The past year has felt similar to the 2008 economic crisis in many ways. Both crises were plagued with widespread unemployment, volatility in financial markets, and business closures. However, if there’s one key difference between the 2008 financial crisis and the current environment, it’s the availability, accuracy and immediacy of data.
By harnessing accurate data and ensuring there is open access to credit, banks and financial institutions can not only lessen the burden of the economic downturn, but also help the country move toward economic stability and growth.
Data’s role in improving financial access
We are all too familiar with the divide that exists between high-income and low-income communities. People who live in lower-income areas are less likely to have access to credit and resources to help manage their finances, which in turn can make it more difficult to achieve important milestones like applying for a mortgage or buying a car. Unfortunately, the pandemic has only perpetuated these inequalities. In August 2020, over a third of lower-income households said their finances were “somewhat” or “much” worse due to the pandemic, with nearly 43% reporting their income was reduced.
Data is critical to addressing financial inequalities head-on and improving financial access. Unlike a decade ago, banks and financial institutions have access to more sophisticated data-driven tools that can help bridge the gap and give those who have traditionally struggled to gain access to credit an opportunity to participate in the credit ecosystem.
Embracing alternative and trended data
Thanks to advanced analytics, there are new lender scoring models that combine traditional credit data, alternative data, and trended data, allowing lenders to glean even deeper insights into borrowers’ financial behavior. These scoring models can be easily integrated into existing models to create a more complete picture of creditworthiness. This is helping lenders make approvals they otherwise couldn’t or wouldn’t. If widely adopted, they have the potential to aid more than 40 million credit invisible consumers gain access to credit, while giving many borrowers a second chance at opportunities like homeownership.
Gone are the days when lenders relied solely on traditional credit data to make lending decisions. While traditional data, such as an individual’s payment history, is still the primary method of assessing a consumer’s creditworthiness, there are now new types of data that can enable lenders to expand financial access to those who need it most.
New types of FCRA-compliant data that are being used to expand access to credit include monthly cell phone, cable, and internet payments, rental payments, and even payments on monthly streaming services. By layering traditional credit data with expanded compliant data, lenders can create a better picture of creditworthiness that was not possible until recently.
Trended data is another tool that can help businesses gain a clearer picture of borrowers’ financial history. Because this type of data illustrates how a person is managing their credit accounts over a 24-month period, including whether they are carrying any balances or paying off their balances each month, lenders can more accurately assess whether a consumer is displaying any signs of payment stress.
Responsible lending for better financial outcomes
Today’s complex environment requires data-driven solutions that allow lenders to work smarter, not harder. When evaluating what information will be most helpful to them, lenders should give consideration to solutions that allow for:
- Agility – Today’s businesses must feel empowered to make strategic decisions quickly in response to internal or external factors. Decisioning tools that leverage the combination of data and predictive analytics can help businesses make decisions swiftly and confidently, no matter the circumstance.
- Risk Management – Lenders that manage risk effectively are best suited to help consumers gain access to credit. Advanced analytics can automate and organize alerts to make managing risk more streamlined. Many companies offer risk management software designed to pinpoint risks that may exist and more easily identify red flag behaviors such as bankruptcy or a history of late payments.
- 360-degree Insights – Businesses can secure a more holistic view of their customers by having access to data from all available channels, including those from their own internal systems and other available data sources. Expanded FCRA-data sets and tools from Experian can help lenders achieve a more accurate view of their customer.
A unified effort
While the worst days of the pandemic may be behind us, the road ahead won’t be easy. True economic recovery will take a unified effort from government officials, consumers, and all of us in the financial services industry.
This starts with identifying consumers who are still able to fulfill their financial obligations. These consumers play an integral role in getting our economy on a path toward recovery.
By leveraging accurate data and opening access to credit, we have the opportunity to not only help those most in need, but also work toward rebuilding our economy and moving our country forward.
By Greg Wright, Executive Vice President and Chief Product Officer for the Experian Consumer Information Services (CIS) business in North America
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