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The Intersection of Data and Lending

The nature of lending is always seeking a strategic advantage. How can fraud be identified more effectively, underwriting decisions be made more precisely, or universe targets be expanded more opportunistically than competitors? 

To help answer these questions, data has been the backbone of lending institutions for decades. As the potential for data in this space expands with new tech capabilities, so do the opportunities for lenders to leverage these insights to better serve existing customers and attract new audiences. 

As more lenders seek strategic advantages in the marketplace to outpace competitors, there is a growing spotlight on how these organizations can leverage consumer-permissioned data. This type of customer data provides lending institutions access to intuitively important financial services data, such as checking transaction data, rental history and utility payment records. By helping lending institutions know more about potential customers when they apply, these consumer-permissioned data sources help broaden their pool of applicants who have historically been locked out of traditional financial services.

So much of our financial health rests on our credit data, yet at least 45 million U.S. adults are classified as credit unscorable. Why is this the case? Traditional credit scores only capture a subset of financial behaviors that may not accurately represent consumer creditworthiness, especially for consumers who can not or do not use credit in conventional ways. Therefore, when individuals are classified as credit invisible or thin file, they are not able to easily access essential financial support without having to go through additional hurdles like having to pay higher rates or fees for services such as a car loan.

Younger consumers who are new to credit demonstrate a prime example of how lack of credit history does not mean higher associated risk for lenders. Currently, 80% of 18–19-year-olds and 40% of 20–24-year-olds are unscored or credit invisible. This is largely because Gen Z and Millennial consumers are often just starting their credit journeys and face a ‘cold-start’ problem. Essentially, even though these younger consumers haven’t done anything wrong to negatively impact their lending worthiness, in the eyes of the credit bureaus, they just haven’t done anything or enough right.

Immigrants are another major audience who face a ‘cold-start’ problem with credit when they enter the U.S. Even if they have worked their whole life to develop their credit worthiness in their previous home country, they are instantly demoted to being classified as credit invisible when entering the U.S. because their credit score cannot be automatically transferred. A majority of these individuals are often highly educated and have consistent streams of income yet still have no way to prove they’re worth the perceived risk for lenders, which highlights even more how great the need is to incorporate alternative data to score more creditworthy consumers. 

Lenders are already on board with the idea of alternative data to solve for these gaps — 89% of lenders agree that alternative data allows them to extend their potential pool of applicants and 74% claim to currently use other data in their process. One of the fastest growing areas for this type of information growth is in cash flow underwriting, where consumers offer access to transaction data from their checking and savings accounts in lieu of, or in addition to, traditional credit bureau reports. 

Consumers are also increasingly on board with opting into these data sources and they are more than willing to provide alternative financial details. In fact, 80% of consumers would share financial information with lenders if it meant increasing their chances for approval or better interest rates.

In addition to providing more flexibility into the financial services application process, consumers enjoy how alternative consumer-permissioned data empowers them to take back some control, which is another long-standing pain point when it comes to how organizations are leveraging consumer data. In a Finicity survey, 90% of respondents said they believe they’re entitled to more insight or control over what personal financial information lenders are leveraging.

Overall, it’s clear lenders and consumers both want universal expansion and financial inclusion opportunities for the credit excluded. Alternative consumer-permissioned data provides both parties the ability to achieve these goals and drive systemic change in the way consumers access financial services. 

At this point, it’s fair to predict that using this data is an inevitability. We see younger generations already embracing the use of consumer-permissioned data, so lenders will do well to recognize the trend that is before them and get on board with it before they are late to the game. This space will only continue to evolve over the next few years as new technology and innovation in the fintech world are introduced to help support this vision. 

About the Author

Sarah Davies, Chief Data and Analytics Officer, Nova Credit. Sarah leads credit risk and analytics for Nova Credit. She has over 20 years of experience in the financial services sector, serving as an executive leader and innovator in the analytics and decision science field. Prior to joining Nova Credit, she was Senior Vice President of Product, Analytics and Research at VantageScore Solutions, where she led the development of the VantageScore credit scoring models.

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