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Using financial data as a force for good

Financial data has the potential to expand access to financial services and empower consumers to leverage their good financial habits to enhance their financial lives. That’s not an overstatement—the data is there, and all these consumers need is a solution that enables them to access and benefit from their data. Greater financial inclusion follows.

Far too many consumers and small businesses face challenges in establishing or building credit lines. Yet, their futures are being determined by their credit scores. A low or non-existent credit score impacts their ability to access many financial services and better financial outcomes. The current credit score is only a starting point to determining the creditworthiness of an individual or small business. There are other vital pieces of information that can give banks and lenders a better picture of a borrower’s finances. We’re committed to a world where people can use their own data for a better life—including the protection of their privacy.

For lenders to accurately assess risk and creditworthiness—especially in a time when unexpected financial disruption has complicated risk assessment—they need access to financial data that expands the picture they get from credit scores and offers a more complete and forward-looking view of a person’s ability to repay.

Comprehensive risk assessments powered by open banking can foster financial inclusion by helping to remedy these problems in today’s credit market:

  • Traditional credit scoring is a lagging indicator of financial health
  • 62 million Americans have a thin credit file or are credit invisible
  • Millennials are lagging behind other generations in building credit

Traditional credit scoring is a lagging indicator of financial health

COVID-19 not only brought economic hardship, but also an increasingly frustrated group of American consumers who lost jobs and income (even if temporarily) because of factors out of their control. Despite widespread financial challenges, the average FICO score actually went up about three points (from 708 to 711) between April and October 2020, according to a Wall Street Journal report. Rounds of stimulus checks and payment holidays have kept some consumers financially afloat, but these rising credit scores could create a longer-term risk for consumers and lenders.

Finicity conducted two similar surveys of 2,000 US consumers in June and November 2020, with each exploring the personal financial impact consumers are feeling and how they believe they will participate in the eventual financial recovery. The latest survey found that 65% of consumers are concerned their credit score will go down in the next 6 months because of the pandemic. Additionally, 45% said they feel insecure in their financial situation over the next 6-9 months, including their ability to pay bills, make purchases and save money.

The COVID-19 pandemic has highlighted that credit scores are a lagging indicator of financial health, and clearly a significant portion of consumers see it the same way. The short-term financial relief they’re receiving now might just be masking the oncoming possibility of credit scores dropping once the pandemic subsides.

62 million Americans have a thin credit file or are credit invisible

A 2017 FDIC survey concluded that approximately 25% of households are either unbanked or underbanked, which means that they either don’t have a bank account or still use financial services outside the traditional banking system (like payday loans). In addition to that, 62 million Americans have a thin credit file or are credit invisible, preventing them from accessing mainstream financial services.

It’s possible that the incoming Biden administration will create stronger regulations around fair lending practices. But alternative streams of data that aren’t currently included in traditional credit scores will be key to economic recovery and expanded inclusion in the traditional financial system, potentially helping more consumers with thin-file credit prove their creditworthiness and their ability to repay loans.

Millennials are lagging behind other generations in building credit

According to an Experian report last year, millennial debt across almost every notable debt product grew more than any other generation over a five-year period between 2015 and 2020. This generation’s total average debt grew 58%, and over this same period, their credit card debt increased 40%, personal loan debt went up by 35%, and student loan debt by 33%.

And even though millennial credit scores also grew more than any other generation’s over that five-year period, they still lagged considerably behind—with an average credit score that is 35 points less than the national average. But these credit scores may not be telling the whole story. A Charles Schwab survey found that millennials actually tend to be better with money than previous generations, and Pew Research Center found that millennial households are earning more than previous generations at the same age. This disconnection highlights that traditional credit review may not deliver a comprehensive view of financial habits.

Millennials are prime candidates to benefit from bringing more alternative data streams into a revamped credit-decisioning process. More comprehensive insights into this generation can increase their access to loans and credit, enabling them to reach significant milestones—like purchasing vehicles and homes—that benefit both millennials and the greater economy.

A New Approach to Credit-Decisioning for Increased Financial Inclusion

What does this new credit-decisioning process look like? For starters, banks and financial institutions will need to leverage open banking platforms to augment traditional credit review and risk assessment with a more holistic view of finances.

Through open banking solutions, lenders can easily validate income, employment, and assets and even assess cash flow with the use of consumer-permissioned financial data. Consumers can also share basic utility payments, rent and phone bill payments, which historically has not counted toward proving their financial standing and creditworthiness. Open-banking-powered financial services experiences will help streamline loan applications, help consumers boost their credit, and on a broader scale, increase inclusion in the traditional financial system. And especially after this past year, we need to expand inclusion and opportunity more than ever.

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