Related article:Only 1 Percent of No-File Consumers Declared Bankrupcy
Banks that are afraid to deal with people with thin or nonexistent credit files -- typically referred to as the underbanked or unbanked -- should think again. According to LexisNexis, the underbanked statistically pose no greater credit risk than the average consumer and might even prove more profitable. In addition, the technology available to help financial services organizations better target this market is maturing.
There are as many as 70 million people in the U.S. with little or no information on file with the three major credit bureaus, LexisNexis reports. But while banks recognize the opportunity the underbanked present, they are only beginning to develop strategies to tap the market that do not involve traditional credit scores, notes Tom Brown, VP, market planning, financial services, with LexisNexis. That's where alternative credit data comes in, he says. LexisNexis amasses this kind of information on millions of consumers.
According to a study of lenders released by the Center for Financial Services Innovation (CFSI), a nonprofit dedicated to championing the underbanked, more than half of the participating lenders use or are considering using alternative credit data to reach this segment. LexisNexis' Brown claims the data, which can run the gamut from rent payment history to asset ownership, actually can paint a more accurate picture of potential customers than can a credit score, which, he says, only looks at obligations.
LexisNexis examined 50 million consumers with thin or no credit files. According to Brown, the firm's study concluded that the underbanked are not necessarily bad risks. "There are people in this group that look very similar to the general population [in terms of credit risk]," he says. "They just don't have access to credit for whatever reason."
Home, Sweet Home
Dayton, Ohio-based LexisNexis looked at several factors in the study, including asset ownership, comparing thin- and no-file consumers with those with full credit files. Among the findings, the study reveals that 45 percent of full-file consumers own real estate while just 5 percent of no-file consumers own real property. The number drops dramatically with thin-file consumers to 1 percent.
But Brown attributes this to the fact that most consumers with thin credit files tend to be young -- perhaps students -- and have not yet thought about purchasing property. He points out that when examining the value of the properties, 12 percent of the properties owned by no-file consumers were valued in excess of a half-million dollars. For consumers with full credit files, this figure was 13 percent.
"This shows there is a no-file population that essentially consists of mainstream consumers who just don't have access to credit," Brown contends. "There are 50 million individuals out there whom [banks] are ignoring. They can be an acceptable risk. I'm not talking about going after the subprime market but those with no credit records."
The key to zeroing in on the underbanked, Brown says, is good analytics. LexisNexis, for example, offers solutions that can be integrated into the application scoring process or the prescreening process to help banks pinpoint individuals who pose acceptable risks, he adds.
"Rather than turn these people down, use alternative data," Brown recommends. "There's no question more banks want to look at this. ... They would use the same type of underwriting practices, but just with different data."