How institutions can evolve their approach to credit to better serve the underbanked
Illustration by Sensibill
Although the reactive phase of COVID-19 is winding down, many remain out of work and several businesses’ doors are still closed. While government relief programs have assisted, many are worried about the impact to credit scores if they don’t have the cash flow to pay off these loans. To ease concerns, credit providers like Equifax, Experian, and others are offering their customers help to manage their credit and pay bills. Equifax, for example, has acquired Ansonia to help businesses gain access to capital and recently released its Response RECOVERY solution suite to provide consumers and businesses with more accessible credit. And FICO has created a Resilience Index to inform creditors of how likely it is a customer will pay bills during an economic downturn.
These initiatives are a step in the right direction, but there is still much work to be done, especially from financial institutions. The truth is current credit standards often encourage bad financial behaviors. Incentivizing people to spend more and take on debt that they’re not necessarily equipped to pay back sets customers up to fail. It also creates an especially significant disadvantage for those from a lower socioeconomic standing. This forms a vicious cycle, excluding a segment of customers from participating in a broad range of services that could improve their financial health.
Now more than ever, there is a great need for financial services and products that specifically help the underbanked and underserved, especially when it comes to extending fair and accessible credit. To put this into perspective, Federal Deposits Insurance Corporation (FDIC) found that 7 percent of Americans lack a bank account, and as many as one in four Americans lack access to services provided by financial institutions. Fintechs have stepped up to help these groups, such as black communities and immigrants, and traditional institutions should take note. Implementing programs like tier-credit or micro-loans to better serve these segments or partnering with fintechs for alternate underwriting are just a few examples of how banks and credit unions can act.
Credit decisioning must evolve to become fairer and more balanced, which is why lenders should look beyond traditional criteria and evaluate alternative data points to determine the creditworthiness of individuals. Just imagine if customers and businesses could share bill payment history with lenders, demonstrating that they consistently pay their bills on time. Using contextual, SKU-level data like rent, utilities, cell phone bills, and shopping history can provide the insight needed to more fairly and accurately assess reliability. A Harris Poll study found that 70 percent of Americans would share more personal data for fairer credit decisions, plus 77 percent believe more data is better when evaluating credit. For any data points institutions chose to leverage, it’s their duty to ensure the data is used responsibly and that there are no biases in their models. Such biases, even unintentional ones, can have devastating impacts on underserved and unbanked communities.
In the next phase of recovery, institutions must step up and provide more assistance to those who are in credit trouble; they have a responsibility to the consumers, businesses, and communities that depend on them. Alleviating credit stress shouldn’t be a reactive issue, and the pandemic has proven that there is a need for a major change in the way traditional institutions determine creditworthiness. Using alternative data and partnering with fintechs can help institutions offer fairness and accessibility for all as we look toward financial recovery.