Bringing Credit Invisibles Into Focus with Alternative Financial Data

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[Editor’s note: This is a guest post from Jonathan Principi, Senior Director of Business Development at Envestnet | Yodlee, a leading data aggregation and data analytics platform powering dynamic, cloud-based innovation for digital financial services. Envestnet | Yodlee is a bronze sponsor at LendIt Fintech USA 2018, which will take place on April 9-11, 2018 in San Francisco.]

Ten percent of the U.S. adult population do not have a credit score or history with any of the big three credit bureaus.

That’s 1 in 10, or roughly 26 million people who are considered “credit invisible.”

But the financial underserved market spends $173 billion in fees and interest to use $1.94 trillion in financial services, according to the 2017 Center for Financial services Innovation study.

If you’re not serving this population, providing them with banking services and loan products, you’re missing out on critical opportunities to improve customer service, perform better risk assessment, and increase the loyalty and lifetime revenue of these customers.

There are four basic categories of people who fall under the credit invisibles umbrella:

  • Millennials: People between 18– 34 and have not yet borrowed money or gotten a credit card.
  • Low-Income: People who don’t make enough money to gain access to credit.
  • Recent immigrants: People who recently moved to the U.S. but haven’t established credit.
  • Mass-affluent: People who earn more than $100,000 per year and pay with cash instead of credit.

By not having credit, these individuals aren’t able to buy homes and cars, or purchase other loan products. But this is because lending providers may rely on traditional credit reporting and overlook other rich sources of financial data to make smarter lending decisions.

For example, financial institutions can look at alternative financial data like cash and investments, employment history and income, rent and utilities payments, and even home ownership and its value. All of these data sources can be used to give a more holistic view of a borrower’s history than a score based on a single credit card and car payment.

Envestnet® | Yodlee® recently released an ebook, Bringing Credit Invisibles Into Focus with Alternative Data, to look at how Millennials, people with low income, recent immigrants, and the wealthy can be better served by using alternative financial data.

In the ebook, we look at the benefits of using alternative financial data and serving these otherwise underserved target groups. We even discuss several use cases, such as a San Francisco-based lender that is using alternative data sources to target Millennial borrowers; they have created a demand within a segment that has been otherwise excluded from home ownership.

As Terry McKeown, Practice Manager, Credit Analytics for Envestnet | Yodlee, stated in this HousingWire article:

“Tapping into alternative financial data from “credit invisibles” can not only broaden an institution’s applicant pool, but also give lenders a more holistic view of their applicants, thus helping to improve risk assessment and approve more qualified customers.”

In other words, alternative financial data helps financial institutions to reach a new segment of customers, and can even improve the quality of their loans, which helps to increase profits and mitigate losses. For example, as we discuss in the ebook, one Washington D.C. community bank has increased its new loan originations from $6.3 million to nearly $17 million per year.

By leveraging alternative financial data, lenders are able to streamline the lending process. Rather than manually gathering data from multiple sources, Envestnet | Yodlee Risk Insight Solutions help to automate the lending process by providing real-time and comprehensive visibility into assets, income, non-credit payment patterns, and transactional detail.

Finally, imagine what it could mean for people who have otherwise struggled with managing personal finances because they can’t participate in traditional borrowing and credit methods, and the loyalty this can engender.

People who haven’t been able to get a car loan or mortgage and are suddenly “made visible” will be able to grow their credit reports, increase their assets, and improve their financial health. As they grow and improve, they’re also increasingly likely to stay with the bank or lender who helped them in their first steps.

Alternative financial data can offer a significantly richer and more comprehensive source of information on potential borrowers. By supplementing credit reports with banking, investment, loan, and credit card information, lenders can obtain a more holistic picture of a borrower’s financial health.

To learn more about how alternative financial data can help you reach a new customer segment – credit invisibles or people with very little credit history, download this ebook.

The information, analysis, and opinions expressed herein are for informational purposes only. Nothing contained in this piece is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type.

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