According to a recent report from the Urban Institute, a large chunk of Americans have no access to credit whatsoever. Sarah Strochak, a Research Assistant at the Housing Finance Policy Center at the Urban Institute states that there are close to 25 million Americans with no credit profile whatsoever, and an additional 28 million lack sufficient information to generate a reliable credit score.
With so many Americans facing limited data available to build a credit score, and according to Urban Institute, broadening the scope of financial data could build more accurate and inclusive credit files. In order to give more Americans access to a credit history, some are looking to a new system called "consumer-contributed data." Using consumer-contributed could mean a more accurate gauge of a borrower’s ability to repay debts.
At an Urban Institute event, supported by FICO, an expert panel, moderated by Alanna McCargo, VP, Housing Finance Policy Center, Urban Institute, discussed research on the opportunities and challenges of this financial technology (fintech) that are creating new opportunities to access data to broaden financial inclusion. The speakers included, Mike Pecan, Data Strategy, Experian; Lauren Saunders, Associate Director, National Consumer Law Center; David Shellenberger, Senior Director, Scoring and Advanced Analytics, FICO; Nick Thomas, President and Cofounder, Finicity.
"We have an opportunity to really change the game in how consumers are assessed for credit risk by bringing in different types of data sources. The opportunity is huge across the board, but particularly so for financial inclusion," Shellenberger said during the event.
Thomas stated that aggregation and secure transfer of consumer-contributed data not only allows borrowers to make smarter financial decisions, but it also reduces the cost and time it takes for lenders to close a loan.
Data from bank accounts, specifically cash flow, can give a lender a clear picture of how much money is coming in versus how much money is being spent. This means borrowers with sufficient income, but little experience with credit products can prove that they are a good credit risk, even with no credit score.
According to Saunders of the National Consumer Law Center, credit scores are a “crude tool,” and data from bank accounts is better for measuring a borrower’s ability to repay. Saunders notes that with a consumer-contributed data system comes significant security risks.
“What is ‘consumer permissioned’ today might soon become no more voluntary than clicking ‘I agree’ to a lot of fine print as a requirement for access to a product or service,” said Saunders.
However, Shellenberger noted that preliminary research based on 35 million consumer credit records has shown promising results. According to Schellenberger, using transaction data—which includes the amount of experience a consumer has managing checking and savings accounts, capacity (the account balance over the past six months), and the presence of information such as negative balances—researchers could build out credit scores for consumers who were previously unscored and adjust FICO scores for consumers with previous scores.
Through an empirical study, Mike Pecen from Experian found that outside of traditional credit history, financial account cash flows are highly correlated to loan payment performance, as well as a strong history of on-time payments.
For more information, visit Urban Institute.