FAIR CREDIT REPORTING ACT

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. FCRA Reauthorization - Just the Facts

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.

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 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.

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, direct 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.

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.

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.

2. Nightmare 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.

3. Endnotes

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.

Source: The DMA - http://www.the-dma.org/government/fcra.shtml