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The new subprime class
Americans are obsessed with scores - credit scores, GPAs, SATs or cholesterol levels. Here's a new score though: 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 specialise in the flourishing field of predictive consumer analytics. It is a business fueled by huge 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. 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 their access.
One innovator in this sphere 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 aconsumer and to transmit his or her score to an eBureau client. "It's like gambling, " 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. Meyer says eBureau's clients use the scores to answer basic business questions about their potential audience.
"Are they legitimate?" 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. 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.
Ed Mierzwinski, consumer program director at the United States Public Interest Research Group in Washington, worries that federal laws haven't kept pace with change in the digital age. "There's a nontransparent, opaque scoring system that collects information about you to generate a score - and what your score is results in the offers you get on the Internet, " he says. "In most cases, you don't know who is collecting the information, you don't know what predictions they have made about you, or the potential for being denied choice or paying too much. "
On the ground floor of eBureau's headquarters are the company's prized assets: several hundred computer processors that analyze billions of details about consumers every month. EBureau has built a glass enclosure on a raised platform to showcase the machines. From the dimly lit viewing hall, tiny green and blue lights flicker behind glass.
Every business needs customers. But how do you find the good ones? In 2006, Meyer began to answer that question by carving a niche for himself in a nascent online industry called "lead generation". Lead generators are companies that set up consumer-friendly websites with the goal of funneling potential customers to various businesses. Such sites offer rate calculators and other tools that prompt people to fill out forms with their names and contact information. The sites then transmit those consumers' information to mortgage brokers, credit card issuers, car insurers and the like, offering access to these prospective customers, or leads, in return for a finder's fee. But, Meyer says, some companies were buying more than 100, 000 leads a month without being able to sort potentially profitable customers from windowshoppers and fakes.
"Are people who are filling out the forms telling the truth? Because Yogi Bear and Fred Flintstone don't buy a lot of stuff, " Meyer says. "Companies needed to figure out whether these leads were quality or not. "
But the spread of consumer rankings raises deep questions of fairness, says Frank Pasquale, a professor at Seton Hall University School of Law. He says, the scores may help companies but over time, they may send some consumers into a downward spiral, locking them into a world of digital disadvantage.
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