The predictive qualities of vinegar dressing (Under the Hood)

Lenders might soon have another tool in their arsenals to measure the creditworthiness of unbanked consumers: grocery transaction data. The products people buy and the frequency with which they shop at grocery stores could shed light on whether — and at what rate — lenders should extend credit , according to a paper titled “Using Grocery Data for Credit Decisions,” published recently by a trio of business school professors. The researchers — Jung Youn Lee from Rice University , Joonhyuk Yang from University of Notre Dame and Eric Anderson from Northwestern University — leveraged data from an unnamed multinational conglomerate that owns a credit card issuer and a large-scale supermarket chain. They analyzed grocery store transactions for 30,089 consumers between January 2017 and June 2019. Their theory was that people who consistently demonstrated “good” behaviors in the grocery domain, like buying healthy foods, were more likely to pay their bills on time. “This premise implies that an individual’s grocery shopping habits can provide insights into the individual’s financial behaviors and, consequently, credit risk,” the researchers wrote. Among the sample consumers, 81% always paid on time, 12% were deemed “sloppy payers” and 7% were defaulters. While the never-delinquents had the highest average credit score, the sloppy payers had the highest average income. Notably, credit scores were missing for 50% of the consumers in the sample, either because they lacked credit track records or because the credit card issuer did not purchase credit scores for those consumers. Broadly, the research showed that consumers’ product choices correlated with on-time payment trends. “For instance, buying cigarettes or energy drinks is associated with a higher likelihood of missing credit card payments or defaulting, whereas purchasing fresh milk or vinegar dressing is linked to consistently paying credit card bills on time,” the researchers wrote. Popular purchases among never-delinquents included flour, yogurt, fruits and vegetables. At the top of the list for sloppy payers were cooked fish, pasta salad, seafood and deli; for defaulters, the top items were cigarettes, energy drinks, canned meat and shellfish. Another key finding in the research was that more predictable buying habits translated into more consistent payments. “Cardholders who consistently pay their bills on time are more likely to shop on the same day of the week, spend similar amounts across months and purchase the same brands and product categories,” the researchers wrote. The researchers further analyzed shopping frequency, brand loyalty, unique product purchases and promotional spending, among other factors. Whereas never-delinquents and defaulters were more predictable in their category and brand choices, sloppy payers tended to purchase a wider variety of products. Defaulters, meanwhile, allocated a greater share of their grocery spending to more convenient items like prepared foods. The grocery transaction data “significantly” improved predictive accuracy — by 3.11 to 7.66 percentage points — for consumers without credit scores, the researchers concluded. In other words, the data would likely be most helpful for consumers new to credit, or “credit invisibles,” as they’re often called. For consumers with existing credit scores, the transaction data generally mirrored the predictive accuracy of those credit scores. But put another way, the research implied that nonfinancial behaviors can provide credit risk signals of similar value to traditional credit scores. Granted, the study could not fully account for sociodemographic variables like whether grocery shoppers had fixed work schedules or juggled multiple part-time jobs, whether they faced time constraints or budget limitations, or whether they exhibited certain personality traits or cognitive abilities — all of which might explain consumers’ food choice preferences, shopping schedules or ability to pay bills on time. Even so, grocery data can be a “strong predictor” of financial habits, the researchers contended, because consumers make “repeated and frequent choices in the domain.” By comparison, alternative data sources like mobile phone payments or rental histories hinge on a single data factor. Additionally, grocery shoppers make choices in a broad cross-section of product categories, which can help identify habits that affect loan repayment behaviors. Might auto lenders start teaming up with grocery store chains to access consumer data that will provide a competitive edge? Perhaps. Based on this new research, lenders that focus on consumers who lack credit scores would probably benefit most. But the near-term challenge will be determining how to effectively leverage the vast amount of granular shopping data to identify the most predictive purchases.

The predictive qualities of vinegar dressing (Under the Hood)

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