@Anonymous wrote:
@Anonymous wrote:Hi ABCD! That sound plausible, but I am pretty sure it is not so. (Though again, I can totally see why you'd think it might be.)
FICO has been repeatedly clear that the big scoring models we are all familar with (Classic, Auto Enhanced, and even Bankcard Enhanced) produce a number that measures one thing: the likelihood that a consumer will become severly delinquent on one or more accounts in the next X months. The exact value for X might vary for the model: maybe it is 18 months for one model or 24 months for another. And "severely delinquent" might have a slightly different definition. (Though I wouldn't be surprised if it had a consistent meaning of "90 days.")
But FICO's published white papers are clear that this and only this is what the score measures.
And aside from what the white papers say, we can see this is empirically by looking at people who are extremely unprofitable for CC issuers (indeed they make the CC companies negative profit) but who score extremely high (800s) on FICO 8 Classic and FICO 8 Bankcard Enhanced. Indeed I am pretty sure that, for every point a person's score exceeds 780, that is correlated with an increasing probability that he will make the CC issuer less money (or even make the issuer negative money). It's possible for a person to have a score in the 840s and yet make the issuer a good deal of money, but that is very rare.
If the score was partly measuring profitability, this could not happen.
But where I think you are likely on target is that FICO may well be making other kinds of highly specialized data mining tools that assist a CCC (for example) in identifying lucrative customers. It's just that the main scoring model does not do that, save through the method of enabling the CCC to assess risk of default (something that certainly eats into profitability).
FICO absolutely is a profit indicator. It isn't sold as such, but it absolutely is one for those who commoditize debt to sell to investors.
Remember: the bank does not generally care only for what YOU spend and generate in either interest rate profits or merchant processing fees but the bank also cares where your particular snapshot (as per FICO) will sit in an aggregate group of borrowers that the bank is bundling to let investors take part in. In fact, you can go back more than 20 years to see the beginning of this trend (see Katherine Samolyk's report from the early 00s).
So while a consumer layman may think a bank loves a consumer with a mid-high FICO score who pays interest, that's not how the bank sees it. A bank may make more money through bundling and commoditization of debt borrowers by adding more high FICO low return customers to a package, thereby skewing the default profile just enough to squeak out a tiny bit more return from investors (and investment AI software) who might have passed on the package had it been a fraction higher in default risk at the same price. (Jens Beckert & Patrik Aspers book from 2011 titled "The Worth of Goods").
Banks don't just make money on interest or merchant fees, they make money on bundling creditors to resell to bond investors (and other commoditized bundled packages) -- see Peter Eavis, 2012, NY Times.
FICO isn't sold as just a risk profile anymore. It probably was 20 years ago, but now FICO isn't just promoting it as a risk measure solely -- when you incorporate securitization into the game, it's also about overall profit incentive for investors buying up those debts as a bundle (Vinod Kothari, "Securitization: The Financial Instrument of the Future", 2006 ).
I thought the comment would be interesting. 
I was going to reply to your previous comment, ABCD: "When has FICO been for the consumer? It isn't. It's for banks.". because that hit me with a "Duh! Of course!" Many of us here get conditioned to thinking in terms of what the FICO score can do for us, the consumer - higher score, bigger CLs, lower APRs. But of course FICO was developed for the lenders, a quick & easy scorecard indicating how risky a borrower might be, but also how profitable they may be. There's so much in a credit report: Low current utilization? Great, nice FICO, but have they carried a balance in the past and paid interest? Ah yes, there it is, back in 2015. So this borrower is one who is willing to splurge for a large purchase and pay interest on it.
I agree with you, FICO absolutely is a profit indicator, and I think it is even privately sold as such. For the commodization of debt as you went into such excellent detail on, but probably a large number of things. Like is the borrower a "churner"? With so many, increasingly large new account bonuses, lenders want to know if you're a long term card holder, or someone who takes the bonus & runs. Large banks like Chase have come up with their own model, the 5/24, but for many smaller banks it's cheaper to use FICO.