two major brands with big-time penetration among financial services firms, Visa and Experian, are hoping to expand upon their already considerable inroads by teaming up to develop credit risk management products and services. The alliance intends to produce a series of jointly developed products to help financial institutions reduce credit-related losses. "We'll have a combination of a broader level of consumer credit information, as well as spending characteristics," says Nancy Hilgers, vp of processing on emerging products for Visa.
Credit risk management has always been a tough function for financial institutions, but perhaps never more so than in the current environment. Driven by adjustable rate mortgages that were extended to high-end subprime borrowers over the past couple of years, an increasing percentage of the population faces bankruptcy risks as the rates on these mortgages goes up rapidly.
For example, the Mortgage Bankers Association reports that mortgage delinquencies were at 5.12 percent at the end of the second quarter, and $14.82 percent for subprime mortgages-the highest levels in five years. And that's just one financial product. Rising credit card debt also endangers both consumers and institutions, making the market ripe for products that can assess an institution's consumer accounts and search for potential problems.
The first product that will come out of the Visa/Experian partnership, BankruptcyPredict, aims to reduce losses by identifying consumers in financial distress and predicting bankruptcies up to two years in advance. By using transaction data and credit file information from Experian, the product delivers credit risk scores to financial institutions. The institutions then consider that score and other risk information when making decisions on when to offer financial education or other actions that may help cardholders recover from financial distress. "This gives account managers a predictive tool and it allows financial institutions to make effective account management choices," says Steven Wagner, an svp at Experian.
The product also uses consumer credit and transaction activity across multiple financial account types. By including many forms of payment cards and other loans or credit products, such as mortgages and lines of credit, financial institutions will have access to a broader range of consumer debt relationships when making account management decisions. It will be available daily, weekly, monthly or quarterly, based on the needs of the institution.
BankruptcyPredict, which will be a subscription service commercially available from both Experian and Visa in early 2008, will have access to a large vault of data from both firms. There are more than 521 million Visa-branded cards issued by more than 13,000 financial institutions generating about $1.8 trillion in the past year.