Loan Growth In A New Economy: It s Time To Turn Over A New Leaf

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1 WHITE PAPER Loan Growth In A New Economy: It s Time To Turn Over A New Leaf Alternative data uncovers new opportunities in a changing environment.

2 U.S. banks received good news in 2016: Consumer lending not only continued its march upwards, 1 but delinquencies were on the decline. Midyear results from the American Bankers Association showed that overdue payments decreased from fourth-quarter 2015 in 7 of 11 individual loan categories. 2 But a bright picture can blind one to the glaring realities. The truth is that these are still tough times for lenders. The landscape is changing in ways that can drastically impact the health and sustainability of your loan portfolio. Competition is increasing Between 2014 and 2015, marketplace lending to consumers skyrocketed from $7.64 billion to $25.74 billion. 3 Another $3.09 billion was issued to individuals through balance sheet consumer lenders in And a report from JMP Securities predicts that payday lending will reach $40 billion in These figures don t include other forms of alternative lending such as crowdfunding. It s also worth noting that Goldman Sachs recently joined the ranks of the disrupters with the launch of a consumer lending platform for low-cost loans. 5 With tens of billions of dollars being borrowed outside of the traditional banking system, there s obviously a market not being met by banks and credit unions. Filling the gap is not that simple though. Financial institutions don t have enough data on these borrowers to confidently assess the risk especially when there are 53 million U.S. consumers with little to no credit footprint with the three major bureaus. 6 1 Federal Reserve Economic Data, Consumer Loans at All Commercial Banks, as of September American Bankers Association press release, Consumer Delinquencies Fall in 7 of 11 Categories in First Quarter, July 7, Cambridge Centre For Alternative Finance in partnership with KPMG and CME Group Foundation, Breaking New Ground: The Americas Alternative Finance Benchmarking Report, April Kellogg Insight of the Kellogg School of Management at Northwestern University, Credit Where Credit Is Due, September Goldman Sachs press release Goldman Sachs Launches New Online Personal Loan Platform, October 13, FICO, Expanding Credit Opportunities (Infographic), 2015

3 Huge segments of the population live outside of creditville At one time, the reliance on bureau-based credit scores to identify and capture prime consumers made sense. The trouble is that credit scores aren t relevant to the growing segments of our population that haven t accessed traditional tradelines in the recent past. These include segments of the following groups: >75M Millennials (>75M) 7 New to credit; limited history Tend to eschew credit cards Heavily use alternative providers 50% of year olds are unbanked 8 >42M >75M Immigrants (>42M ) 9 Financial profiles & payment track records from native countries don t translate in the U.S. Credit/debt may not be cultural norm 1 in 6 Hispanic households are unbanked; nearly 3 in 10 are underbanked 10 Asian unbanked & underbanked rates have risen sharply of late 11 Baby Boomers (>75M ) 12 May have more debt than previous generations 13 BUT many have paid off houses, cars and other debt Strong repayment history, with more assets than other groups You have a duty to underserved communities Financial inclusion is an important goal that s in constant conflict with portfolio risk management. The reliance on bureau-based scores has created a catch-22 that leaves many consumers disenfranchised from the financial system. Government and industry both have recognized that change is in order. Recently, the U.S. Department of the Treasury and the U.S. Agency for International Development launched an initiative to find efficient ways to connect individuals with safe, affordable financial products. A group of diverse stakeholders including financial institutions, businesses such as LexisNexis, and nonprofits are coming together on several strategies to make this goal a reality. 7 Pew Research Center, Millennials overtake Baby Boomers as America s largest generation, April FDIC to the Urban Financial Services Coalition, Remarks by Martin J. Gruenberg, Chairman, June Center For Immigration Studies, A profile of the foreign-born using 2014 and 2015 Census Bureau data, October FDIC to the Urban Financial Services Coalition, Remarks by Martin J. Gruenberg, Chairman, June FDIC, 2015 FDIC National Survey of Unbanked and Underbanked Households, October Pew Research Center, Millennials overtake Baby Boomers as America s largest generation, April Zero Hedge, Baby Boomers Are Drowning In Loans, February

4 Lending today lends itself to an alternate approach It s clear that old ways of managing the consumer loan portfolio aren t sustainable in the face of new competition, changing demographics and increasing regulatory demands. As more lenders go after the same pool of prime consumers, you re facing higher customer acquisition costs with less chance of success. But what if you took an alternative path from your competitors? A credit life is more than three digits It's three-dimensional Though an applicant may not have a bank account or credit card, he or she most certainly has a residence. A job. Perhaps a college degree and/or a professional license. They may take motorcycle rides on the weekends or enjoy boating. All of this creates a life footprint that can help shed light on payment history, asset ownership and stability. When the decisioning process is enhanced with this kind of information, as many as 60% of consumers who lack a conventional credit score end up qualifying for traditional bank products. 14 Employment Education level Professional licenses & certifications Other assets Alternative data offers a more nuanced view of applicants even those who already have a full credit file. For example, one large U.S. bank uses alternative data to greenlight mortgages up to $500,000 for medical residents who meet certain criteria. And a California-based credit union uses it to offer a loan refinancing product to shift consumers out of high-cost payday loans. There, voter registration and membership in professional organizations are viewed as favorable indicators that might mitigate other yellow flags of concern. As a result of this program, participants have seen their credit scores increase approximately points and the credit union has enjoyed addition growth from word-of-mouth referrals LexisNexis Risk Solutions research, Ovum, Enterprise Case Study: Solving Underbanked Credit Scoring, September 2016

5 Alternative data puts the credit invisible into clearer context 25 % Service occupations 15 % 44 % College educated Production/transportation/ material-moving 17 % 30 % In management/ professional jobs FOREIGN-BORN CONSUMERS In sales/office jobs Bureau of Labor Statistics, Labor Force Characteristics of Foreign-Born Workers, May 2016 This helps you: Approve more loans within the existing pool of applicants Optimize terms based on better insight Loan amounts Down payment requirements Cosigner requirements Interest rate 4

6 Alternative data promotes lending friendliness Using fully compliant alternative credit data helps you be more approachable to consumers who have not felt the love from traditional banking. FDIC figures released in October 2016 reveal that 27% of U.S. households (33.5 million) were unbanked or underbanked in Even more compelling is that 13.7% of these households had consumer credit needs unmet by banks, according to the report. These households include applicants that were denied bank credit; those who felt discouraged from applying for bank credit; and those who relied on alternative financial service providers for credit. 16 Complicated banking processes have a lot to do with discouraging borrowers and driving them away from the traditional banking system. A study by the Federal Reserve of Kansas City revealed that simpler identification requirements plays a significant role in consumers choosing alternative financial providers (such as supermarkets and check-cashing stores) for basic transactions in lieu of traditional bank accounts. 17 If information requirements are a barrier to opening checking and savings accounts, it stands to reason that these consumers would be even more turned off by the document requirements, expanded timeline, and stress of loan origination. The burden to deliver a thick file of paperwork and possibly a higher down payment and/or a cosigner is likely to push individuals, especially Millennials, toward alternative lenders whose technology platforms and reduced credit requirements hold appeal. According to PwC, speed of the lending process is the most important factor to borrowers, outside of interest rates and closing costs. 18 The use of automated alternative credit scores reduces the burden and improves the customer experience overall. 16 FDIC, 2015 FDIC National Survey of Unbanked and Underbanked Households, October Federal Reserve Bank of Kansas City, A Study of the Unbanked and Underbanked Consumer in the Tenth Federal Reserve District, May PricewaterhouseCoopers LLP, Consumer Lending: Understanding today s empowered borrower, 2015

7 Alternative data isn't all alike Carefully consider your options While alternative data can prove significantly valuable, the sources you choose matter. There are many sources for alternative data, including free tools. But let the buyer beware: Compliance and quality are paramount and the data needs to pass the most rigorous tests of both. Here are some key considerations when selecting and working with an alternative data provider: Compliance: Never use alternative data unless you re assured that it meets standards for fair indicators of creditworthiness as outlined by the Fair Credit Report Act and Equal Credit Opportunity Act. Depth and breadth of data assets: Your credit risk assessment strategy is only as strong as the amount of insight you can uncover in an instant. What kind of records does the provider have access to? How much of the population is covered? How often are the records updated? Consistency of feeder data sources: You ll want to ensure the data you receive including variable definitions and sources remains constant. As vendors grow, they may strive to improve their products and offerings, but changing sources compromises your ability to track progress with consistent archive data. Data reliability: Is the data smart enough to know that Jon Jones, Jonathan Jones and T. Jonathan Jones are the same individual? Can you trust the veracity of the data that s pulled from a multiplicity of sources and inconsistently formatted? Ask the provider how data is cleansed, parsed and linked. Transparency and consumer friendliness: When a consumer has a question about a credit decision or wants to better understand their credit worthiness in general, it s important they have full transparency and easy access to their information. Make sure there s a reasonable mechanism of disclosure reporting. 6

8 Let s continue the conversation LexisNexis Risk Solutions can help you safely grow your loan portfolio with a fully compliant alternative data solution powered by unparalleled data assets, our proprietary advanced linking technology, and the HPCC super computing platform. We offer the industry s largest breadth and depth of consumer and alternative data composed from 65 billion consumer records and more than 13,000 sources to deliver robust consumer insight and a more complete view of risk. Contact or visit lexisnexis.com/creditrisk About LexisNexis Risk Solutions LexisNexis Risk Solutions ( is a leader in providing essential information that helps customers across all industries and government assess, predict, and manage risk. Combining cutting-edge technology, unique data and advanced scoring analytics, we provide products and services that address evolving client needs in the risk sector while upholding the highest standards of security and privacy. LexisNexis Risk Solutions is part of RELX Group plc, a world-leading provider of information and analytics for professional and business customers across industries. LexisNexis and the Knowledge Burst logo are registered trademarks of Reed Elsevier Properties Inc., used under license. Copyright NXR EN-US