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A layered approach to lending on the road to recovery

Ongoing stay at home orders and unemployment continue to create financial obstacles for the most vulnerable consumers

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  • Written by  Alpa Lally, Vice President Experian Data Business
A layered approach to lending on the road to recovery

It goes without saying; the COVID-19 pandemic created significant disruption in how businesses and consumers operate today. While the promise of an effective vaccine and a new year on the horizon are encouraging signs, ongoing stay at home orders and unemployment continue to create financial obstacles for the most vulnerable consumers.

While there is no question the fallout from the pandemic has created a strenuous financial situation for millions of Americans, this is not the case for everyone. On average, consumers are reducing their credit utilization rates, credit card balances and have fewer missed payments year-over-year with reports of record level savings.

This dichotomy has created a challenging lending environment to say the least.

Because consumers are facing unique financial situations, there is not a one size fits all solution. Ensuring individuals who can still meet their financial obligations have access to credit and providing lenders with the necessary tools to identify them is critical to maintaining consumer financial health, along with the health of our economy.

As we grapple with another significant spike in COVID-19 cases and prepare for 2021, lenders must rely on data to grow their portfolios, manage risk effectively and maintain access to credit more than ever.

With advanced data and analytics, lenders can identify consumers who can fulfill their financial obligations and ensure they continue to have access to credit. This fortunate part of the population plays an important role in getting our economy back on track.

Layering data to create a holistic picture

When determining whether to extend an offer of credit, lenders can gain excellent insight into a consumer’s risk profile from the information included in an applicant’s credit profile. Traditional credit data has proven its effectiveness in determining consumer creditworthiness time and time again and remains the primary means for assessing risk.

Credit data details a consumer’s financial track record in a way other data sets fall short.

Take cash-flow data for example. While Experian is a recognized leader and advocate for the use of alternative data, the use of cash flow data alone can be risky. For example, as mentioned, consumer’s savings have increased since the start of the pandemic. If a consumer is responsibly and regularly investing in some form of savings, this would narrow their cash flow, which may be misleading and constrain financial access.

The “less is more” adage does not ring true when it comes to decisioning. More data is always better and a layered approach is key. Especially now.

Paving the way for effective decisioning

Thankfully, advancements in technology, the availability of predictive data attributes, and consumer sentiment about sharing data have paved the way for effective lending decisions in the current environment.

In recent years, there has been tremendous growth in the types and diversity of predictive attributes that can be used to assess consumer creditworthiness.

At the same time, consumers are showing greater openness to providing data, which has supported this trajectory and made room for new, innovative solutions. For example, according to an Experian report, 80percent of consumers say they would share various types of financial information with lenders if it meant increased chances for approval or improved interest rates. To further support this notion, more than 4.9 million consumers have contributed their on-time telecommunications, utility, mobile phone and streaming service payments to their Experian credit report through Experian Boost since the free service launched in March 2019.

By layering traditional credit data with expanded Fair Credit Reporting Act (FCRA) compliant data attributes, lenders can examine all aspects of a consumer’s financial capacity while creating a more detailed view of their stability, ability and willingness to repay.

By layering data about how an applicant services monthly payments for items not included in a credit report with traditional credit data, a more complete picture of creditworthiness is created. Further, looking at public record data, whether an applicant is a member of a trade organization or holds a professional license, how they’ve managed a pay day loan or their credit accounts over a 24-month period, makes that picture of creditworthiness even clearer.

The newest score models make it easy for lenders to incorporate this multi-layered approach into their decisioning. Doing so also improves financial access for the more than 45 million credit invisible consumers living in the U.S. who were excluded from the credit economy prior to the pandemic.

Data and innovation have changed the face of the financial industry. Now is the time for those changes to be harnessed to deliver tangible good to consumes and lenders while we continue on the road to recovery from the pandemic.


By Alpa Lally, Vice President Experian Data Business 

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