NEW YORK CITY — Lenders who aren’t tapping into underserved markets are leaving money on the table, but by leveraging alternative data sources financiers can expand their consumer base while helping to improve financial inclusion.
For lenders to have a true view of the risk tied to lending to a particular consumer, they must look beyond a borrower’s credit score, Rikard Bandebo, executive vice president and chief product officer of VantageScore, a credit risk modeling and analytics provider, said Wednesday during FinovateFall in New York City.
Currently, a credit score reflects items such as a borrower’s payment track record and length of credit history but does not provide all the information needed for lenders to “score people fairly,” Bandebo said.
“Income is probably one of the most important factors, not just the amount but the stability of that income and where it is coming from makes a massive difference,” he said, noting it is also crucial to understand a borrower’s assets, liabilities and cash flow. “In an ideal world, if we want to try to make lending decisions on individuals, we’d really like to have a good view across those three areas.”
Leveraging millions of consumers’ checking and savings account data, such as checking and debit account histories and credit file details, VantageScore was able to adjust its scoring models, Bandebo said.
“We found that not only did that adjustment with the checking account data have a big impact on predictability, it also had a massive impact on our ability to score more fairly,” he said. Under the model that leverages bank account data, 18% of subprime consumers had their scores increase by more than 20 points while some consumers’ scores moved down, Bandebo said.
Using bank account or other alternative data “can really help lenders and fintechs … in situations where having a little bit more due diligence would be valuable for making credit decisions,” he said.
By creating more inclusive scoring models, lenders and fintechs can extend credit access to more consumers as well as increase their own addressable markets and better predict a borrower’s likelihood of default, Bandebo added.
A borrower “can’t get access to credit if you don’t have a credit score; you can’t get a credit score if you don’t have a credit history, and you don’t have credit history unless you get credit,” he said. “Including additional data sources can really help break that chain.”
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