The nature of lending is always looking for strategic advantage. How can fraud be identified more effectively, underwriting decisions made more accurately, or universal targets expanded more opportunistically than competitors?
To help answer these questions, data has been the backbone of credit institutions for decades. As the potential of data in this space grows with new technological capabilities, the opportunities for lenders to leverage this information to better serve existing customers and attract new audiences also increase.
As more and more lenders seek strategic market advantages to outpace their competitors, there is growing spotlight on how these organizations can leverage consumer-authorized data. This type of customer data allows lending institutions to access intuitively important financial services data, such as verification of transaction data, rental history, and utility payment records. By helping lending institutions learn more about potential customers when they apply, these consumer-authorized data sources help expand their pool of applicants who have historically been excluded from traditional financial services.
Much of our financial health relies on our credit data, but at least 45 million American adults are classified as non-assessable credit. why is this the case? Traditional credit scores capture only a subset of financial behaviors that may not accurately represent consumer creditworthiness, especially for consumers who cannot or do not use credit conventionally. Therefore, when individuals are classified as invisible credit or light credit, they are unable to easily access essential financial support without having to jump through additional hurdles, such as having to pay higher rates or fees for services such as a car loan.
Young consumers new to credit are a prime example of how a lack of credit history does not mean a higher associated risk for lenders. Currently, 80% of 18-19 year olds and 40% of 20-24 year olds are not graded or credited. This is largely because Gen Z and Millennial consumers often start their credit journey and face a “cold start” problem. Essentially, even if these young consumers did nothing wrong to negatively impact their creditworthiness, in the eyes of the credit bureaus, they simply did nothing or did well enough.
Immigrants are another major audience that faces a “cold start” problem with credit when entering the United States. Even though they have worked their whole lives to develop their creditworthiness in their former home country, they are instantly demoted and classified as invisible credit. when they enter the United States because their credit score cannot be automatically transferred. The majority of these people are often highly educated and have steady streams of income, but still have no way of proving they are worth the perceived risk to lenders, further underscoring the need for integrate alternative data to mark more creditworthy consumers. .
Lenders are already on board with the idea of alternative data to fill these gaps – 89% of lenders agree that alternative data allows them to expand their potential pool of candidates and 74% say they currently use other data in their process. One of the fastest growing areas for this type of information growth is cash flow underwriting, where consumers offer access to transaction data from their checking and savings accounts instead or in addition to traditional credit bureau reports.
Consumers are also increasingly willing to use these data sources and are more than willing to provide alternative financial details. In reality, 80% of consumers would share financial information with lenders if it meant increasing their chances of approval or better interest rates.
In addition to providing more flexibility in the process of applying for financial services, consumers appreciate how alternative consumer-authorized data allows them to regain some control, which is another long-standing issue in is about how organizations use consumer data. In a Finicity survey90% of respondents said they believe they have the right to better understand or control the personal financial information used by lenders.
Overall, it is clear that both lenders and consumers want opportunities for universal expansion and financial inclusion for excluded credit. Alternative consumer-authorized data offers both parties the opportunity to achieve these goals and drive systemic change in the way consumers access financial services.
At this point, it’s fair to predict that the use of this data is inevitable. We see younger generations already embracing the use of consumer-authorized data, so lenders would do well to recognize the trend ahead of them and jump on board before they fall behind the game. will only continue to evolve over the next few years as new technologies and innovations in the world of fintech are introduced to support this vision.
About the Author
Sarah Davies, Director of Data and Analytics, Nova Credit. Sarah leads credit risk and analytics for Nova Credit. She has over 20 years of experience in the financial services industry, as a leader and innovator in analytics and decision science. Prior to joining Nova Credit, she was Senior Vice President of Products, Analytics and Research at VantageScore Solutions, where she led the development of VantageScore credit scoring models.
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