If It Ain’t Broke, Don’t Fix It, But If It Is……

Back in the day, when I was starting out in banking, we had an underwriting model based on trust. We thought that if we lent you money, you would pay it back. As personal honor quietly left the scene and became a thing of the past, we had to find a new model. Some incredibly bright mathematicians began to develop intricate formulae that they perceived could replace honor with predictive behavioral systems. And guess what, for the most part they worked – the FICO score was born.

In fact ,FICO has worked fairly well for more that 4 decades until now. I have been led to believe that two of the major predictors may need to be revamped in light of current economic conditions. They are the formulae that calculate overall credit card debt to overall credit card availability and individual credit card account outstandings versus credit line. Given the problem banks are having relative to bad debt, many issuers are reducing their available lines to many cardholders. This is to be expected as many issuers began accepting lower and lower FICO scores in their quest for more and more borrowers until being an air breather became the standard criteria.

The issuers, as is their wont, overreacted dramatically and cut credit lines incredibly deep across their portfolios. One consumer I spoke with had a credit line cut from $10,000 to $300 with absolutely no explanation other than she hadn’t used the card in a while. Given the interest rate at well over 30% and no rewards program, it was no wonder the card was little used. The impact, however raised her overall outstanding debt to availability quite a bit, thus lowering her FICO score.

Her other creditors quickly noted the lowered score and pounced. The one account she used frequently to maximize mileage rewards had her credit line lowered from $30,000 to $7,500. She happened to have an outstanding balance of $6,000. Her ratio on this account jumped from a comfortable 20% to a whopping 80% overnight. Her FICO score went directly into the toilet. She always paid substantially more than the minimum payment and never, ever paid late. All she did was wake up in the morning. From being credit worthy and respectable to being a bum in the time it took to recalculate a formula.

The reason for my rant is that this could dramatically impact how we underwrite small merchants. Many mom and pop shops rely on their personal FICO score to access financing and try to accept credit and debit cards. If their FICO scores become distorted due to faulty mathematical modeling, we all have a problem. I presume that the geniuses that develop these models have grasped the problem and are diligently working to fix it. But as my dad used to say, “never presume. because when you do, you make a press out of you and me” or something like that. If it ain’t broke, don’t fix it, but if it is….

Paul Martaus

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Two Companies Suffering from an Identity Crisis

There was a time in the 80s when NCR attempted to buy into the business created when banks began sharing their ATMs. As these networks took hold, NCR was turning the corner by giving Diebold a run for its money. NCR had studied human/machine ergonomics and was outdoing Diebold on that front while emulating Diebold's success from a machine network standpoint. NCR was just beginning to hit its stride in this competition.

But when you sell an ATM, you make money on that transaction and only that transaction. The only ongoing revenue stream from the vendor's standpoint is the annual maintenance fee. A pittance when you start to think about the revenue streams created by adopting per transaction pricing associated with processing ATM transactions.

Having worked for NCR and then subsequently accepting a position with Manufacturers Hanover Trust, at the time the 4th largest bank in the US, I watched as NCR offered to become an equity partner with Manny Hanny in a shared network we were calling Matrix. Matrix would be owned by some of the large banks in NYC (Chase, Chemical, anybody but Citi, which was all of our competitors and a bank that we watched move market share by 9% points because of their self-service strategy) and NCR, whose management was ready with cash and equipment as their investment vehicle.

The whole idea tanked as we approached banks that were shocked that we'd want to share with an ATM vendor the revenue streams created by the cards that we, the banks, had worked so hard to get consumers to adopt and use. No easy task, let me tell you. Consumers don't change their payment habits with any alacrity whatsoever. 

Fast forward 25 years and now we watch NCR go toe-to-toe in the DVD Video Kiosk placement and rental business with Coinstar's Redbox unit. And they've hired the fellow who ran Coinstar's coin business to do it. A fellow who knows little to nothing about networks, real-time, online transaction processing or any of the infrastructure that's required in a network of kiosks that must take orders from a central server farm.

But then, no one at Coinstar understands those real-time, bank-like transaction processing systems. Their kiosks are about as dumb as they come. When you first look at those machines you think “what an asset!” But then once you understand their limitations, you think 'there's more work than opportunity associated with those devices.

That is unless you're NCR. 

So while NCR couldn't move the banks in the 80s, maybe the answer this time around is that NCR buys its way into the transaction processing business by buying Coinstar. There's synergy here. NCR knows networking. Coinstar knows how to motivate consumers, which is a talent of the person NCR took from Coinstar (he ran Coinstar's coin-counting business for at least 10 years). But what would be Coinstar's motivation? Certainly, not to get their employee back. Maybe survival?

While Coinstar seems to own the video rental business with Redbox, their coin-counting kiosks are an albatross. Maybe NCR could turn those 10,000+ kiosks into a true asset. I mean if they, NCR, want to be in the transaction processing business and given what they know about it, which is a ton, they might possibly be one of the only companies that could truly exploit the infrastructure Coinstar has created.

Coinstar clearly hasn't and my bet is that they won't (and can't). Although their Redbox unit is looking more and more like the company's crown jewel with networking capabilities, they never knew what they truly needed to know about the 4th Wall to have that strategy make a difference. Combining the best of these two companies might truly benefit all of their shareholders.

Peter Quadagno

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