By Mark Leher
An account holder’s creditworthiness is more than just a credit score. Creditors evaluate a variety of factors beyond credit score to determine approvals and what terms are offered on a new account. Financial institutions have an opportunity to expand and strengthen their lending process by taking a more holistic approach when assessing suitability for loans, credit cards or other forms of debt. By using first-party data from account holders, banks can improve the loan process for borrowers, grow business organically and positively impact an account holder’s financial wellness.
Holistic approach using first-party data
With total U.S. consumer debt at $14.9 trillion, individuals face multiple challenges throughout their financial journeys, often occurring at common points relative to age, life stage or circumstance. Transforming the way credit is evaluated to recognize these critical lifecycle moments can have a positive impact for the account holder and bank. By recognizing when an account holder needs assistance with managing debt, repairing credit or gaining access to affordable capital, a bank can take action to support that account holder in the short term. This, in turn, can lead to greater financial viability and growth—and a more stable and profitable relationship in the long term.
Financial institutions should be more intentional in proactively assessing account holders’ financial journeys to identify their ability to make recurring payments on standard budget items such as utilities, mobile service payment, insurance payments, ecommerce, daycare and subscription services. These are ongoing payment obligations which can make up a significant portion of disposable income but do not show up on a credit report. First-party transaction data can help a bank understand if borrowers are in a financial position to remain in good standing when having debt liability. This intelligence into the account holder’s behavior can lead to the right messaging and engagement from the bank to best suit each individual’s credit needs and can expedite the loan process.
Transaction analysis in practice: Buy now pay later
Buy now pay later is a quickly growing financial product of which millions of consumers are taking advantage. BNPL allows a consumer to pay for a purchase over time, typically four months, instead of paying in full at the time of purchase. BNPL vendors such as Klarna and Affirm have rapidly partnered with ecommerce players. BNPL is effectively an interest-free consumer installment loan. It’s clear in the transaction data: 6 percent of the account holders at a midsize credit union using Segmint made BNPL payments during the year (53 percent more than in 2020). Additionally, the total dollar volume paid to BNPL vendors increased by 83 percent in 2021 over 2020.
Why should your bank care? Even the credit agencies agree that BNPL is a real debt obligation with significant liability for some consumers who are not using this payment method responsibly. To an institution evaluating creditworthiness, this is sometimes “hidden debt and hidden risk.” However, this hidden debt can be revealed immediately with transaction analysis, where payments to BNPL vendors are made each month out of an account holder’s account. Identifying BNPL payments helps an institution analyze the full picture of an account holder’s debt obligation and may be an opportunity for a bank to provide financial wellness coaching.
Transaction analysis in practice: cryptocurrency assets
Cryptocurrency is an emerging space where many younger account holders may be diversifying their money. Transaction analysis can clearly show the in-flows and out-flows of funds into cryptocurrency exchanges. Another Segmint client saw a 440 percent increase in the number of account holders sending money to cryptocurrency exchanges in 2021 over 2020. The average dollar volume of crypto transactions for each account holder was nearly $7,500. Unfortunately, without digging into the transactions, these assets are hidden to a financial institution.
Understanding which account holders have cryptocurrency provides a more complete picture of their financial situation. It also is an opportunity for the bank to engage that account holder in a conversation about financial wellness and the value of ensuring diversification into traditional investment vehicles. Account holders will always appreciate when a bank is proactive in supporting their overall financial well-being.
Transaction analysis in practice: The gig economy
Where an account holder’s money comes from is equally important to where it goes. How are your account holders paying their bills?
Analyzing credit transactions can answer this question. A paycheck is still the most common source of income, but many account holders are now participating in the gig economy to supplement their income or to replace a traditional paycheck entirely. Gig economy jobs are short-term and task based and workers are independent contractors versus full time employees. Payments from Lyft, Uber, Doordash, Grubhub and other gig economy players frequently appear in transaction data. Account holders at one Segmint financial institution saw a 93 percent increase in payment volume received from gig economy work in 2021 over 2020.
Other non-traditional income sources that should be considered, like inflows from payment processors, or marketplaces such as Etsy or Shopify, that could indicate an account holder is using a consumer account to run a small business. Financial institutions shouldn’t ignore non-traditional sources of income when evaluating creditworthiness.
Data usage leads to empowering borrowers
Using first-party data to develop a holistic approach for assessing creditworthiness ultimately allows institutions to empower more individuals to borrow. This practice can drive brand loyalty and confidence in the financial institution.
Loan viability is a critical part of the borrowing process for both a financial institution and account holder or consumer. As an individual or even a business assesses overall financial wellness, taking into consideration credit worthiness, a bank can many times be one step ahead by having a holistic view of their finances through transaction data analysis. A bank can leverage this data, empowering individuals to borrow wisely, providing access to funds for small businesses, education tools and other macro impacts. The support and relevant products and services that a bank provides to an account holder will favorably bridge the gap between their institution and other credit-only issuers.
Mark Leher is VP of data and analytics at Segmint.
