Shostack + Friends Blog Archive


Security and Economics

Household Finance, a unit of HSBC, has sent me a $5,000 check out of the blue. Big verbage on the front indicates that “Signing this check will result in a loan…” at 23%, which over 5 years comes to an estimated $3,500 in finance charges. Most attractive.

Now, ignoring Household’s record of fraud, and ignoring the interest payment as uninteresting to me, I’m curious what level of fraud/default they could accept (by their customers) and still be making money?

Given that the Fed rate is under 2%, they make 21% on each of these that’s paid off. So unless 20% of their respondents are going bankrupt, they make money. (Look for one in the mail soon.) If they have an at-all decent credit analyzer, they can probably do better than that, but realize that Household aims to make money in the so-called ‘sub-prime’ market, which used to be called people down on their luck or deadbeats. (That it’s a growth market may seem sad, but remember these folks used to be the market for loan-sharks. It’s a testament to the development of risk management techniques that there’s now players like HSBC willing to play in the market.)

So, this is a simple risk analysis with some . I look forward to the day we can do this sort of thing for information security.