Why Lending is Harder Than Ever

Capital constraint, or the inability to borrow money, is a serious problem for borrowers, lenders and the overall economy. Think of the axiom that $1 today is worth more than $1 tomorrow. This money principle applies when you buy a house or a car. Over time, you pay off the loan with interest so you pay even more over time. The same principle also applies to smaller loans. If you need essential car repair or child care today, and your only option is to use a credit card or borrow some money to cover that cost, that is capital constraint.

Capital constraint prohibits customers from being able to exchange dollars today for dollars tomorrow. They don’t have access to efficient capital today, so they’ll need to overpay tomorrow. It can be all too easy to ask a customer, “Why don’t you pay off your credit card and have $0 in savings?” but that comes from an assumption that they actually have the ability to access those resources.

Let’s say a customer has $300 in a savings account and a few hundred dollars on a credit card. It actually makes sense for that person to make minimum payments on their credit card, rather than to destroy their safety net (even though their emergency fund is so small). In scenarios like these, it makes sense for the customer to decide to pay a few dollars in interest to secure that emergency car repair or child care need. Access to credit extends a valuable lifeline.

This is why capital constraint creates an underserved or underbanked population and an overall inefficient market. There’s a real need for lenders to solve this problem, and there are major benefits to be gained in the process. For instance, instead of automatically denying potential borrowers with 660 FICO® Scores who don't consistently make $80,000 per year, lenders can give them the benefit of a doubt with a responsible lending opportunity. In turn, lenders can serve new populations to grow margins to increase wallet share while supporting the economy at large.

Increasing wallet share with responsible lending opportunities

In lending, if you’re not making new loans, the Earth turns into the Moon. Originate or shrink. It’s just not feasible to lend to the same people, over and over again. It’s a scenario that creates serious, macro-level problems, but also everyday inefficiencies throughout the economy. The goal of serving expanded populations isn’t to overextend everyday people, but rather to identify new customers to expand responsible lending portfolios with favorable, resilient margins.

You might have noticed Experian’s recent media blitz for Experian Boost — including commercials aired during the 2023 Super Bowl. Now consumers know they can access more lending opportunities based on good consumer behavior that was previously overlooked (such as on-time rental payments). Now Equifax offers Core Credit, a collaboration with Lendingtree. Customers can sign up to receive personalized lending offers and personalized advice on how to save money based on their unique credit profiles. The data looks beyond credit scores to incorporate other factors such as actual expenses and timely utility payments. Finally, we’re proud to have TransUnion as a significant, strategic investor in Bud. We’re combining their expertise with our advanced data intelligence to move into the next generation of lending, improve affordability and develop better safeguards against fraud.

It’s easy to look at a customer’s choices and interpret them as being irrational from afar, but if you knew the full details of their situation, the incentives actually make sense. I had a very large portfolio of everyday customers, and in my experience, I’ve come to realize that most consumers know what to do and that they do try to make the right choices. The fact that 10 million consumers have used Bank of America’s Life Plan since its 2020 launch is further support of this observation. When a population is focused on getting better banking options, they’re clearly trying to improve the state of their finances. BofA’s digital experience allows customers to set and track short-term and long-term goals. In turn, they receive personalized education and advice for actionable steps to turn those goals into a reality.

Lenders need solutions to harness actual bank transaction data, identifying customers who are missing payments and helping lenders react to that information. This edge helps lenders improve personalization, serve existing customers better and increase wallet share by serving new populations of customers — and better lending opportunities are a benefit to all.

Chris Luth is Lead Product Manager — North America at data intelligence fintech Bud Financial (Bud). He joined as the organization’s first product lead in January 2023 to lead the firm’s development of advanced technology that solves the problems of financial consumers and providers.