Millions of Americans are being deprived of the credit they deserve. Either they have no access to credit or, where approved, it comes at a significantly
In our recent paper, "Alternate Data in Credit Underwriting: Potential Resolutions For the Unbanked and Underbanked," we lay out the case for a bold revamping of the U.S. credit industry that can provide excellent and appropriate banking to an underserved adult population, the size of Texas and California combined.
At the heart of our proposal is the recognition that traditional types of information and methods of collection can be significantly supplemented by additional types of relevant data and ways of making it available. This is already beginning to happen. In the weeks since our paper was published, Zillow — the real estate platform — has announced a facility that allows renters who pay their rent on Zillow to have their on-time payments reported to Experian for free. Touted as a first for any online rental marketplace, it should be a significant source of alternative data, offering an "opportunity for renters to build credit through regular rent payments at no additional cost," according to a Zillow press release.
This is a good start, but it's not enough. We recommend three main banking innovations, alongside a stronger set of national privacy laws to regulate the stream of personal information that goes into building a credit score. These recommendations can fast track and standardize trends that are already appearing in the industry. FICO has stated that alternative information can add legitimate value to predictive models of creditworthiness, leading both fintechs and traditional players to take action. Products such as Experian Boost and open banking avenues like Visa's Tink, MasterCard's Finicity and Plaid are just some examples of programs that either provide or use alternative information in the credit process.
Our first proposal is that, as in the Zillow initiative, many more consumers should be able to opt in to data provision. They should be able to choose whether or not to include non-standard data to determine credit. At the moment, consumers who are already banked — for example, those who have mortgages — can access further services at favorable rates. Of course, important information like mortgages should be included in credit decisions, but they are not the only regular living expenses that should be included. Regular consumer payments more typical for the unbanked or underbanked such as those for rent, utilities or phone plans should also be made available through opt-in and opt-out services.
Second, the financial industry should incentivize broader data collection. Legacy forms of collection mean that credit bureaus are strong but have an incomplete set of credit profiles that reflect a narrower set of reporting practices than is currently possible, rather than a broad variety of real-world payments. If American banks can make it simple and lucrative to furnish data to credit bureaus, both banks and consumers will reap the rewards. By focusing on smaller, non-prime entities, consumers who were previously "invisible" will become seen by the credit industry and those with "thin" profiles will have a more complete/well-rounded picture of their credit viability. This will give consumers better access to credit at lower prices.
In this month's roundup of top banking news: Truist Financial announces plans to shutter 4% of its branch network, Fiserv pursues a special-purpose bank charter, Wells Fargo distributes a $1,000 bonus to lower-paid employees and more.
This can help specific communities, often distinguished by race, education or geography. For example, Nova Credit aims to be a global credit bureau, helping immigrants share their credit histories from previous countries. By gathering information from countries across Europe, South America, Asia and the Pacific Islands, and making it available to domestic U.S. bureaus, Nova Credit can help immigrants avoid
Third, credit information is currently stored and shared in a number of different forms. We propose standardizing and digitizing all credit information so it can be shared efficiently and at a low cost between relevant entities. As aspects of society continue to be digitized, there are an ever-increasing number of data points that can be pulled to arrive at a more comprehensive measure of personal creditworthiness. This will allow people whose creditworthiness has been proven on a local, community level to benefit from national, professional access.
One final consideration: Because we suggest expanding the scope of information that is available to credit bureaus so that it reflects real-world payments made by people from all walks of life, it is vital that consumers who opt-in are protected from data breaches and malicious business practices.
Without taking these proposals on board in a systematic way, lenders will continue to act in ways that they believe to be in their best interest. If this persists, the underserved will become even less served and the consumer segment will fall prey to payday lenders and their ilk. India and China have each made progress in broadening credit access, and the U.S. needs to emulate them. Lenders need greater protection from risk or to be offered significant incentives to change and realize their potential as comprehensive credit providers.
Taking these three steps in a systematic way will not only help the financial services industry benefit from financially enfranchising the 62 million American adults who have "thin credit" but also strengthen our financial system. It will also, importantly, make significant progress toward equality of access to credit based on creditworthiness regardless of race, ethnicity, gender, creed or educational attainment.
