Financial inclusion programs driven by regulatory agencies are far from new. But a new approach by the OCC’s Project REACh (Roundtable for Economic Access and Change), is spurring industry engagement and promising to make a significant impact on creating full, equal, and fair participation in the nation’s economy.
As one of its initial focuses, Project REACh, spearheaded by leaders from banking, business, technology and national civil rights organizations, is challenging financial institutions to adopt more robust credit scoring methods. Specifically, it is currently focusing on assessing the nearly 50M United States consumers who cannot be readily scored with traditional credit data and tools.1
These consumers, often known as “credit invisible” and “thin file” consumers, have little-to-no credit history and therefore, may be challenging for lenders to evaluate. Since they may lack a traditional credit score, lenders may have little to go on when determining whether to approve applicants for mortgages, loans, credit cards, cell phone services, rentals and more. The result is that credit invisibles often find themselves declined, based not on a history of poor credit management, but based on the limitations of the data behind the scores themselves.
Strong financial inclusion strategies start with knowing the right questions to ask.
Because of Project REACh’s push for financial institutions to develop more inclusive credit scoring strategies, the majority of leading U.S. banks have formed implementation task forces. These task forces are facing many critical questions: how to obtain insights to evaluate a large portion of credit invisibles, whether to develop new financial products aimed at a less-prime consumer population, whether to relax risk criteria on existing products, and how to expand outreach to an underserved population,
The answers often begin with understanding how many credit invisibles can be effectively evaluated through alternative data—defined as data that may not available through a traditional credit report—and whether these assessments truly reveal credit quality. Rather than focus narrowly on repayment history, utilization or delinquencies, alternative data models and attributes strike right to the core of people’s stability and ability to manage credit responsibilities. By taking into account behavioral predicators such as non-traditional credit seeking history, education history, professional licenses, asset ownership, rent payments and more, a fuller picture emerges about an applicant’s true creditworthiness.
It is important, though, to keep in mind that all alternative data is not the same. As financial institutions work to determine what approach to take to meet the OCC’s mandate on scoring credit invisible consumers, it is worth evaluating alternative data qualities that impact financial inclusion.
Alternative data qualities that impact financial inclusion
Accuracy: The first and most obvious quality, accuracy refers both to the quality of the data (is it linked to the right consumer, does it truly convey an event) and to the ability to drive a predictive and stable assessment of consumer credit risk.
Breadth of Coverage: While the bar may rise or fall by industry, most alternative data solutions may be able to evaluate at least 85% of credit invisible applicants for any given financial product or service. Anything less, and lenders could be leaving a meaningful portion of consumers who could be evaluated out in the cold. Look for tools such as LexisNexis® RiskViewTM Spectrum, which routinely scores 99% of applicants—including over 90% of credit invisibles.2
Positive Signals: Alternative data should be capable of identifying meaningful portions of credit invisibles for potential approval—and that includes positive data (insights that convey low risk credit behaviors). Lenders may want to consider alternative data scores and attributes that include a mix of positive and negative insights to deliver a more robust picture of consumer risk.
While Project REACh is focusing today on better assessing credit invisibles, more initiatives are on the horizon. A foreseeable next step is expanding credit access to near-prime and subprime consumer populations. When lenders and service providers embrace alternative data sources that meet the above standards, they position themselves at the forefront of financial inclusion.
- LexisNexis® Risk Solutions, 2021
RiskView™ Spectrum is a consumer reporting agency product provided by LexisNexis Risk Solutions Inc. and may only be accessed in compliance with the Fair Credit Reporting Act, 15 U.S.C. 1681, et seq. This document (a) is for educational purposes only and is not intended to and shall not be used as legal advice, (b) and (b) does not guarantee the functionality or features of LexisNexis® Risk Solutions products identified. LexisNexis® Risk Solutions does not warrant that this document is complete or error-free.