Millennials are well known for disrupting the well-established methods of their elders. Are they doing it again with credit ratings?
Assessing creditworthiness through an individual’s credit score has been around for a long time. But for Millennials, this method often doesn’t work because their preference for non-traditional banking solutions, render conventional credit rating methods ineffective.
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In fact, Millennials are not the only group who struggle to get lines of credit to buy a car or home. Immigrants and low-income individuals also find it difficult, leading to a significant portion of potential borrowers who frequently struggle to get credit due to a lack of a good rating.
In India over 70 percent of the population, around 1.2 billion people, fall into this category. Well over 25 million people, roughly one in ten in the U.S. are deemed to be “credit invisible” meaning they have little to no credit history.
So, if it conventional credit scoring models don't work, what are some of the best alternatives? How can you capture this vast area of untapped opportunity?
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This type of assessment generates scores based on personality and behaviour, rather than on financial credit history. Traits tested include those such as conscientiousness, agreeableness, and neuroticism in an innovative way designed to offer options to anyone regardless of their history. For example, the tests propose that the more conscientious you are, the more likely you are to be better at saving and thus a better candidate for a loan.
Psychometric testing is a fascinating alternative to assess someone’s future financial behaviour and is already being used in some countries like Turkey, Russia, and India. Uptake in some more developed countries such as the United States has been weak, partly due to culture.
Current Account Data
If psychometric testing sounds a little too Orwellian for your tastes, another alternative could be to use current account data which contains a wealth of information on spending and savings patterns.
For example, regular payments of utility bills and healthy inflows of cash into a bank account can both indicate positive financial behaviour. Regular savings payments into retirement plans can suggest an individual is financially responsible and present a reliable guide for lenders looking to decide whether a person is creditworthy or not. Frequent overdrafts and late payments on credit card bills may show the type of individual that a lender wants to stay well clear of since their prior financial history is unstable.
The great news is that many of these sources of data already exist, giving banks and other lenders a tool to assess a person’s financial activity where no credit history may be available.
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Social Media Data
Social media channels could provide another alternative data source for lenders and could be a good option for Millennials. Sites such as LinkedIn provide records of an individual's employment history which could be used to give a rough indication of current salary and earning potential. Even Facebook or Instagram business pages could indicate the success of a person’s business or personal venture, and therefore give clues about their financial situation.
A risk with this type of data is that it can be manipulated, so would perhaps only provide additional verification, rather than a sole method itself.
The use of alternative credit scoring solutions opens up new revenue streams and makes you more relevant to credit invisibles and tech-savvy millennials. Leveraging financial data opens doors to assessing risk, improving acceptance and reducing onboarding times.