UCSD Jacobs School of Engineering

UCSD Jacobs School of Engineering - Research Review “Better Decisions thru Data at FI” Larry Rosenberger Vice President, R&D 2/28/2002

What fuels my perspective? u Techie background u u Started at FI in ’ 74 as a “kid out of school” u u Physics and Operations Research 30 employees then, approx 2300 now Long sequence of assignments = lots of scar tissue u Client projects u R&D/new product development u CEO ’ 91 -’ 99 u R&D/mentor/spiritual leader of our scientific community Copyright © 2002 Fair, Isaac and Company, Inc. All rights reserved. 2

TOPICS u Fair, Isaac in a nutshell u Evolution and revolutions in “demand -side analytics” for consumer businesses u “Strategy Science” – the newest frontier

Some of our product portfolio: “Franchises” u FICO scores Distributed through the 3 Credit Bureaus, predicts future credit risk of consumer. They are used in most US lending decisions, including ¾ of mortgage originations. u my. FICO. com Helps Million+ consumers manage their credit health. Superbowl ad. “See how lenders see you” u FALCON Used to protect more than 450 million credit, card accounts worldwide, 65% of all card transactions. Incorporates Patented, profiling system to render real-time decisions. Related Fraud protection products for TELCOM (1000+ tps), for the Internet, for Application Fraud. u TRIAD used to manage 65% of world’s credit card accounts. Automates principles of Adaptive Control to enable banks implement and test different strategies (preferably that use advanced analytics). u PMAX: real-time transaction monitoring of consumer’s “touchpoints” (purchases, payments, non-mons, …) Copyright © 2002 Fair, Isaac and Company, Inc. All rights reserved. 4

Market Verticals Credit Mortgage Government Retail Consumers Insurance Telecommunications Healthcare 25 Billion Decisions a

We power better decisions among a blue-chip roster of brands Copyright © 2002 Fair,

History: Innovators since 1956 Strategy Design Strategy Science Blaze Advisor (HNC) TRIAD Account Automated Credit v Management Roamex (HNC) App Processing Comprehensive Liquid Credit Medical Bill Review my. FICO. com (HNC) Insurance Claims Reserving (HNC) Decision Mgmt. Workers Comp Fraud (HNC) Predictive Analytics FICO Scores FICO for Mortgages Application Scoring Insurance Scores Falcon (HNC) Customer Profitability (HNC) HNC Founded 1986 Fair, Isaac Founded 1956 HNC Merger Fair, Isaac IPO 1987 Dyna. Mark Acquired 1992 1950 1960 1970 1980 Copyright © 2002 Fair, Isaac and Company, Inc. All rights reserved. 1990 2002 7

A Few Summary Numbers u $625 MM-$650 MM in annual revenues u Approx 2300 employees u u Clients in over 50 countries u u About 100 Ph. Ds Over 20 locations around the world Market value $2. 2 B-$2. 5 B Copyright © 2002 Fair, Isaac and Company, Inc. All rights reserved. 8

Better Decisions through Data Where We Add Value Information DATA External Data Internal Data DATA MGMT. D. Ware. Prod. House Ops. Analyti c Data Mart Result s DB ED Decision Strategies ANALYTICS STRATEGY EXECUTION Predictions Predictive Modeling PA Decision Modeling and Strategy Design Explorato ry Analysis / Data Mining Insights EA DA AC Reactions Decisi Prod. on Engine Ops. Rules Mgmt Case Mgmt Actions Prospects Fair, Isaac and Company, Customers Copyright © 2002 & Inc. All rights reserved. 9

Production Environment – Falcon Example Merchant Auth System Authorization Fraud Risk Evaluation Rule Engine Profiles Updates Falcon Neural Engine profiles Falcon Server Account Status Change Manager’s Priorities Manager Case Management System Productivity and case reports Analyst’s Action High risk accounts Analyst Falcon Workstations Copyright © 2002 Fair, Isaac and Company, Inc. All rights reserved. 10

FI’s Scientific Community’s Mission To provide the “analytic heart” of our current and future decision technology that powers the most widely used and useful decision-making solutions and tools for the global consumer economy: u Invent it u Develop it u Integrate it with our other capabilities u Deliver it to our clients u Support it Copyright © 2002 Fair, Isaac and Company, Inc. All rights reserved. 11

u Fair, Isaac in a nutshell TOPICS u Evolution and revolutions in “demand -side analytics” for consumer businesses u “Strategy Science” – the newest frontier

Evolution in “demand-side analytic technology” for consumer businesses Profiling & Segmentation Predictive Models or “Scores” Multi-Dimensional Trade-Off Assessment Strategy Science HIGH X X X X Benefit X X X X X XX X X X XX XXX X X X • Establishes broad segments based on customer profile data Incremental Profit Impact • Rank orders prospects on a single dimension • Creates micro segments by matrixing 2 or 3 predictive models • Brings all predictive analytics into a single decision framework • Assigns the optimal action for each prospect/account given specific business constraints 0 -10% 10 -30% 5 -20% 5 -35% … identifying the right actions to take for each account Copyright © 2002 Fair, Isaac and Company, Inc. All rights reserved. 13

“ 3 rd Revolution” in Data-Guided Decisioning Where Are We? Profit Improvement today Predictive Modeling 20 -30% Adaptive Control 20 -30% Strategy Science 20 -30% Time Copyright © 2002 Fair, Isaac and Company, Inc. All rights reserved. 14

u Fair, Isaac in a nutshell u Evolution and revolutions in “demand -side analytics” for consumer businesses TOPICS u “Strategy Science” – the newest frontier

Strategy Science replaces guesswork in strategy design with science Decision Modeling Optimization and Visualization Technology Accelerate d Learning Optimal Strategy STRATEGY SPACE • Establish mathematical relationships between customer treatment options, their reactions and profitability • Engineer profitimprovement strategies subject to constraints on key metrics • Learning beyond historical operating regions to yield superior performance Copyright © 2002 Fair, Isaac and Company, Inc. All rights reserved. 16

Predicting Vs. Decisioning – Prediction focus DATA Profit Score Judgmental Decision Strategies DATA Response Score DATA Revenue Score Expert Judgment Actions DATA Risk Score DATA Prospects & Customers Copyright © 2002 Fair, Isaac and Company, Inc. All rights reserved. 17

Predicting Vs. Decisioning – Decision focus DATA Profit Score DATA Response Score DATA Revenue Score DATA Risk Score DATA Optimal Decision Strategies Strategy Science = Decision Actions Modeling + Strategy Optimization + Accelerated Learning Prospects & Customers Response data collection Copyright © 2002 Fair, Isaac and Company, Inc. All rights reserved. 18

Strategy Science solutions u Acquisitions u u Origination u u Strategy Science for Acquisitions Strategy Science for Initial Credit Line assignment, Installment loan limit, Installment/Indirect loan pricing Account Management u Strategy Science for Cross Sell, Credit Line Management, Retention, Repricing, Balance Transfers, Collections Copyright © 2002 Fair, Isaac and Company, Inc. All rights reserved. 19

FAST adoption! u Strategy Science applications u 3 countries u 25 clients u 41

What Strategy Science does #1. Links decisions to the underlying economics Copyright © 2002

What Strategy Science does #2. Captures customers reactions to lender’s actions Customer Action Revenue score = 720 Risk score = 680 Retention Offer #1: Current Balance = $1, 250 0% balance transfer for 8 months Current Pricing = 11. 25% Relationship length = 3 yrs … Revenue score = 720 Retention Offer #2: Risk score = 680 Free air miles Current Balance = $1, 250 & Current Pricing = 11. 25% $1, 000 line increase Relationship length = 3 yrs … Copyright © 2002 Fair, Isaac and Company, Inc. All rights reserved. Reaction P(Acceptance) = 30% E(Balance change) = $650 E(Incremental cost) = $28 … P(Acceptance) = 25% E(Balance change) = $150 E(Incremental cost) = $33 … 22

What Strategy Science does #3. Connects decisions to lender’s business constraints Copyright © 2002

What Strategy Science does #4. Simulates many scenarios and allows lender to choose the most attractive Profit / account $95 (+30%) $83 (+14%) Baseline Profit / account $73 Copyright © 2002 Fair, Isaac and Company, Inc. All rights reserved. Profit / account $78 (+7%) 24

Q/A Better Decisions thru Data at Fair, Isaac

UCSD Jacobs School of Engineering — Research Review