Electronic Scores Rank Consumers by Potential Value

The following is an excerpt from an article in 

The New York Times
Sunday, August 19, 2012

Electronic Scores Rank Consumers by Potential Value

By NATASHA SINGER

ST. CLOUD, Minn. AMERICANS are obsessed with their scores. Credit scores, G.P.A.’s, SAT’s, blood pressure and cholesterol levels — you name it.

So here’s a new score to obsess about: the e-score, an online calculation that is assuming an increasingly important, and controversial, role in e-commerce.

These digital scores, known broadly as consumer valuation or buying-power scores, measure our potential value as customers. What’s your e-score? You’ll probably never know. That’s because they are largely invisible to the public. But they are highly valuable to companies that want — or in some cases, don’t want — to have you as their customer.

Online consumer scores are calculated by a handful of start-ups, as well as a few financial services stalwarts, that specialize in the flourishing field of predictive consumer analytics. It is a Google-esque business, one fueled by almost unimaginable amounts of data and powered by complex computer algorithms. The result is a private, digital ranking of American society unlike anything that has come before.

It’s true that credit scores, based on personal credit reports, have been around for decades. And direct marketing companies have long ranked consumers by their socioeconomic status. But e-scores go further. They can take into account facts like occupation, salary and home value to spending on luxury goods or pet food, and do it all with algorithms that their creators say accurately predict spending.

A growing number of companies, including banks, credit and debit card providers, insurers and online educational institutions are using these scores to choose whom to woo on the Web. These scores can determine whether someone is pitched a platinum credit card or a plain one, a full-service cable plan or none at all. They can determine whether a customer is routed promptly to an attentive service agent or relegated to an overflow call center.

Federal regulators and consumer advocates worry that these scores could eventually put some consumers at a disadvantage, particularly those under financial stress. In effect, they say, the scores could create a new subprime class: people who are bypassed by companies online without even knowing it. Financial institutions, in particular, might avoid people with low scores, reducing those people’s access to home loans, credit cards and insurance.

It might seem strange that one innovator in this sphere has blossomed here in St. Cloud, a world away from the hothouse of Silicon Valley. It is called eBureau, and it develops eScores — its name for custom scoring algorithms — to predict whether someone is likely to become a customer or a money-loser. Gordy Meyer, the founder and chief executive, says his system needs less than a second to size up a consumer and to transmit his or her score to an eBureau client.

“It’s like gambling,” Mr. Meyer says. “It’s a game of odds, when to double down and when to pass.”

Every month, eBureau scores about 20 million American adults on behalf of clients like banks, payday lenders and insurers, looking to buy the names of prospective customers. An eBureau spinoff called TruSignal, also located here, scores about 110 million consumers monthly for advertisers seeking select audiences for online ads. Mr. Meyer says eBureau’s clients use the scores to answer basic business questions about their potential audience.

“Are they legitimate?” Mr. Meyer asks. “Are they worth pursuing? Are they worth spending money on?” The scores, he adds, are generated without using federally regulated consumer data and are not used to make credit decisions about consumers. (Using regulated credit data for marketing purposes could run afoul of federal law.)

Such assurances aside, consumer value scores have begun to trouble some federal regulators. One of their worries is that these scores, which have spread quietly through American business, measure individuals against one another, using yardsticks that are essentially secret. Another is that the scores could pigeonhole people, limit their financial choices and channel some into predatory loans, they say.

“The scoring is a tool to enable financial institutions to make decisions about financing based on unconventional methods,” says David Vladeck, the director of the bureau of consumer protection at the Federal Trade Commission. “We are troubled by these practices.”

Federal law governs the use of old-fashioned credit scores. Companies must have a legally permissible purpose before checking consumers’ credit reports and must alert them if they are denied credit or insurance based on information in those reports. But the law does not extend to the new valuation scores because they are derived from nontraditional data and promoted for marketing.

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