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Serving Communities with a Hybrid Approach to Risk Assessment

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This post was co-authored by Mike Mondelli

Imagine a person who is in the market for their first credit account, and you’re the one to say yes. It’s an opportunity to make a difference in that person’s life and build lifetime loyalty.

For some consumers, getting that first credit account can be a challenge, however. In fact:

  • 45 million U.S. consumers are unscorable or “credit invisible” (CFPB)
  • Nearly 6 in 10 Americans are struggling financially (CFSI)
  • 87% of lenders say they decline at least some credit applicants because they cannot be scored (The State of Alternative Data)

Particular emerging consumer segments, like Millennials, minorities, immigrants and rural dwellers, are heavily underserved, yet could greatly benefit from access to quality financial services.

Until now, we’ve relied on credit bureau data to reveal the liabilities within a consumer’s financial record. But what about the assets a consumer has or the ability to manage financial arrangements over time? As economic markets and lending regulations change, many banks and finance companies are realizing that these emerging segments of the population require a more holistic approach to risk assessment.

Enter the Hybrid Approach to Risk Assessment

Combining alternative and trended credit data sources to assess creditworthiness creates a more comprehensive picture of consumer risk and provides more powerful predictive insights.

Alternative data

Through validation and testing, alternative data is shown to score more than 90% of applicants who would otherwise be returned as no-hits or thin-files by traditional models.1 Alternative data assets help add depth to a consumer’s credit file and can have tremendous impact on business growth, as well as financial inclusion. Individuals who are unable to reach their financial goals due to lack of traditional credit can now be scored using alternative data—which provides more information to help determine true creditworthiness of those consumers.

Alternative data sheds light on the consumer’s ability to pay, provides affirmation or contradiction with regard to the consumer’s willingness to pay and highlights assets a consumer may have to leverage as collateral.

Examples of alternative data:

  • Non-traditional lending channels like payday loans and club or magazine subscriptions provide additional data points on payment histories for these micro transactions outside of traditional credit bureau data.
  • Checking and debit account management, property, tax and deed records reveal account management history, assets and equity in a home can be powerful information in determining whether consumers have collateral they could leverage if needed
  • Length and time of residency can help infer address stability.

Trended credit data

In addition to alternative data, the other half of the hybrid approach to risk assessment is trended credit data, which leverages an expanded view of credit behavior data with historical information on each loan account.

Trended credit data includes:

  • More than two years of payment history
  • Amount paid versus minimum due
  • Spending behaviors over time

Incorporating payment history information provides the basis for critical intelligence, such as the trajectory of a consumer’s debt balances and spending patterns.

When additional data assets are leveraged in risk assessment, many current customers and applicants of financial institutions may be assessed as lower credit risks, receive more beneficial pricing or possibly switch from a decline to an approval.1 This big-picture view of credit and payment behavior enables you to offer consumers with limited credit history a line of credit. You’re empowering those underserved consumers while setting the foundation to build life-long relationships.

To learn more about the power of the hybrid approach to risk assessment and what it can mean for your business, download Data Fusion: The Rise of Alternative and Trended Data.

[1] Based on multiple customer validation results using CreditVision® LinkSM