An underbanked consumer is not necessarily a subprime consumer, according to FactorTrust Chief Executive Greg Rable.
“Ultimately, with the underbanked, the differences would be these consumers will have a bank account, they’ll have a job, and they usually just lacked traditional credit options,” Rable told Auto Finance News.
In many cases, those underbanked consumers are also millennials, Rable said, who haven’t used traditional financial services in the past, but rather gravitate towards alternative lenders that offer greater speed and convenience.
“They operate differently, he said. “And when looking at your underwriting, you have to be able to solve for that.”
The ability to more accurately score a consumer today, thanks to the amount of data available, has evolved to a much more sophisticated level, versus even just a few years ago, according to Rable.
“Five years ago no one would have thought about alternative data in the same way,” he said. “So I think it’s just part of the evolution of those markets.”
The auto finance industry has adopted the use of alternative data quicker than other financial markets, Rable said, and he credits the continually recovering economy and competition among lenders – especially in subprime auto – with its rising popularity.
“If you didn’t see a very vibrant nonprime market, then I don’t think you’d care as much, you’d probably still do things with traditional bureau data and the Fico score,” he said. “But I think [traditional] lenders have seen so many other new lenders that aren’t using Fico, and aren’t using bureau data.”
Check out the video below for more from Rable on the difference between underbanked and subprime.
