The financial crisis of late 2008 triggered a sharp increase in unemployment, seeing the rate jump from 5.5 percent to a high of 10.1 percent; a rapid reduction in consumer loans offered by large banks; and a staggering devaluation of home values resulting in foreclosures and strategic defaults creating a major shift in consumer FICO® credit scores.
It is believed that 30 to 40 million consumers experienced a negative change to their FICO® Score with 15 to 20 million consumers seeing their score drop below 600.1 This credit score shift resulted in further account closures and reduced credit lines, creating the perfect credit storm. This storm resulted in nearly $2 trillion worth of liquidity being pulled from the consumer credit markets by early 2009. This confluence of events forced a whole new group of consumers in need of liquidity to seek alternative financial services providers to fill this void.
The problem is that alternative financial data providers do not report to traditional credit bureaus. If a lender relies on these reports alone, they are missing reliable data on a large segment of the population.
In the U.S. today, there are roughly 53 million people without a reliable FICO® score, either because their credit history is insufficient or nonexistent.2 However, many of these same people are creditworthy consumers who would make desirable customers. When traditional credit reports are supplemented with alternative credit data, lenders can extend credit with confidence knowing that they’re seeing an applicant’s entire financial picture.
As the alternative finance industry continues to grow, lending professionals are being driven to re-examine the previously long-held and proven understanding of consumer behaviors in search of the “new normal” patterns. Tried and trusted scoring methodologies that do not account for the activity in the alternative financial services sector should no longer be considered the cornerstone of your portfolio strategy. The underlying data that drives them is no longer complete enough and a significant gap exists that, if left unfilled, puts your portfolio at a competitive disadvantage.
Gaining Ground with Alternative Financial Data
While risk management is still top-of-mind for portfolio managers, there is still the need to consider growth. Savvy organizations are preparing to take market share from those who remain internally focused and wary of the future. The long sought-after holy grail of growth has been the emerging consumer population and those consumers with a thin file in the big bureau systems.
The estimated 55 million consumers in this untapped group represent a tremendous and virtually untouched market for those lenders who are willing to explore alternative and complementary means to determine creditworthiness. Millennials, for example, are 10x more likely to use peer-to-peer lending than Baby Boomers.
Raising the Bar on Alternative Financial Data
Traditional credit bureau data is limited by its failure to capture alternative lending information. As an industry catering to what was previously a relatively small and generally unwanted consumer population, alternative financial services providers are now enjoying the luxury of working with consumers who, as recently as a few years ago, may have been prime or even super prime. Historically, the three major bureaus have been unable to provide lenders information and visibility into alternative data and thus have created a large void in the decision-making process. While past performance has shown to be a predictor of future behaviors, in the “new normal” the most recent information is the most predictive as consumer’s financial situations and credit preferences continue to be in a state of flux.
Lack of information can impact your financial institution’s portfolio strategy along with acquisition decisions in the “new normal” consumer environment.
Alternative Financial Data: Clarity Services, Inc.
Clarity Services, Inc. is a real-time credit bureau leveraging world-class technology and focusing on alternative data reporting. Clarity’s data sources of alternative financial services providers include: check cashers, debit card issuers, prepaid card issuers, short-term installment lenders, peer-to-peer microlenders, online lenders, buy-here-pay-here auto dealers, collection agencies, and more.
The Clarity System was created with the crucial and rapidly changing requirements of the alternative lending market in mind. A modern technology platform combined with an agile approach to development allows for rapid implementation of new features and products to respond to customer-specific needs. Combining technology, unique data, analytics, and a complete understanding of this consumer segment are the cornerstones of Clarity.
The Clarity Difference:
- Significant footprint in non-traditional lending
- Real-time data availability
- Rule-based decision engine
- Dedicated analytics and strategy consultancy team
- Built with a focus on data quality and technology
- Highly flexible and client-focused
Clarity Helps Your Business:
- Detect negative bank history and behavior
- Identify good credit risk candidates where the major bureaus have not seen them
- Lead indicators on a consumer’s credit or banking relationships that are going bad
- Extend traditional products to potential customers who may be overlooked
- Start gaining ground on the “new normal” contact Clarity to secure the last piece of the consumer puzzle.
* In the Americas. Cambridge Centre for Alternative Finance, along with their project partners the Polsky Center for Entrepreneurship and Innovation at the University of Chicago, KPMG and the CME Group Foundation. (April 2016). Breaking New Ground: The Americas Alternative Finance Benchmarking Report. Retrieved from http://bit.ly/1Mr9MH0.
1FICO™, April 2010
2FICO. (2015). Insights White Paper No. 90, Can Alternative Data Expand Credit Access. Retrieved from http://www.fico.com/en/latest-thinking?asset_type=106&solutions=8.
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