8/14/2019 Financial Services Solutions - Credit Insight From Non-Traditional Data

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Friday, August 3, 2007

2007 SourceMedia Inc. and American Banker. All rights reserved. SourceMedia, One S tate Street Plaza, New York, N.Y. 10004 (800) 367-3989

By THOMAS C. BROWN

To achieve growth, lenders must alwaysbe on the lookout for new, creditworthy customers, but this process has becomeincreasingly difficult in a competitive mar-ket with an oversaturated customer base.

Make no mistake the pool of potentialborrowers is shrinking. There is an urgentneed to consider emerging, nontraditionaltechnologies to facilitate growth.

More than 75% of Americans have creditcards, with the average cardholder carryingnine. Nearly half of cardholders maintain abalance on their accounts and usually carry even larger debt loads for their cars, homes,

and education.In addition, most consumers receive upto 30 credit card solicitations annually. Stu-dents are becoming cardholders at an early age 83% of undergraduates have at leastone card, with 32% having four or more.By the time they graduate, tomorrows buy-ers will have tripled the number of cardsin their wallets and doubled their averagecard balance.

The median number of bank cards perperson is two, and the median credit limitis $13,500. Total household debt, includ-

ing mortgage, now reaches nearly 100% of most consumers post-tax annual income.With credit debt at this level, where is

the room for growth? Where can lenderslook to find new sources of revenue andcultivate borrowers?

Lenders must shift their focus to the25% of people who have traditionally reliedon cash. This group includes immigrants,

young people new to credit, and those witha cultural bias against credit. This is wherethe growth potential lies.

These markets offer a vast sea of untapped, creditworthy individuals whosethin history makes it difficult for themto obtain credit. The challenge for lendersbecomes how to tap this revenue sourcewith fiscal assurance.

Traditionally, banks and credit card com-panies have been forced to rely on evalua-tions of a consumers credit history, usually proffered by one of the major reportingagencies. This method determines cred-

itworthiness by looking at such factors aswhether bills are paid on time, the debtcarried, the amount of credit available, thedebt-to-income ratio, etc.

But in todays competitive climate, thismethod falls short. Not every consumerhas a robust credit history, and some his-tories do not reflect true creditworthiness,because they do not take into consideration,for example, life-changing circumstances.

To supplement traditional credit-scoringmethods, lenders should consider technol-ogy to target applicants who may have been

rejected by previous scoring methods.Nontraditional credit scoring relies ona detailed analysis of positive and deroga-tory life events, evidence of assets andaddress stability, positive identity verifica-tion, and public records like employmentand marital histories.

These noncredit sources record infor-mation that is analogous to a traditional

credit history, providing relevant insighabout an individuals economic lifestyle. Thiapproach can help lenders predict futurebehavior and identify new borrowers.

For an applicant with a thin credit his-tory, stable addresses with phone listings arevidence of responsible housing and utilitypayments. Credit bureaus typically do norecord such payments, but nontraditionaldata sources do.

Consider the wireless phone industrywhich uses traditional credit scoring yeexperiences higher-than-usual delinquen-cies and risk. Of 100,000 new telecom cu

tomers who were followed for 18 months19% were delinquent. The losses incurredin this industry can be substantially reducedif poor-risk customers those scoring lowby nontraditional scoring methods arerequired to make an up-front deposit.

Traditional scoring methods rely exclusively on past credit management. Thiapproach significantly limits lendersgrowth potential. The alternative usingnontraditional data instead of credit his-tory will enable creditors to capitalizon the expansive market of nontraditional

credit seekers.There is room for growth in this marketwith the use of out-of-the-box thinking andmodern scoring technologies.

Credit Insight from Nontraditional Data

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Mr. Brown is the vice president of financial servsolutions at LexisNexis Risk and Information AnalyGroup, a Boca Raton, Fla., division of Reed Elsevier P