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Preserving the Credit Economy

FCRA Reauthorization – Why It Matters to All Direct Marketers

Introduction: Who Will Be Affected?

  • If your firm markets directly to consumers using a catalog, the telephone, direct mail, the Internet, or any combination of these media, then your firm will be impacted.
  • If your firm services any segment of the direct marketing industry – whether as a printer, mail delivery service, list broker or list manager, information aggregator – then your firm will be impacted

1. Working Paper on FCRA Reauthorization – Just the Facts Who may be affected and how?

What is the FCRA? The Fair Credit Reporting Act (FCRA) defines consumer reporting agencies (known as credit bureaus), consumer reports (also known as credit reports) and their permissible purposes. It also establishes a federal regime for how certain types of financial information may be shared by affiliated financial service providers, and — in conjunction with the Gramm Leach Bliley Act (GLBA) — unaffiliated third parties. This legal “ceiling” prevents states from enacting a patchwork of rules transcending FCRA.

How Do Direct Marketers Use Consumer Reports?Consumer reports – due to their accuracy and usefulness — are applied across a broad range of industries. They are used widely for purposes of authentication, verification, employment screening, pre-screening, and risk management decisions for credit and insurance.

What Will Happen to Direct Marketers Should the FCRA Expire? On January 1, 1, 2004, the state preemption provisions of the FCRAair Credit Reporting Act are due to expire. This is a very significant event for all businesses that rely on data sharing to conduct business. If preemption is allowed to sunset, the impact will be felt across the economy, but particularly in the following sectors: financial services, insurance, direct and interactive marketing, information services, utilities, and retailing.

Consumer reports – due to their accuracy and usefulness — are applied across a broad range of industries. They are used widely for purposes of authentication, verification, employment screening, pre-screening, and risk management decisions for credit and insurance. If preemption is allowed to sunset, the impact will be felt across the economy, but particularly in the following sectors: financial services, insurance, direct marketing, and retailers who offer lines of credit.

2. Segment by Segment Analysis

This is because the state preemption provisions currently make it impossible for states to make certain types of privacy rules more restrictive than those put forward in the FCRA. Specifically, the FCRA is directed at regulating the practices of Consumer Reporting Agencies (CRA), better known as the Credit Bureaus. It sets certain exemptions for companies sharing the types of data contained in consumer reports so that they do not incur the legal obligations of a CRA. Through these exemptions, the FCRA explicitly establishes the rules by which companies can share such information about consumers with their affiliates, and implicitly (and in concert with the Gramm-Leach-Bliley Act) creates the context for sharing [other] other data with unaffiliated third parties.

Because the FCRA is rather long and complex, it is easier to explain by way of example. All direct marketers will be affected, but not equallySome of the types of business practices at risk. The following segments are particularly vulnerable to changes should the pre-emption standards of the FCRA lapse follow:

  • Catalogers & Direct Marketers Mailers – While the FCRA prevents firms from using consumer reports for target marketing, catalogers and direct mailers are heavy users of commercial “commercial identity information” and consumer preference information1 about consumers acquired from derived from financial service providers. An individual consumer’s basic contact information, their relationship with a financial service institution, and “transaction” and experience” data are all used by information aggregators to create marketing databases. Because consumers are vested with banks and other financial service institutions, they tend to provide their financial institutions with up to date contact information. Direct marketers rely on this information for accurate contact information. If this rich source of accurate data is lost to rule changes, more consumers will receive unwanted solicitations, and costs borne by firms, and ultimately by consumers, will inevitably creep upward.

    If the preemption provisions of FCRA expire, and the states enact more restrictive legislation — such as “opt-in” style rules for affiliate and third party data sharing — then mailing lists become less accurate, prospect marketing costs increase, customer relationship management becomes harder, and house-file databases decay more rapidly. By one estimation, costs for catalogers (and, by proxy, direct mailers) are likely to increase between 3.5% and 11%.1.2 T This would disproportionately impact rural and inner-city consumers, which are underserved by traditional retail outlets.

    Another potential outcome with similar consequences is that the federal preemption provisions bearing specifically on the ability of credit issuers to prescreen are permitted to sunset. This would be a disaster for both consumers and distance sellers. Reduced availability of credit, caused by a hampered ability to market credit to consumers via prescreened offerings, would in turn impact distance selling as a majority of distance sales are transacted via credit card.

  • Teleservices – Although the FCRA prevents firms from utilizing consumer reports for telemarketing, telemarketers are heavy users of “commercial identity information” and consumer preference information derived from financial service providers. An individual consumer’s basic contact information, their relationship with a financial service institution, and “transaction” and experience” data are all used by information aggregators to create marketing databases.

    Because consumers are vested with banks and other financial service institutions, they tend to provide their financial institutions with up to date contact information. Telemarketers rely on this information for accurate phone numbers. If this rich source of accurate data is lost due to rules changes, databases relied upon by telemarketers will be far less accurate, more consumers will receive unwanted calls, and costs will invariably creep upward.

  • Nonprofits & Charities – While the FCRA prevents firms from using consumer reports for target marketing, nonprofits and charitable organizations that directly solicit contributions are heavy consumers of “commercial identity information” and consumer preference information about consumers derived from financial service providers. An prospective donor’s basic contact information, their relationship with a financial service institution, and “transaction” and experience” data are all used by information aggregators to create fundraising databases.

    If this rich source of accurate data is lost due to the expiration of the FCRA’s preemption provisions, database-driven fundraising efforts by charities and nonprofits will be less accurate. Many qualified potential donors will be overlooked, while valuable resources will be squandered on solicitations to individuals who are highly unlikely to give. Further, should an “opt-in” style third-party and affiliate data restriction replace the FCRA, according to one recent study approximately $16.5 billion currently allocated to charitable programs will be spent on additional marketing and administrative costs.

  • List Brokers – Firms in this industry serve a vital “brokerage” role between credit bureaus and financial service providers. Specifically, among other things, these firms sell lists to financial service institutions for offers of credit or invitations to apply for credit. Often times, revenue generated from the sales of pre-screen lists accounts for a significant portion of a list broker’s total annual earnings. Such prescreen lists are then used in either direct mail or telemarketing campaigns, or some combination of both. Should FCRA lapse, list brokers could lose a significant source of revenue. In addition, telemarketers and direct mailersdirect marketers would also lose much of their prescreen business.

    The harms to consumers could be significant as well: a patchwork of egregious state regulations would diminish the accuracy of pre-screen lists, and the decreased predictive capabilities of such lists would increase the number of mismatched offers to consumers. In turn, this would lead to reduced consumer choice and greater consumer annoyance.

  • What is a Consumer Reporting Agency? – Under the terms of the Fair Credit Reporting Act (FCRA), any entity providing personal identifying information to a third party for any of the permissible purposes – decisioning regarding credit, insurance, employment, compliance with a court order, tracking an individual for purposes of child support, or the granting of a government license – is classified as a consumer reporting agency (CRA). The FCRA establishes the underlying regulatory regime governing the collection, storage, and use of consumer reporting data among affiliated companies and third parties. As such, it governs data flows for a wide range of uses the affect firms in sectors beyond financial services.

    These include, but are not limited to, the following: mortgage reporting agencies; check verification services; employee screening services (note, these are all considered “investigative reporting agencies,” as the reports generated by such entities encompass verbal information gathered through the process of interviews); resellers of consumer reports (e.g. Credco, a subsidiary of First American); and pre-screening processors (e.g. Acxiom, and other entities that act as agents for financial service firms, which process consumer reporting data from CRAs to create mailable lists for target marketers); and medical information bureaus.

  • National Marketing –In today’s economy, because we have national markets, consumer reports – due to their accuracy and usefulness – are ubiquitously applied across a broad range of industries. They are used widely for purposes of authentication, verification, employment screening, pre-screening, risk management decisions for credit and insurance, and target marketing.
  • Target Marketing (includes: Telemarketing, Mail, Catalog, Internet retail) – Outbound telemarketing and mail have long been the subject of many of the most vocal protests of consumers and consumer advocates. The consequence of new regulations on the types of consumer information flows currently protected by the FCRA, and the potential loss of legal harmony from state to state, would be less accurate information on consumers.

    While the FCRA prevents firms from utilizing consumer reports for target marketing, firms that engage in target marketing are heavy consumers of “commercial identity information” and consumer preference information that is derived from financial service providers. An individual consumer’s basic contact information, their relationship with a financial service institution, and “transaction” and experience” data are all utilized by information aggregators to create marketing databases.

    Given the public’s stated distaste for target marketing – an odd sentiment given that more than two thirds of American consumers take advantage of such opportunities each year – it is a near certainty that state lawmakers will attempt to restrict information flows from financial institutions if state preemption does in fact lapse. Decreasing the ability of telemarketers to target solicitations, maintain the accuracy of their database, and therefore exposing consumers to more unwanted phone calls and mail is sure to further annoy a public already hostile to direct marketing.

  • Credit Issuers (includes: Retailing, Telecommunications, Financial Services) – The largest consumer of United States Postal Service product is a credit card company. Furthermore, according to an Information Policy Institute study, 5% of the goods and services sold using outbound telemarketing are credit cards or financial services product. The FCRA currently permits financial service providers to use consumer reports in order to “prescreen” potential customers for a financial service offering, as long as the solicitation includes a “firm” offer of credit.

    The FCRA also of course affects Telecommunications companies to the extent that they extend credit, use consumer reports to establish consumer pricing or to set deposits, furnish data to consumer reporting agencies, or prescreen customers for pre-approved offers of telecommunication services.

    Likewise, many large and medium-sized retailers are creditors, as they extend lines of credit directly to consumers. As a result, they stand to be impacted by modifications to the FCRA, in the same manner as credit card companies, banks, mortgage issuers, and credit unions. Similarly for those retailers that offer lines of credit through third party credit lenders such as Household or GE Capital.

    Retailers also stand to be affected by modifications to the FCRA, or its expiration, in the context of affiliate data sharing. Many retailers routinely share credit information to process credit charges, and share transactional data among affiliated companies for purposes of joint-marketing and the extension of promotional offers.

  • CRM Databases (All firms engaged in one-to one marketing) – Data integration is the first step in successful customer relationship management (CRM). The affiliate sharing provisions of the FCRA creates a regulatory framework that allows CRM databases to be built because it preempts state governments from regulating this aspect of information sharing. Data from financial service firms are used to maintain the accuracy of a firm’s customer database, and to provide a global perspective of each individual customer.
  • Insurance Underwriting – Most insurance companies use consumer reports for underwriting and pricing policies. The use of credit scores for insurance purposes is an issue under debate in many state capitals and could become a galvanizing issue during consideration of FCRA reauthorization. Insurance companies also use credit histories to prescreen consumers for pre-approved offers of insurance.
  • Utilities as Direct Marketers – Americans register more than 40 million changes of address each year with the U.S. Postal Service. With each move, the new resident must establish a relationship with new utility providers. Utility companies depend on information from consumer reporting agencies to verify a new customer’s identity, assess risk of non-payment and to help establish appropriate security deposits or other service charges to mitigate losses due to non-payment. Given a scenario where the pre-emption provisions of FCRA lapse, and were access to such information about consumers reduced, utilities would face increased costs, which in turn would be passed on to consumers. Moreover, less risky consumers would be forced to subsidize more risky consumers as utility companies faced greater obstacles establishing the level of risk appropriate to a particular customer. For instance, a large financial services institution offers in excess of 50 different credit cards, either directly or through a third-party partner. Rather than maintaining separate databases for each of these cards, with the assistance of a third-party information aggregator, the financial service institution has created a single database to provide a 360 degree view of each individual in its existing customer base.

    The rationale underlying this business model is that growth in revenues and profitability in the future is just as likely to come from cross-marketing to existing customers – including new credit cards and other financial service products offered by affiliated companies – rather than merely capturing market share from rival companies.

  • Target Marketing – Firms that engage in database marketing, also known as either target marketing or direct marketing, are heavy consumers of “commercial identity information” and consumer preference information that is derived from financial service providers. An individual consumer’s basic contact information, that they have a relationship with a particular financial service institution, and their “transactional” and “experience” data are all utilized by information aggregators to create marketing databases.

    Furthermore, even the data maintained by direct marketers on their own customers – the so-called “house-file” – is serviced for list hygiene (removing duplicates, ensuring the accuracy of contact information) and enhanced (appending existing customer information with additional third-party data to provide a broader understanding of customers preferences and habits) using data from consumer reports. The affiliate sharing provisions of the FCRA, in combination with the “opt-out” provisions for third party sharing under GLB, allow primary pools of consumer information to flow to databases used for target marketing.

  • Financial Service Providers As Direct Marketers – The largest consumers of United States Postal Service product are credit card companies. Furthermore, according to an Information Policy Institute study, 5% of the goods and services sold using outbound telemarketing are credit cards or financial services product. The FCRA currently permits financial service providers to use consumer reports in order to “prescreen” potential customers for a financial service offering, as long as the solicitation includes a “firm” offer of credit. Were the pre-emption provisions bearing on “prescreening” permitted to lapse, financial service providers would have decreased ability to accurately target solicitations. The increased costs of marketing new offers of credit would be passed along to consumers; consumers would enjoy diminished access to credit, and consumer annoyance would increase.
  • Retailers as Credit Issuers – Many large and medium-sized retailers are creditors, as they extend lines of credit directly to consumers. As a result, they stand to be impacted by modifications to the FCRA, in the same manner as credit card companies, banks, mortgage issuers, and credit unions. Similarly for those retailers that offer lines of credit through third party credit lenders such as Household or GE Capital.

    Retailers also stand to be affected by modifications to the FCRA, or its expiration, in the context of affiliate data sharing. Many retailers routinely share credit information to process credit charges, and share transactional data among affiliated companies for purposes of joint-marketing and the extension of promotional offers.

  • E-tailers Processing Credit Payments – Online retailers depend on secure credit card verification and authentication systems in order to process online payment. In the absence of uniform national standards for credit reporting, e-tailers will find their ability to identify fraud diminished and may face increased compliance costs processing payments.
  • Check cashing services – During 2001, nearly 50 billion checks were written for a total of almost $50 trillion. Nearly 1.2 million bad checks are written every day.4 Check cashing services depend on information from consumer reporting agencies to help prevent fraud and to ensure the checks they cash don’t bounce.
  • Automobile Dealers as Direct Marketers – Auto dealers play a vital role in the automobile financing environment by making temporary loans that are sold within a few days to financial institutions. Auto dealers rely heavily on consumer reporting agencies to make risk decisions on “instant loans,” allowing Americans to purchase an automobile within hours.
  • Information Service Providers – Because of the nature of their business, firms in this industry will be most directly impacted by potential changes in the FCRA. Information service providers collect non-public personal information (NPPI) on the customers of financial service providers for use in their marketing databases. Direct marketers, in turn, rely on these databases for accuracy – up to date name and address information – and for their fraud prevention and authentication systems. These rich and robust databases provide direct marketers with a high degree of confidence that their lists are accurate, and ensure that their customers are receiving their orders. Comprehensive marketing databases driven by NPPI from financial service providers also enable direct marketers to better understand their customers, and to optimally meet their needs by having a global view of individual customers.

    Information service providers need access to NPPI from financial service providers now more than ever. With the continued growth of interactive marketing, and the reliance of all direct marketers on their database products, expiration of the FCRA coupled with the passing of restrictive legislation in the states could severely impact the quality of data available to information service providers.

  • Retailer – Many large and medium-sized retailers are creditors, as they extend lines of credit directly to consumers. As a result, they stand to be impacted by modifications to the FCRA, or the expiration of the preemptive provisions of the FCRA, in the same fashion as would credit card companies, banks, mortgage issuers, and credit unions. Similarly for those retailers that offer lines of credit through third party credit lenders such as Household or GE Capital. Retailers also stand to be affected by modifications to the FCRA, or its expiration, in the context of affiliate data sharing. Myriad retailers routinely share credit information to process credit charges, and share transactional data among affiliated companies for purposes of joint-marketing and the extension of promotional offers.
  • Telecommunications – Telecommunications companies are affected by the FCRA to the extent that they extent credit, use consumer reports to establish consumer pricing or to set deposits, furnish data to consumer reporting agencies, or prescreen customers for pre-approved offers of telecommunication services.
  • Insurance Companies – Most insurance companies use consumer reports to in underwriting and pricing policies. The use of credit reports for insurance purposes is an issue being debated in many state capitals and could become an issue during consideration of the FCRA reauthorization. Insurance companies also use credit histories to prescreen customers for pre-approved offers of insurance.
  • Check cashing services – During 2001, nearly 50 billion checks were written for a total of almost $50 trillion. Nearly 1.2 million bad checks are written every day (Federal Reserve, cited in AP story, Nov. 15, 2001). Check cashing services depend on information from consumer reporting agencies to help prevent fraud and to ensure the checks they cash don’t bounce.
  • Automobile Dealers – Auto dealers play a vital role in the automobile financing environment by making temporary loans that are sold within a few days to financial institutions. Auto dealers rely heavily on consumer reporting agencies to make risk decisions on “instant loans,” allowing Americans to purchase an automobile within hours.
  • 3. Possible Scenarios for Direct Marketers

    Despite the fact that nearly two-thirds of American consumers take advantage of direct and interactive marketing opportunities each year – it is a near certainty that state lawmakers will attempt to restrict information flows from financial institutions if the FCRA’s state preemption provisions lapse, or if they are substantially modified. Here’s how it could happen:

    • Scenario 1: Balkanization – FCRA expires, states pass a patchwork of restrictions on third-party and affiliate data sharing. Database marketing becomes more costly, CRM impeded.
    • Scenario 2: Horse-trading – Financial service providers, desperate to preserve affiliate data sharing, agree to “sacrifice” third-party data sharing in the form of a federal “opt-in” law.
    • Scenario 3: Slippery Slope – Congress modifies the FCRA to require an “opt-in” for affiliate data sharing of financial information. States, empowered by a weak GLBA, follow suit and pass opt-in requirements for third-party data sharing (e.g. California). Direct marketing becomes the target of endless legislative and regulatory “privacy” reforms.

    1. Commercial information is comprised of data about individual customers of financial service providers that is not contained in a consumer report. This information is collected by information service providers from financial institutions and is used in the creation of marketing databases and other information services.
    2. Turner, Michael A. “The Impact of Data Restrictions On Consumer Distance Shopping,” Conducted for The Privacy Leadership Initiative and the Information Services Executive Council. March, 2001. Available at http://www.bbbonline.org/UnderstandingPrivacy/library/whitepapers.asp or www.infopolicy.org
    3. Turner, Michael A. “The Impact of Data Restrictions on Fundraising for Charitable Organizations and Nonprofits,” Conducted for The Privacy Leadership Initiative and the Information Services Executive Council. November, 2001. Available at www.infopolicy.org.
    4. Federal Reserve, cited in AP story, Nov. 15, 2001.

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