Imagine if news only released on a monthly basis. Especially in a year like 2020, how much would you miss? You’d only get snippets of this year’s chaos. Never the whole story.
Traditional creditworthiness determiners are like this: they provide a glimpse of a borrower’s financial story, but it’s limited. Many in the credit industry are expanding their view and reshaping how they determine creditworthiness, opening the door to not only more complete understanding of financial health, but also to new markets, new borrowers, and an expanding credit economy.
COVID-19 may not have been the catalyst for transformation in the credit industry, but it certainly helped things along. In fact, A recent report from McKinsey & Company argued that COVID-19 has rendered data sources typically used to determine creditworthiness obsolete. McKinsey continued to point out that “the six- or 12-month-old data on which lenders relied in the past were no longer useful in evaluating the resilience of individual borrowers.” In response to this crisis, McKinsey suggested that “creative approaches to acquire and utilize high-frequency data are the order of the day.”
Our own report confirms McKinsey’s argument from a consumer’s standpoint. According to our research, 82 percent of consumers believe the current credit review process needs to change in order for responsible borrowers to prove their creditworthiness. This need for change likely stems from the belief that the current credit rating system fails to give lenders a complete picture of a potential borrower’s worthiness.
The key to adapting to these challenges? Open banking.
Let’s dig deeper into the forces demanding change, how the credit industry is responding, and how both consumers and lenders can benefit from the open banking data that’s reshaping how lenders determine creditworthiness.
Forces for Change
The number of credit invisibles and other consumers with thin credit files is on the rise. In fact, the Consumer Financial Protection Bureau (CFPB) found that at least 26 million Americans are completely credit invisible. That’s 26 million people lacking an accurate risk assessment when lenders rely only on the traditional credit score. Millions of Americans that may lack access to credit despite potentially good financial health. And this number doesn’t even consider the other 27 million consumers with a thin credit file that may also prevent credit access.
COVID-19 has only further complicated consumers’ relationship with credit. According to our report, 95 percent of consumers are concerned about their ability to either rebuild credit or take out a loan. Much of this concern comes from both uncertainty about factors that affect creditworthiness, and a widespread belief that traditional credit scores don’t accurately evaluate financial health and creditworthiness in real-time.
The Credit Industry Responds
To better serve those with little to no credit history, as well as those whose traditional credit score may have been affected by uncontrollable events, forward-thinkers in the credit industry have responded with innovative, data-centered initiatives. These solutions leverage open banking platforms to supplement credit scores with a more comprehensive understanding of a consumer’s financial wellbeing.
Experian Boost, for example, benefits consumers with little to no credit history as well as established borrowers who want to increase their FICO credit score. Consumers permission access to their bank accounts and Experian Boost uses Finicity’s open banking platform to directly access bank data. Boost then identifies on-time payments that aren’t regularly considered in a credit score, like phone payments, utilities, and even Netflix subscriptions. This additional data builds a more detailed picture of a consumer’s financial behaviors and helps them develop a positive payment history.
While Experian Boost may be the first service to include on-time payments in credit-score consideration, they aren’t the only business expanding the picture painted by the traditional FICO score. The UltraFICO™ Score is another innovation that uses data gathered through an open banking platform to consider the length your bank accounts have been open, the recency and frequency of your bank transactions, evidence of consistent cash on hand, and history of positive account balances.
Altogether, this information helps a lender see a more comprehensive picture of a borrower’s financial habits. And where methods for improving credit scores can sometimes seem elusive, pulling the consumer into scoring empowers them to take actionable steps to improve their score, simply by changing how they use their bank accounts.
These and other industry transformations aren’t removing the credit score, they’re enhancing it. And open banking is the key.
How Consumers and Lenders Benefit from Reshaping Creditworthiness
Enhancing the credit score through open banking platforms has the potential to benefit everybody, but it’s most likely to benefit young consumers and immigrants, who tend to lack credit history or have thin files. In fact, industry estimates suggest that 5.5 million U.S. consumers are able to move from unscorable or subprime credit score bands into prime or near prime score bands when lenders consider telecom, utility, and other types of non-traditional credit data.
The credit transformation will also particularly help those with lower income and marginalized communities who have historically been disproportionately affected by thin or nonexistent credit files. In the end, the credit transformation fosters financial inclusion, which can in turn challenge historic discrimination and create meaningful change in marginalized communities.
The open banking platforms that enable credit industry innovations like Experian Boost and the UltraFICO™ Score provide access to consumer data without compromising the consumer’s control or security. Access to real-time data, via consumer-permissioning, directly from consumer accounts benefits everyone involved. Lenders mitigate risks and improve decisioning with access to real-time, comprehensive data that provides a clearer picture of a borrower’s financial wellbeing. Consumers benefit from greater control, greater transparency, and more access to credit.
By embracing open banking platforms in the credit industry and expanding how we determine creditworthiness, the resulting innovations can enable broader access to credit and empower both consumers and lenders to better weather future pandemics and disruptions. Learn more about how Finicity is capitalizing on its open banking platform and transforming credit decisioning with Finicity Lend.