Awash in a sea of credit scores, a host of US-based financial services players are turning to unconventional data sources to get a fresh look at creditworthiness. As Charles Davis reports, the need to reassess credit data is pressing as the number of underbanked Americans continues to grow
The iconic credit score is far from a thing of the past, but an increasing number of lenders are starting to look at other measures as the number of US consumers with no credit score rises past 88m.
Lenders are turning to all sorts of indicators, from bill payments to rent and utility records to gain a better sense of their financial picture.
FactorTrust, a credit reporting agency founded in 2006, is one such source. It tracks data from alternative lenders to maintain histories on 10m underbanked US consumers. Its database contains over 100m distinct transaction records covering all phases of the consumer credit lifecycle. As the underbanked demographic continues to grow, there is an even greater urgency from lenders for information on these consumers, resulting in a 34% increase in inquiries to the company’s database during the third quarter of 2012.
Deep data analysis on actual, real-time behaviour of underbanked consumers is necessary to gain relevant, actionable information on the unique characteristics and behavioural attributes of this market – and how to successfully provide lending solutions to an otherwise ignored demographic.
Greg Rabel, CEO of FactorTrust, who founded the company in 2005, says that the market for alternative credit data sources reflects the growth in underbanked consumers as a result of tightening credit standards. "We were looking at alternative financial services with the view that good, strong identity verification and authorisation hasn’t really worked its way down to the underbanked consumers,"
Rabel says. "Then the recession hit, and the subprime mortgage issue came along, and pushed a lot of consumers down into the underbanked category."
Rabel adds that FactorTrust’s work with the underbanked has revealed a massive slice of the US consumer market, one that shattersa lot of myths about the segment.
In 2011, for example, the company estimates that the revenue nationwide from the interest and fees paid by underbanked consumers on 22 financial products was $78bn, an increase of 7% over 2010.
Financial products ranged from very short credit to deposit-type products and short-term internet loans, sub-prime auto loans, instalment loans, subprime credit cards, prepaid and check cashing cards.
The Center for Financial Services Innovation and Core Innovation Capital estimated the underbanked market in the US at $682bn in its 2011 Underbanked Market Sizing Study.
"These are people that already are in the financial services markets to some extent, in that they have bank accounts, but they are either newer customers or they have had issues in the past and thus have no or little access to credit," he says.
"They have jobs but have had a bit of a choppy past, or just didn’t get a lot of credit and now need it."
Rable says the consumers tracked by his Roswell, Georgia-based firm range in age from the mid-20s to the mid-40s. Most are employed, typically earning between $30,000 and $50,000 a year. And two of the top eight employers of consumers in the database are actually major banks.
Historically, these types of households have just been cut out of the credit equation. The recent overall credit restriction has probably cut the creditworthy market in half, Rabel says.
Now with the economy improving and lenders on the lookout for business, Factor-Trust’s data – a mix of over 100m distinct transaction records covering all phases of the consumer credit lifecycle – saw a 34% increase in inquiry volume in the third quarterof 2012. That activity fuelled a 54% increase in US revenue (the company also operates in Canada and the UK) over thirdquarter2011.
"The bigger financial institutions and credit unions are now beginning to move toward us, because this is where the growth area is in the credit spectrum," Rabel notes. Data on these consumers is updated in real time by FactorTrust’s lender customer base and is unique compared to traditional credit bureau data. Rabel says that as the underbanked demographic continues to grow, there is an even greater urgency from lenders for information on these consumers, and the immediacy of real-time updates is essential, as these individuals have more fluid financial pictures that require greater validation for secure lending decisions.
"We see employment history, as well as all proprietary data from clients, and it’s reported in real time, so it’s updated nightly," Rabel explains. "Every payment made, for example, updates in the database, and with an underbanked consumer, that’s really important – then we augment our data with public record data, so we look at any sort of defaults or judgments out there as well. We’re trying to provide as clear a picture as we can."
The goal, he adds, is to provide enough data on underbanked consumers to make an increasingly broad segment of lenders comfortable with providing financing to the millions of Americans caught in the credit squeeze.
"There are a lot of areas where lenders will lend more and further downstream if they have the data to make them feel comfortable about it," he says. "We have been working hard to help people understand that these consumers are just like the rest of us, and if banks are looking to expand their lending, this is an opportunity for organic growth with some real loyal, active households."
A number of other players are vying for a piece of the alternative credit data market, among them Corelogic, which recently debuted a product called CoreScore that examines transactions such as car, rental, payday and child support payments.
Another firm, eCredable, lets consumers record monthly bill payment accounts, request verification of their payment history and create a credit report that meets industry standards and can be shared with a creditor, service provider or employer.
eCredable markets its service directly to underbanked households, offering to verify their bill payment history and grade them from ‘A’ through ‘F’. Those who earn an ‘A’ or ‘B’ can be referred to its partner companies for an auto loan or mortgage.