Pre-Session Reading Central Bank: The ChexSystemsSM QualiFile

Pre-Session Reading
Central Bank: The ChexSystemsSM QualiFile® Decision
RETAIL MARKETING FOR GROWTH AND PROFITABILITY
Jay W. Coakley
President
Coakley Strategic Solutions LLC
Jefferson City, Missouri
[email protected]
573-462-6260
August 11 & 12, 2016
N9-208-029
SEPTEMBER 14, 2007
DENNIS CAMPBELL
F. ASÍS MARTÍNEZ-JEREZ
PETER TUFANO
EMILY MCCLINTOCK EKINS
Central Bank: The ChexSystems QualiFile®
Decision
SM
Jay Coakley let out a slow breath as he glanced over the numbers in Central Bancompany’s latest
report. In spite of an aggressive marketing campaign aimed at signing up new customers and
opening more accounts, it appeared that growth at the bank hadn’t budged in 2004. How was this
possible? Coakley thought. If we don’t attract customers to the basic checking account, we’ll never establish
the kind of lasting relationships we need for long-term growth in other areas. As Senior Vice President and
Director of Marketing at the bank, he had a vested interest in finding out what had gone wrong.
Coakley slipped on his reading glasses and took a closer look at the statistics. When he reached
the section on risk assessment, Coakley did a double-take. On average, he saw, 20% of checking
account applicants had been turned down as a result of the bank's risk policies. That meant that the
bank’s affiliates had lost as many as 7,000 potential customers over the course of the year. If the risk
calculations were overly conservative and even half of these customers could be retrieved, the bank
would have no problem meeting its elusive growth targets.
Coakley quickly rummaged through his desk, looking for some promotional materials he had
been given earlier that week. ChexSystems, the Minneapolis-based debit bureau, was offering a new
product called QualiFile that claimed to produce a finer segmentation of customers according to risk.
Coakley knew that purchasing the product would be a financially significant decision, and if the bank
bought it, he would have to decide how to use it. But if QualiFile could deliver on its promise, his
customer acquisition headaches might be over. A solid year of growth at the bank might even help
make up for the insult of the previous weekend, when Coakley had seen his beloved football team,
the Indianapolis Colts, lose in the playoffs to the New England Patriots.
History of Central Bancompany
Central Bancompany had started out in 1902 as private bank serving customers in Jefferson City,
Missouri. Early on, the bank—then known as the Central Missouri Trust Company—had been led by
Sam Baker Cook, a former Missouri Secretary of State. By 2004, the holding company had acquired 13
affiliates and a trust company throughout the states of Missouri and Oklahoma. It had remained in
________________________________________________________________________________________________________________
Professors Dennis Campbell, F. Asís Martínez-Jerez and Peter Tufano and Research Associate Emily McClintock Ekins prepared this case. HBS
cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or
illustrations of effective or ineffective management.
Copyright © 2007 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,
write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be
reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical,
photocopying, recording, or otherwise—without the permission of Harvard Business School.
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Central Bank: The ChexSystemsSM QualiFile® Decision
private hands, with the Cook family maintaining leadership through four generations and retaining
ownership of much of the stock held by the company’s shareholders.
Connection with local communities had been a guiding principle of the bank for over a century.
Whenever it acquired a new affiliate, Central encouraged the new member to retain its original name,
board, employees, and overall local identity. It also gave the affiliates a large measure of autonomy in
decision-making. The banks chose whom to hire and fire, where to close or open branches, and, most
importantly, which customers merited a particular product.1 Because local bank employees were
expected to know many of their clients personally, the company believed that they were in a better
position to decide who should open a checking account or receive a mortgage than the central office.
The parent company, led by co-chairmen Robert Robuck and CEO Bryan Cook, oversaw those
functions that were characteristic of a corporate center or for which economies of scale or scope
justified centralized management. Thus, corporate strategy, including the acquisition of new
affiliates; legal work; and internal audits were carried out by the holding company. The central office
was also responsible for asset and liability management, information technology, group marketing,
and, though the affiliates had the final say in loan approvals, for the group-wide system of credit risk
assessment. Additionally, in 2001, management decided to standardize some practices across the
entire Central Bancompany family—for instance, by allowing the central office to define product
suites and product characteristics such as pricing guidelines and overdraft policies—though the final
decision for these issues, as with loan approvals, was left to the local member banks.
Cook explained the company’s strategic balance between small-bank style and large-bank
capabilities this way:
The theory that we go on is that a lot of the smaller community banks offer pretty good
service, but they don’t really have the capacity, the money, and oftentimes they don’t really have
the capabilities of top management. You go to the large banks and they are able to offer
sophistication of management, the technology, those types of things. But they sometimes forget
customer service. We, I think, are able to bring both together.2
Along with smaller community banks such as Exchange National Bank and Premier Bank,
Central Bancompany, with 4% of total bank branches in Missouri and 5.5% ($5.9 billion) of total
deposits, had to compete with financial giants such as Bank of America and large regional
competitors such as Commerce Bank and United Missouri Bank (UNB). In spite of the heavyweight
competition, however, in 2004 Central achieved a return on equity of 11.3% against an industry
average of 12.6% (See Exhibit 1 for a summary financial report).
The Challenge of Growth
As the banking industry had grown increasingly competitive in the last 20 years, profit margins
for banks had narrowed. Net interest margin, a traditional source of bank profit, had been eroded by
sustained low interest rates and intense competition (Exhibit 2). In this economic environment, banks
turned to new avenues for profit such as increasing fee revenue and improving efficiency through
growth (Exhibit 3).
1 Vanderwerf, Martin. “First National Banker is a Hard Charger with a Soft Touch. The Successful strategy of S. Bryan Cook is
simple: Be accessible, build relationships and invest in the community,” St. Louis Post-Dispatch, 11 March 2005.
2 Vanderwerf.
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The new course led to drastic changes in the competitive landscape. Relaxed federal regulations
led many banks to attempt growth through combination, resulting in a wave of mergers and
acquisitions. Nationwide, the number of FDIC-insured commercial banks fell from 14,496 in 1984 to
7,630 in 2004.3 Changes in marketing strategies mirrored the dynamics of the takeover-driven market.
Rather than waiting for clients’ needs to drive them to a branch, banks had begun to aggressively
court new customers.
Central Bancompany saw these trends alter its competitive landscape significantly over the years.
In the bank’s home state of Missouri, the number of financial institutions fell 54% between 1984 and
2004, from 722 to 338.4 Central responded by pursuing careful acquisitions of smaller local banks. By
2004 its affiliates included branches in Oklahoma as well as in Missouri, and CEO Cook had set his
sights on future growth in “contiguous states.”5 At the same time, the bank was trying to grow
organically by broadening its customer base in current branches. However, Central remained a
moderately sized regional institution. And as larger and more powerful banks swallowed smaller
banks in surrounding areas, the fight for market share was growing more and more difficult.
According to Coakley’s latest report, the bank was successfully attracting new customers, but the
volume of new accounts was not large enough to satisfy Central’s growth goals:
Convincing individuals to change banks is very expensive, so a retail bank like Central can’t
try to grow by stealing competitors’ clients. Instead, we capture individuals in a period of life
transition—people who are moving, getting married, starting a new job, or buying a home. Our
marketing dollars have to aim to capture the attention of those customers and bring them into the
branch.
Each year, we lose 30,000 customer accounts, about 20,000 of which are due to transition and
10,000 to excessive overdrafts or account mismanagement, but we also sell 35,000 new accounts. If
we wanted to increase our 170,000 checking accounts by 5% we would need to sell 3,500 more
accounts. If half of the 7,000 applications we reject every year are actually viable customers, we
can easily achieve our target. But we have to find out who those customers are.
Coakley’s thoughts pointed to two remedies: either the bank could redirect its marketing
campaigns so as to attract customers with more dependable records, or the bank could reevaluate its
denial decisions. With a finer segmentation of the large group of denied customers, the bank might be
able to salvage some clients who initially seemed too risky or unattractive and find ways to serve
them profitably.
Coakley, who regularly taught at the University of Wisconsin’s Graduate School of Banking and
was a regular attendee of professional conferences approached the problems he encountered at the
bank with a slightly different mindset than many of his colleagues. In particular Coakley believed it
was unwise to make blanket assumptions about all customers with a bad credit history. As a case in
point, he thought about his neighbor, Larry.6 Larry had long held a six-figure middle-management
3 FDIC Statistics At a Glance, “Historical Trends,” http://www.fdic.gov/bank/statistical/stats/2007Jun/FDIC.pdf (accessed
August 23, 2007).
4 Federal Financial Institutions Examination Council, Reports of Condition and Income for all Insured U.S. Commercial Banks,
“Commercial Banks in Missouri,” accessed through the Reserve Bank of St. Louis website.
5 Vanderwerf.
6 Disguised name.
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Central Bank: The ChexSystemsSM QualiFile® Decision
position, but when he lost his job following the firm’s IPO (initial public offering), he struggled to
keep up with his previous lifestyle. Coakley reflected on Larry’s situation:
Because options in the region were limited for someone with Larry’s expertise, it took him more
than a year to find a similar position—and by that time, he had lost his house and filed for
bankruptcy. But as soon as he found a new job, he was back in business. He was stuck in a bad
situation temporarily, but he wasn’t a bad customer. Knowing Larry made me realize that some of
the people we were turning down might be potentially valuable clients.
The Economics of a Checking Account
To help grow the bank, Coakley wanted to focus its marketing efforts on customers who needed a
checking account. Checking accounts were a baseline product that helped establish a relationship
with customers and led to future purchases of credit products, car loans, or mortgages, all three of
which were major sources of profit for the bank. In essence, Coakley explained, the checking account
was a loyalty-generating product:
On average, capturing a new checking account customer costs us about $100. This cost includes
the risk assessment test, the time employees spend processing the transactions, and the allocation
of marketing expenses. But over an average tenure of five years, we expect to more than recover
these costs through the profitability of the checking account itself and the cross-selling of
additional products.
Historically, most banks had charged a monthly fee for checking accounts, but increased
competition had led many banks, including Central Bancompany affiliates, to offer the standard
account for free. The remaining sources of revenue associated with an account were relatively small.
In 2004, the average checking account at Central Bancompany generated about $10 in fees linked to
transactions such as funds transfers. The bank also earned a spread on deposited funds of about 3%
(the average account held $1,000 in deposited funds). Customers who paid for items with a debit card
generated an additional average of $30 annually for the bank through interchange fees,7 but only 80%
of checking-account clients held a debit card and only 60% used them for retail purchases.
Central Bancompany spent about $160 per year to maintain each checking account. This cost
included fixed-cost allocations for the brick-and-mortar branch network and call center, IT expenses,
and transaction-related costs such as mailing the monthly statement or checking a balance.
Because most checking accounts at Central Bancompany were only marginally profitable on their
own, their usefulness to the bank lay mainly in their role as a gateway to more profitable lending
products. Although Central did not explicitly measure customer profitability, Coakley knew from
customer surveys that clients seeking a loan provider were likely to stay with the bank in which they
held their checking account.
Another source of profit attributed to the checking accounts was a segment of customers that
generated substantial overdraft fees. While most customers overdrew their accounts infrequently, if
7 Banks can earn revenue from consumer use of debit cards in a variety of ways, depending on their role in the transaction. In
debit card transactions, a bank can be an “issuing bank” (which issues the debit card to the consumer) or an “acquiring bank”
(which acquires the transaction via its relationship with the merchant.) Merchants typically accept a discount off of the
amounts the consumer promises to pay under debit and credit card transactions. A debit card issuer, like Central Bank, would
typically capture its portion of this discount in “interchange fees.” .
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Central Bank: The ChexSystemsSM QualiFile® Decision
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at all, a significant minority—about 11%—overdrew approximately 50 times per year, generating $25
in fees each time. Another 11% did not overdraw their accounts at all, and the rest overdrew their
accounts once or twice a year. Nationwide, the fees generated from overdraft programs was a major
source of revenue for retail banks, and though relatively recent, was growing fast. Between 1999 and
2003, the number of banks using the leading vendor’s overdraft protection program increased more
than fourfold.8 The policies behind this service were as controversial as they were popular.
Overdraft Protection
In the past, the probability of a consumer defaulting on an overdrawn check deterred most banks
from covering account overdrafts. Only credit-worthy customers were awarded overdraft protection
in the form of a line of credit.9 In addition, managers sometimes approved overdrafts on a case-bycase basis for customers with a high net worth or a longstanding relationship with the bank.10 Checks
from other customers written with insufficient funds simply “bounced,” returning to the retailer
unpaid. Bounced checks triggered a charge on the client’s bank account of more than $25, often in
addition to a penalty charged by the retailer.11
But by 2004, many banks had decided to offer universal overdraft protection—not only for checks,
but also, often, for transactions at ATMs and other points of service—in exchange for overdraft fees.
Those in the industry saw overdraft protection as an improvement for consumers, especially when
compared with past practices. “Universal overdraft protection, sometimes called ‘courtesy’
protection, applies to checking accounts automatically,” Coakley explained. “It puts an end to the old
ad-hoc system and its bias. Branch managers often unintentionally favored people more like
themselves. An automatic program gives all customers the same treatment regardless of gender, age,
or ethnicity.” Paul Smith, Central Bank’s Overdraft Product Manager, emphasized the sense of
security that the product gave customers. “It saves them from hassle and embarrassment,” he said.
“Although we do charge a fee for the service, we essentially help clients avoid the cost and shame of
a bounced check.”
Overdraft services came in many different forms (see Exhibit 4 for examples). Some banks
charged a flat fee for overdrafts, and some charged an additional amount by the day.12 The coverage
limit also varied, usually between $500 and $1,200. But overall, the fees accounted for an increasing
amount of bank revenue, and the service was becoming more and more common throughout the
industry. According to the FDIC, A.T.M., bounced-check, and overdraft fees totaled $30 billion in
2003, a 14 percent increase over 2001.13 This figure represented 30% of banks operating profits.14
8 Alex Berenson, “Banks Encourage Overdrafts, Reaping Profit,” The New York Times, January 22, 2003.
9 Jean Ann Fox, “Overdrawn: Consumers Face Hidden Overdraft Charges Form Nation’s Largest Banks,” Consumer
Federation of America, June 9, 2005, p. 3.
10 Fox, p. 3.
11 http://www.bankrate.com/brm/news/CheckingStudy2004/interest/nsf-fee.asp, accessed on August 30, 2007.
12 Department of the Treasury, Office of the Comptroller of the Currency [Docket No. 05-03], Federal Reserve System [Docket
No. OP-1198], FDIC, National Credit Union Administration, “Joint Guidance on Overdraft Protection Programs,” p. 6.
13 Quoted in Berenson.
14 Quoted in Berenson.
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Central Bank: The ChexSystemsSM QualiFile® Decision
Opposition to the new overdraft programs grew as the practice became more popular. Consumer
advocates argued that the fees took advantage of low-income customers, comparing them to the
charges for salary advances offered by check-cashing outlets.15 The FDIC warned that “some
institutions have adopted marketing practices that appear to encourage consumers to overdraw their
accounts, such as by informing consumers that the service may be used to take an advance on their
next paycheck.”16 A report by the Consumer Federation of America claimed that “the depositors who
most frequently face [overdraft] fees are the lowest income and youngest consumers.”17 According to
the New York Times, overdraft fees could “translate into an annual interest rate [of] several thousand
percent” depending on the rate of repayment.18
In 2001, Central Bancompany introduced its own overdraft protection plan, called Overdraft
Access (see Exhibit 5 for details). Covering all customers inevitably resulted in some defaults. If a
customer defaulted on an overdrawn account, the average cost to the bank was $250. However,
responsible customers more than made up for this loss. The majority of customers who incurred
overdraft fees at Central Bancompany branches paid their bills reliably, albeit late. They also came
from a wide range of social and economic demographics, suggesting that they lacked the discipline
needed to balance a checking account rather than the financial ability to do so. By 2004, overdraft fees
accounted for about 25% of Central Bancompany’s revenue.
Opening an Account at Central Bancompany
The USA PATRIOT Act of 2001 required banks in the United States to verify the identity of their
clients through a customer identification program (CIP).19 Thus, like most American banks, Central
required potential customers seeking a new checking account to visit an affiliate branch in person
rather than contacting the bank by phone or over the internet. At Central, a customer service
representative (CSR) at the branch interviewed each potential client to assess his or her checking
account needs. This interview also served to collect the information required by the CIP, including
full name, date of birth, and a physical street address verified by a document such as a driver’s
license or passport.20
When the CSR entered a potential client’s information into the bank’s main database, it was
automatically submitted to the bank’s risk assessment system, an external data solution called
ChexSystems provided by a firm of the same name. ChexSystems compared the data with
information from other banks in order to flag applicants who had recently experienced a negative,
risk-enhancing event. The system notified the bank if the customer had been forced to close an
account or had left bills unpaid at a participating retailer. It also informed the bank of cases in which
15 Berenson.
16 “Joint Guidance on Overdraft Protection Programs.”
17 Fox, p. 18.
18 Berenson.
19 Susan B. Hollinger, “USA Patriot Act Requires Banks to Implement Customer Identification Programs,” Gallagher, Callahan
& Gartrell, PC, http://www.gcglaw.com/resources/financial/identification.html. Viewed June 11, 2007.
20 Carl Fornaris, “USA Patriot Act: Long-Awaited Final Customer Identification Regulations That Apply to Banks, Broker
Dealers, Trust Companies, Mutual Funds and Other Financial Institutions,” Greenberg Traurig LLP, http://www.gtlaw.com/
pub/alerts/2003/fornarisc_05.asp. Viewed June 11, 2007.
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Central Bank: The ChexSystemsSM QualiFile® Decision
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the given social security number and other identifying information did not seem to match, signaling a
possible incidence of identity fraud or theft (a typical screen is displayed in Exhibit 6).
Central Bancompany’s historic policy was to reject all account applicants who were listed with a
negative event in ChexSystems. In theory, the CSR had the authority to override a warning generated
by ChexSystems. These overrides were then submitted to a branch manager for approval. However,
as Eileen Richter, a CSR in the main branch of Central Bank in Jefferson City explained, her
colleagues did not exercise this discretionary power lightly:
[CSRs] don’t overrule the system unless they have access to some very compelling information
not captured by the bank database—for instance, if the customer has a long history with the bank
and the CSR is familiar with his or her story. If I approve a flagged customer and the relationship
turns sour, I know that I will get my hand slapped.
Sarah Wood, the branch manager, corroborated Richter’s account: “As the largest branch, we open
some 140 accounts per month. All requests to override the ChexSystems recommendation have to go
through me, but in any given month I only receive one or two requests. Of these, I only approve
about half.”
If a CSR decided to reject an account based on a negative risk assessment, he or she informed the
applicant and provided a document detailing how to contact ChexSystems to find out the reason for
denial (Exhibit 7). As Richter noted, “applicants usually know what the problem on their record is in
advance. They may even indicate as much in the initial interview.”21
From Coakley’s point of view, the current risk-assessment policies amounted to a black and white
system of approval:
I’m sure that Larry, my hard-working neighbor, would not make it past the first interview in
one of our branches. His past bankruptcy would probably scare off the CSR. In the current
climate, a lot of people like him may be walking out of the branches empty-handed—or, rather,
carrying the denial sheet generated by ChexSystems.
Back in his office, Coakley scanned the sales pitch Tom Lankford, a sales executive at
ChexSystems, had given him describing the firm’s new QualiFile product. Coakley had voiced some
of his frustrations about the “black and white” evaluation system to Lankford a few months earlier,
in the fall of 2004. But before he made any calls about the new system, he decided to give the
company profile a closer look.
eFunds
ChexSystems, Inc. was a wholly owned subsidiary of eFunds Corporation. eFunds, in turn, was a
Scottsdale-based firm that focused on three business segments: electronic payments, global
outsourcing, and risk management (see Exhibit 8 for the relative contribution of each segment). The
electronic payments segment processed transactions at approximately 140,000 ATMs, retail terminals,
21 The decision to approve or decline was made by the individual financial institution and not by eFunds. If a decline decision
was made by the financial institution based on ChexSystems data, the standard practice was to provide the consumer with an
adverse action notice with information on how to review a free copy of the consumer's ChexSystems report. The ChexSystems
report given to the consumer provided detailed information on how to dispute incorrect data.
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Central Bank: The ChexSystemsSM QualiFile® Decision
and other points of service nationwide.22 The global outsourcing division offered products that
helped collect data and support call centers and back-office services outside the United States.23 The
risk management segment helped banks verify customer identities, detect fraud, and prevent
financial loss (see Exhibit 9 for a list of services and suite of products of eFunds risk management
segment). Paul Bjerke, Director of Product Management for ChexSystems, commenting on the scope
of the information captured in the company's databases, noted that “approximately 9,000 financial
institutions, representing over 100,000 banking locations, report to ChexSystems. That’s about 90% of
all commercial banks, credit unions, and savings institutions.”
The eFunds risk management business grew out of an earlier response to a simple problem. In
1971, two Minneapolis grocers decided to share the names of customers who had paid for their
groceries with bad checks. Over time, more grocers joined their group and area banks agreed to
provide them with the identities of clients whose accounts had been closed. Later on, this list was
taken over by a third party that maintained the archive, responded to inquiries, and shared
information with banks and retailers.
The company grew quickly, about 20 percent a year, and the list of customers soon filled walls of
shelves and filing cabinets. According to company legend, the firm was forced to adopt electronic
files when employees, who continuously handled the heavy files, began to complain of back pain.
This electronic database eventually came to be known as ChexSystems.
In 1984, ChexSystems was purchased by the Deluxe Corporation. By April 1999, the Deluxe
Corporation had combined ChexSystems with three other operating units—DebitBureau, Deposit
Payment Protection Services, and an electronic check conversion company—to form eFunds. In June
2000, the eFunds Corporation held its initial public offering on the NASDAQ national market and
later that year completed its separation from Deluxe. The launch of the new eFunds Corporation
brought a new CEO, Paul Walsh, and with him a new team. Walsh’s team led efforts to develop a
diverse suite of risk assessment products, one of which was QualiFile.
QualiFile
The QualiFile product was part of eFunds’ initiative to create a higher value-added product for
customers seeking a finer segmentation of risk. Instead of providing raw information about a
customer’s negative financial events, like ChexSystems, QualiFile integrated proprietary information
with data from other sources in an econometric model. The model weighed each factor to produce a
number known as the QualiFile Risk Score, which ranged from 100 to 899 (Exhibit 10). Higher scores
predicted a lower likelihood of eventual default. Customers without any information were assigned a
score reflecting the historic risk of a no-information applicant. While recent fraud still triggered a
very low score, other negative events that had simply been flagged in the ChexSystems database
were put into perspective using a more holistic view of the customer’s financial history.
Along with the risk score, QualiFile was able to generate customized action recommendations for
each applicant based on a set of rules adopted by the bank using the service. In fact, front-line
employees at the bank never saw the score but a screen suggesting a specific commercial action
(Exhibit 11). Each bank that purchased QualiFile could request that eFunds program the system
22 eFunds Annual Report 2005. Revenue generated by ATM Management’s processing fees was recorded under the Electronic
Payments business segment.
23 eFunds Annual Report 2005.
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according to the bank’s current strategy. Thus, if a bank wanted to be more aggressive and assume
more risk, it could set a lower cut-off point for account approval. The bank could also manage its risk
by offering different product features (such as overdraft protection or a credit card offer) depending
on the QualiFile Risk Score of the applicant.
Although Coakley was only considering the version of QualiFile that focused on debit risk,
eFunds also offered versions of the product that bundled debit risk information with data from the
credit bureaus and/or data from suppliers of socio-demographic information. Banks could
incorporate this information into their customer relationship management (CRM) systems to design a
more sophisticated segmentation of the product offering for potential applicants.
After carefully reviewing the rest of the brochure, Coakley turned to the chart that eFunds had
created to support QualiFile sales and help customers understand the value of the product. Using
actual information from a nationally representative sample of one million accounts opened by banks
that were customers of eFunds, the chart compared the performance of customers who were offered a
checking account based on the information in ChexSystems with the score they would have received
using QualiFile (Exhibit 12).
QualiFile’s statistical model seemed to offer the potential for an improvement over ChexSystems’
system of flags. Still, Coakley wondered exactly how much value it could offer the bank. The average
ChexSystems inquiry costed $2; the same inquiry using QualiFile would cost $2.75. Would QualiFile
really help Central accept more valuable customers? How much would the bank lose on bad
customer bets? Would CSRs trust or fear the new tool? If the bank bought the product, what kind of
customer acquisition strategy should it pursue?
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Exhibit 1
Central Bank: The ChexSystemsSM QualiFile® Decision
Summary Financial Information: Central Bancompany
in millions
Interest Income
2001
$
379.85
2002
$
308.93
2003
$
269.38
2004
$
289.94
Interest Expense
169.99
94.91
66.53
66.06
Net Interest Income
209.86
214.03
202.85
223.87
Noninterest income
$
83.64
$
91.74
$
105.51
$
101.34
Noninterest expense
168.17
174.10
181.32
189.80
Net Noninterest Income
-84.53
-82.36
-75.81
-88.46
Provision for loan losses
$
Income before taxes
Income taxes
Net income
(12.89) $
(16.03) $
(14.87) $
112.44
115.64
112.18
-42.65
$
69.79
-40.98
$
74.66
-36.79
$
75.39
(9.24)
126.18
-45.74
$
80.43
Assets
Cash and Due from Banks
Investment securities
Money Market Obligations
Loans less Unearned Income
Allowance for Loan Losses
Net Loans
Other Assets
Total Assets
$163.33
1,233.64
$189.13
$183.38
1,468.15
1,698.63
$184.30
275.21
262.52
214.35
1,683.47
172.50
3,663.28
3,716.49
3,782.08
4,122.01
(63.82)
(67.52)
(71.03)
(73.90)
3,599.46
3,648.97
3,711.04
4,048.11
295.65
295.20
313.96
335.18
$5,567.29
$5,863.98
$6,121.36
$6,423.56
Liabilities
Non-interest-Bearing Demand Deposits
$745.84
$849.96
$977.41
$1,055.04
Savings, NOW, and oney Market Deposits
1,589.57
1,725.62
1,781.85
1,974.15
Time Deposits
1,913.01
1,830.91
1,773.79
1,710.79
Total Deposits
$4,248.42
$4,406.49
$4,533.05
$4,739.98
652.18
736.04
810.84
837.75
Borrowed Funds
58.40
52.72
50.44
58.55
Other Liabilities
81.88
81.08
82.44
76.26
5,040.88
5,276.33
5,476.78
5,712.54
Federal Funds Purchased & Repurchase Agreements
Total Liabilities
Total Stockholder Equity
Total Liabilities and Stockholder Equity
Source: Central Bank documents.
10
526.41
587.65
644.59
711.01
$5,567.29
$5,863.98
$6,121.36
$6,423.56
Central Bank: The ChexSystemsSM QualiFile® Decision
Exhibit 2
208-029
Evolution of the U.S. Call Rate, 1984-2004. Yields in percentages.
Call Rate
1/6/2004
1/6/2002
1/6/2000
1/6/1998
1/6/1996
1/6/1994
1/6/1992
1/6/1990
1/6/1988
1/6/1986
1/6/1984
14
12
10
8
6
4
2
0
Source: Global Financial Data.
Note: The call rate is the interest rate for overnight deposits in the interbank market.
Exhibit 3 Breakdown of Financial Institutions’ Income by Source. FDIC-Insured Banks, 1982–2004.
$ Billions, Percentage.
100%=
86.7
Other Income 23%
Net Interest Income
77%
1982
128.9
174.6
256.4
356.6
433.6
27%
32%
37%
43%
42%
73%
68%
63%
57%
58%
1986
1991
1996
2000
2004
Sources: Standard & Poor’s Banking Industry Surveys: November 12, 1992, November 11, 1999; November 8, 2001; November
6, 2003; July 7, 2005
11
208-029
Exhibit 4
Comparison of Overdraft Products
Overdraft
Protection
Program
Non-Credit
Line
Protection
Credit Line
Protection
Bounced
Check Fees
Source:
-12-
Bank of
America
Premier
Bank
Commerce
Bank
Exchange
National
Bank
United
Missouri
Bank
Central
Bank
No
Yes
No
No
No
Yes
Cost
Free
Free
Free
Free
$15
Free
Savings
account
link
Yes
Yes
No
No
No
No
Courtesy
protection
No
No
No
Yes
No
Yes
Fee per
overdraft
$10 (per
transfer)
$22
N/A
$24
N/A
$25-$35
Offered
Yes
No
Yes
Yes
Yes
Yes
Fee
amount
Yearly, first
offense
$20; $35
thereafter
$28
Yearly, first
offense
$25; $35
thereafter
$24
$32
$25-$35
Automatic
www.bankofamerica.com, accessed July 13, 2007; www.wellsfargo.com, accessed July 13,2007; www.commercebank.com, accessed July 13, 2007; www.exchangebk.com, accessed July 14, 2007;
www.umb.com, accessed July 14, 2007; Central Bancompany documents.
Note: 2007 pricing schedules. Although 2004 price levels may differ, diversity of schemes is representative of 2004 overdraft protection products
208-029
Exhibit 5a
Overdraft Access at Central Bancompany: Product Brochure
Source: Central Bank documents. See Exhibit 5b for detail of far right column.
-13-
208-029
Exhibit 5a (continued)
For more information stop by any of our convenient locations, or call us.
Source: Central Bank documents.
-14-
Central Bank: The ChexSystemsSM QualiFile® Decision
Exhibit 5b
208-029
Detail of Overdraft Access Brochure
Overdraft Access Policy
It is the policy of all Central Bancompany Affiliates (hereafter known as Bank) to comply with all applicable
safety and soundness standards.
Your Understanding Your Deposit Account brochure describes the duties, obligations and rights of the
Depositor, the Authorized Signatories and the Bank with regard to your deposit accounts. Your Understanding
Your Deposit Account brochure is incorporated herein for all purposes as if it were set forth verbatim, and its
terms shall control any possible conflict, if any, between any provision of the Overdraft Access Policy and that of
the Understanding Your Deposit Account brochure.
The Bank is not obligated to pay any item presented for payment if your account does not contain sufficient
collected (available) funds. Any discretionary service payment by the Bank of any non-sufficient fund check, inperson withdrawal, ATM withdrawal, or other electronic item or to provide prior written notice of its decision to
refuse to pay any additional non-sufficient fund check, in-person withdrawal, ATM withdrawal, or other
electronic item.
Pursuant to the Bank’s commitment to always provide better customer service, if you maintain an account that
has been open for a minimum of thirty days, the Bank will consider approving your overdrafts, whether they
result from checks, in-person withdrawal, ATM withdrawal, or other electronic transactions. In deciding whether
or not to approve your overdrafts, the Bank may consider a number of factors, including but not limited to,
whether or not your account is in good standing, how long your account has been open, your average deposit
balances held with the Bank, and/or whether or not you or your account is subject to any legal or administrative
order or levy. Then the Bank will consider, as a discretionary courtesy and not a right or obligation, approving
your reasonable overdrafts. Overdraft Access is neither an overdraft line of credit nor an overdraft protection
agreement.
Each month your Overdraft Access amount will appear on your deposit account statement. Any and all bank
fees and charges, including without limitation the non-sufficient fund/overdraft fees, will be added to your
Overdraft Access balance, regardless of whether such charges and fees result in a balance exceeding your
overdraft Access limit.
The total overdraft Access (negative) balance, including any and all bank fees and charges, is due and payable
upon demand, and the Depositor and each Authorized Signatory will continue to be liable for such amounts, as
described in the Understanding Your Deposit Account brochure.
Again, approval of reasonable overdrafts through Overdraft Access on accounts in good standing (as
described above) is only a courtesy, and not a right or obligation. Accordingly, the listing of an Overdraft Access
amount on your account statement is not a guarantee or agreement that your overdrafts will be paid. It is within
the Bank’s sole and absolute discretion to cease this service at any time without prior written notice, reason or
cause.
If you present a check, in-person withdrawal, ATM withdrawal, or other electronic transaction for payment
and we create an overdraft, pursuant to provisions in the Understanding Your Deposit Account brochure, you
agree to pay us the amount of any overdraft and applicable fees as published, immediately, without notice or
demand from us, unless you otherwise specify you wish all NSFs returned. Each account holder is jointly and
severally responsible under the terms outlined in Understanding Your Deposit Account brochure for paying any
overdraft amounts. All Overdraft/NSF fees are listed in the Common Features section of the Understanding
Your Deposit Account brochure.
You have the right to “Opt-Out” of Overdraft Access. Contact any Customer Service Representative to
request removal of Overdraft Access from your account.
Source: Central Bank documents.
15
208-029
Central Bank: The ChexSystemsSM QualiFile® Decision
Exhibit 6
Sample ChexSystems Response Screen
MCD712A-01
SS NBR
: 996-52-8512
LAST NAME : ADAMS
STREET
: 1234 ELM AVENUE
ZIP CODE : 55551 DOB: 9566
TIME AT ADDR :
1 YRS
2 MOS
CHEXSYSTEMS
08:55:22
DL NBR: A100100100100
FIRST NAME : ROBERT
CITY
: STILLWATER
PHONE (H) : 999-555-1234
PRV STS
: OR
01/07/04
DL ST : MN
MI
: R
ST
: MO
DEPOSIT :
500.00
(01) SS NBR: BECAME AVAILABLE FOR ISSUANCE IN 1956 IN CO (Possible Manipulations Delivered Next Day)
(02) DL VALIDATION: VALID DRIVER’S LICENSE FORMAT: ADAMS, ROBERT R DOB: 09/05/66
(03) 06 PREVIOUS INQUIRIES BY 04 F.I.(S) (Tracked for Next 30 Days)
(04) REPORTED INFORMATION: (Tracked for Next 90 Days)
SS NBR: 996-52-8512
ADAMS, ROBERT R
5234 GET-A-WAY STREET
BLUFFTON, KS 55551
REASON: NSF ACTIVITY
(05))COLLECTION INFO: DEBT REPORTED OF $190
REPORTED BY: DATE: 06-07-00
METROBANK/FIRST STREET OFFICE
1234 BANK STREET
BANKTOWN, MO 555555
(06) RETAIL: 6 ITEMS FOR $150
(07) WARM ADDRESS: MAIL BOX ETC
(08) PHONE INFO: CELLULAR PH# / PHONE NUMBER NOT FOUND IN ZIP CODE
(09) SSN/DOB INFORMATION: SSN BECAME AVAILABLE BEFORE DATE OF BIRTH. CURRENTAGE 29
Source: eFunds documents.
16
Central Bank: The ChexSystemsSM QualiFile® Decision
Exhibit 7
Checking Account Refusal Letter
Source: Central Bank documents.
17
208-029
208-029
Exhibit 8
Central Bank: The ChexSystemsSM QualiFile® Decision
Contribution to eFunds Operating Income by Division, US$ Millions, 2004
$16.0
($2.3)
($29.6)
$26.5
$58.5
$47.9
46
Division
Risk
Management
Electronic
Payments
Global
ATM
Outsourcing Management*
Corporate
Expenses
Total
Source: eFunds, Casewriter analysis.
Note: On November 19, 2004, eFunds sold the ATM management business, simultaneously entering a five-year master service agreement with
the buyer to operate significant parts of the business. Thereafter, eFunds ceased to present ATM management as an independent segment,
recording the operating results of the agreement within the electronic payments segment.
18
Central Bank: The ChexSystemsSM QualiFile® Decision
Exhibit 9a
208-029
eFunds Risk Management Division Services
Fraud
Prevention
Targeting
ƒ Drive traffic to
branches and
web sites
ƒ Move from free
checking to
relationships:
universe
expansion
Regulatory
Compliance
ƒ Non-intrusive
ƒ Streamline
fraud screening
enterprise
during the
compliance
account opening
activities and
process
costs
ƒ Need for
increased
efficiency
ƒ Know-YourCustomer
ƒ Minimize false
positives
ƒ Move from
unbanked to
banked
Risk
Management
Relationship
Expansion
ƒ Improve riskreward ratio
through
automated
account
opening
ƒ Enforce
consistent
decisions
across delivery
channels
Account
Management
ƒ Leverage account ƒ Increase
opening to build
efficiency while
relationships
minimizing
losses
ƒ Target products
to consumers’
ƒ Gain insight on
needs
account
portfolio
ƒ Leverage account
opening “data”
ƒ Manage fraud at
the enterprise
ƒ Cross sell
level
ƒ Improve chargeoff recovery
New Account
Decisioning
New Account
Opening
Know Your
Customer
Account
Management
Enterprise Fraud
Management
Source: eFunds documents.
Exhibit 9b
eFunds Product Suite
New Account
Opening
New Account
Decisioning
• EFD DebitBureau ®
• EFD ChexSystems
SM
New AccountChex
• EFD eXpress
Accounts
Know Your
Customer
• EFD ID Verification
• EFD Government
List Screening
• EFD ChexSystems
QualiFile®
• EFD Address
Analysis
• EFD Cross Sell
• EFD ID
Authentication
SM
• EFD FraudFinder
• EFD Debit Report
• EFD Account
Ownership
• EFD Background
Reports
Focus of the case
Source: eFunds documents
19
Account
Management
Enterprise Fraud
Management
• EFD Behavior
Monitoring
• EFD Integrated
Fraud Platform
• EFD Consumer
Education
• EFD Investigative
Case Management
• EFD Deposit
Account Recovery
208-029
Central Bank: The ChexSystemsSM QualiFile® Decision
Exhibit 10a
QualiFile Risk Score Breakdown
Am ounts Ow ed,
3.8%
Account Type, 4.0%
Recent Activity, 9.5%
Current Status,
35.4%
Length of History,
14.7%
Paym ent History,
32.7%
Current Status
Payment History
Length of History
Recent Activity
Account Type
Amounts Owed
The percentage assigned to each of the factors depicted above reflects its impact to the QualiFile score with
respect to the entire population. The impact of these factors may vary from individual to individual due to
differences in credit and debit history.
•
•
•
•
•
Current Status
• Present status of all credit accounts
• Present status of specific types of credit accounts
• Present status of all debit accounts
Payment History
• Delinquency details (including lack of delinquency) on all credit accounts
• Delinquency details (including lack of delinquency) on specific types of credit accounts
• The number and timing of retail items
Length of History
• The length of overall credit history
• The length of history for specific types of credit accounts
• The length of debit account history
Account Type
• The types of credit accounts
• The number of each credit account type
Amounts Owed
• The percentage of revolving credit line currently in use
Source: eFunds documents.
20
Central Bank: The ChexSystemsSM QualiFile® Decision
208-029
Exhibit 10b QualiFile Information Structure
Information from
Financial Institutions
Information from
Retailers
Third-Party
Information
Over 9,000 institutions and
100,000 locations
Over 70,000 locations―70%
of retail check payments
> Account applications
> 3.5 billion checks verified
at point-of-sale
> Reported account
openings
> Unpaid NSF checks
> Paid NSF checks
> Reported account
closures
> Positive pay records
> Check printing histories
> Time-to-pay records
Analytics and
Decisions
> State-of-the-art consumer
data integration
> Demographic data
> Public records
> Predictive risk models
> Cross-industry fraud
suspect data
> Neural net fraud models
> Driver’s license files
Links
> Phone information
> Warm address files
> Lost and stolen account
numbers
> Postal information
> Fraud hot list records
> Social Security
Administration data
> Integrated to major credit
bureaus
> Other industry partners
Source: eFunds documents.
Exhibit 11
Sample QualiFile Response Screen
QUALIFILE
MCD704A-01
SS NBR
: 996-52-8512
LAST NAME : ADAMS
STREET
: 1234 ELM AVENUE
ZIP CODE : 55551 DOB: 9566
TIME AT ADDR :
1 YRS
2 MOS
21
DL NBR: A100100100100
FIRST NAME : ROBERT
CITY
: STILLWATER
PHONE (H) : 999-555-1234
PRV STS
: OR
(01)
ACTION
(02)
PRODUCT OFFER(S): ATM CARD
DEBIT CARD
CREDIT CARD
LINE OF CREDIT
OVERDRAFT PROTECTION
NOTIFY BROKERAGE SERVICES
Source: eFunds documents.
:
08:54:02
ACCEPT CHECKING ACCOUNT
MAIL THANK YOU NOTE
06/01/04
DL ST : MN
MI
: R
ST
: MO
DEPOSIT :
500.00
COPY DRIVERS LICENSE
+
$200
$5000
$2000
$1500
+
09.99%
16.80%
18.00%
208-029
Exhibit 12
Segment
Central Bank: The ChexSystemsSM QualiFile® Decision
QualiFile Risk Score Performance Table
Score Interval
# of
Accounts
# of
Bads
New
AccountChex
Plus Hit
Indexed
Revenue
Per
Account
Indexed
Losses
Per Bad
1
100 - 132
45,103
16,257
37,170
136
120
2
133 - 155
45,368
13,753
24,607
120
104
3
156 - 176
44,660
12,347
21,273
116
105
4
177 - 197
46,130
11,495
20,083
108
99
5
198 - 220
45,592
10,555
20,193
113
100
6
221 - 245
45,569
9,627
19,034
113
102
7
246 - 275
45,611
8,971
19,757
120
103
8
276 - 307
45,004
8,070
18,098
117
105
9
308 - 345
45,311
7,232
16,620
114
100
10
346 - 384
45,883
5,948
15,590
113
117
11
385 - 415
45,952
5,683
7,554
90
97
12
416 - 466
45,493
5,039
9,695
103
108
13
467 - 525
45,001
4,236
8,373
107
115
14
526 - 586
46,054
3,459
6,172
99
109
15
587 - 647
45,228
2,569
3,895
97
125
16
648 - 707
45,391
2,303
2,788
91
89
17
708 - 766
46,141
1,822
1,777
81
151
18
767 - 832
45,395
1,417
701
76
129
19
833 - 873
6,350
261
27
93
22
20
998 (Deceased SSN)
187
21
999 (No Data)
Total
636
87
205
160
174,130
24,997
0
71
65
1,000,000
156,127
253,611
100
100
The first five columns in this table are drawn from a database eFunds compiled from approximately 1 million accounts in
client banks. eFunds then applied QualiFile and AccountChex Plus to these accounts.
•
Segment: An arbitrary grouping of accounts by score defined so that each group contains roughly the same number of
accounts.
•
Score Interval: The minimum and maximum scores in each segment assessed at the moment the accounts were
opened.
•
# of Accounts: The number of accounts in each segment.
•
# of Bads: The number of accounts forcibly closed by the bank within one year of the account opening.
•
New AccountChex Plus Hit: The number of accounts in each segment that were flagged at the time of opening due to
a negative event (the forcible closing of an account, an unpaid check, or an unpaid retailer account) within the
previous five years. If a bank used a rule to deny accounts to all consumers with a check system “hit” these accounts
would not have been opened.
The last two columns in this table were constructed using the data of an undisclosed customer bank for which eFunds
performed a special study. The indices are built so that the average of all segments = 100.
•
Indexed Revenue Per Account: The financial margin and fees minus the operating costs for a good account.
•
Indexed Losses Per Bad: The revenues generated by the account minus the outstanding unpaid overdrafts and the
costs of bill collection.
Source:
eFunds.
22
Central Bank: The ChexSystemsSM QualiFile® Decision
23
208-029