The past year has been similar to the 2008 economic crisis in many ways. Both crises have been plagued by widespread unemployment, volatile financial markets and business closures. However, if there is one key difference between the 2008 financial crisis and the current environment, it is the availability, accuracy and timeliness of data.
By tapping into accurate data and ensuring open access to credit, banks and financial institutions can not only ease the burden of the economic downturn, but also help the country move towards economic stability and growth.
The role of data in improving financial access
We know all too well the divide that exists between high income and low income communities. People who live in low-income areas are less likely to have access to credit and resources to help them manage their finances, which can make it more difficult to complete important milestones like applying for a mortgage or lending a home. buying a car. Unfortunately, the pandemic has only perpetuated these inequalities. In August 2020, more than a third of low-income households said their finances were “a little” or “a lot” worse as a result of the pandemic, with nearly 43% saying their incomes had been reduced.
Data is essential to tackle financial inequalities head-on and improve access to financial services. 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 access credit an opportunity to participate in the ecosystem of credit.
Adopt alternative and trend data
Thanks to advanced analytics, there are new lender scoring models that combine traditional credit data, alternative data, and trend data, allowing lenders to gain even deeper insight into borrowers’ financial behavior. These rating models can be easily integrated with existing models to create a more complete picture of creditworthiness. This helps lenders make approvals that they might not or would not want otherwise. If widely adopted, they have the potential to help more than 40 million invisible credit consumers access credit, while giving many borrowers a second chance to access opportunities such as home ownership. the property.
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, remains the primary method of assessing a consumer’s creditworthiness, there are now new types of data that can allow lenders to expand their creditworthiness. financial access to those who need it most.
New FCRA-compliant data types that are being used to expand access to credit include monthly cell phone, cable, and internet payments, rental payments, and even monthly streaming service payments. By overlaying traditional credit data with expanded compliant data, lenders can create a better picture of credit worthiness that was not possible until recently.
Trend data is another tool that can help businesses get a better idea of the financial history of borrowers. Because this type of data illustrates how a person manages their credit accounts over a 24-month period, including whether they carry balances or pay off their balances each month, lenders can more accurately assess whether a consumer is showing bad credit. payment signs. stress.
Responsible loans for better financial results
Today’s complex environment demands data-driven solutions that allow lenders to work smarter, not harder. When evaluating what information will be most useful to them, lenders should consider solutions that:
- Agility – Businesses today need to feel empowered to make strategic decisions quickly in response to internal or external factors. Decision support tools that harness the combination of data and predictive analytics can help businesses make decisions quickly and confidently, no matter what the circumstances.
- Risk management – Lenders who manage risk effectively are in the best position to help consumers access credit. Advanced analytics can automate and organize alerts to streamline risk management. Many companies offer risk management software designed to identify risks that may exist and more easily identify warning behaviors such as bankruptcy or a history of late payments.
- 360 degree views – Businesses can gain a more holistic view of their customers by having access to data from all available channels, including that of their own internal systems and other available data sources. Experian’s extensive FCRA datasets and tools can help lenders get a more accurate view of their client.
A unified effort
While the worst days of the pandemic may be behind us, the road ahead will not be easy. A true economic recovery will require a unified effort on the part of government officials, consumers and all of us in the financial services industry.
It starts with identifying consumers who are still able to meet their financial obligations. These consumers play a vital role in putting our economy on the path to recovery.
By leveraging accurate data and opening up access to credit, we have the opportunity not only to help those who need it most, but also to work to rebuild our economy and move our country forward. .
Through Greg Wright, Executive Vice President and Product Manager for the Experian Consumer Information Services (CIS) business in North America