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

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

 Fair, Isaac in a nutshell  Evolution and revolutions in “demand-side analytics” for consumer businesses  “Strategy Science” – the newest frontier T O P I C S

Copyright © 2002 Fair, Isaac and Company, Inc. All rights reserved. Job # goes here 4 Some of our product portfolio: “Franchises”  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.  myFICO.com Helps Million+ consumers manage their credit health. Superbowl ad.“See how lenders see you”  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.  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).  PMAX: real-time transaction monitoring of consumer’s “touch- points” (purchases, payments, non-mons, …)

Copyright © 2002 Fair, Isaac and Company, Inc. All rights reserved. Job # goes here 5 Market Verticals 25 Billion Decisions a Year Government Retail Insurance Mortgage Telecommunications Credit Consumers Healthcare

Copyright © 2002 Fair, Isaac and Company, Inc. All rights reserved. Job # goes here 6 We power better decisions among a blue-chip roster of brands

Copyright © 2002 Fair, Isaac and Company, Inc. All rights reserved. Job # goes here 7 v History: Innovators since Decision Mgmt. Strategy Design Fair, Isaac Founded 1956 Fair, Isaac Founded 1956 HNC Founded 1986 Fair, Isaac IPO 1987 HNC Merger FICO Scores FICO for Mortgages Customer Profitability (HNC) Predictive Analytics Automated Credit App Processing TRIAD Account Management Liquid Credit Strategy Science DynaMark Acquired 1992 Blaze Advisor (HNC) ApplicationScoringApplicationScoring Falcon (HNC) Insurance Scores Comprehensive Medical Bill Review (HNC) Insurance Claims Reserving (HNC) Workers Comp Fraud (HNC) myFICO.com Roamex (HNC)

Copyright © 2002 Fair, Isaac and Company, Inc. All rights reserved. Job # goes here 8 A Few Summary Numbers  $625MM-$650MM in annual revenues  Approx 2300 employees  About 100 PhDs  Clients in over 50 countries  Over 20 locations around the world  Market value $2.2B-$2.5B

Copyright © 2002 Fair, Isaac and Company, Inc. All rights reserved. Job # goes here 9 Better Decisions through Data Where We Add Value External Data Internal Data Information Decision Strategies Prospects & Customers ActionsReactions D A T A ANALYTICS D. Ware- House Analytic Data Mart Results DB ED PredictiveModelingPA Exploratory Analysis / Data Mining EA DecisionModelingand Strategy Design DA Predictions Insights DATA MGMT. Prod. Ops. STRATEGY EXECUTION Decision Engine Rules Mgmt Case Mgmt Prod. Ops. AC

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

Copyright © 2002 Fair, Isaac and Company, Inc. All rights reserved. Job # goes here 11 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:  Invent it  Develop it  Integrate it with our other capabilities  Deliver it to our clients  Support it

 Fair, Isaac in a nutshell  Evolution and revolutions in “demand-side analytics” for consumer businesses  “Strategy Science” – the newest frontier T O P I C S

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

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

 Fair, Isaac in a nutshell  Evolution and revolutions in “demand-side analytics” for consumer businesses  “Strategy Science” – the newest frontier T O P I C S

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

Copyright © 2002 Fair, Isaac and Company, Inc. All rights reserved. Job # goes here 17 Prospects & Customers Judgmental Decision Strategies Actions Predicting Vs. Decisioning – Prediction focus ExpertJudgment Profit Score Profit Score D A T A Response Score Response Score Revenue Score Revenue Score Risk Score Risk Score D A T A

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

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

Copyright © 2002 Fair, Isaac and Company, Inc. All rights reserved. Job # goes here 20 FAST adoption!  Strategy Science applications  3 countries  25 clients  41 projects – in progress/completed

Copyright © 2002 Fair, Isaac and Company, Inc. All rights reserved. Job # goes here 21 What Strategy Science does #1. Links decisions to the underlying economics

Copyright © 2002 Fair, Isaac and Company, Inc. All rights reserved. Job # goes here 22 What Strategy Science does #2. Captures customers reactions to lender’s actions Customer Action Reaction P(Acceptance) = 25% E(Balance change) = $150 E(Incremental cost) = $33 … Retention Offer #2: Free air miles & $1,000 line increase Revenue score = 720 Risk score = 680 Current Balance = $1,250 Current Pricing = 11.25% Relationship length = 3 yrs … Revenue score = 720 Risk score = 680 Current Balance = $1,250 Current Pricing = 11.25% Relationship length = 3 yrs … Retention Offer #1: 0% balance transfer for 8 months P(Acceptance) = 30% E(Balance change) = $650 E(Incremental cost) = $28 …

Copyright © 2002 Fair, Isaac and Company, Inc. All rights reserved. Job # goes here 23 What Strategy Science does #3. Connects decisions to lender’s business constraints

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

Q/AQ/A Better Decisions thru Data at Fair, Isaac