New Credit Risk Models for the Unbanked Emerge

This August, TransUnion announced the launch of their latest product aimed at incorporating new credit risk models for the unbanked — the CreditVision Link Short-Term Risk Score. TransUnion advertises the score as “the first and only score in market to combine both trended credit bureau data and alternative data sources.” It promises lenders the opportunity to expand their customer base without increasing risk. The launch of CreditVision Link is a significant step forward for alternative credit data, taking it from the sidelines to the mainstream. 

In today’s article, we’ll dive into the new risk scoring model at the heart of CreditVision Link, and explore the forces pushing alternative credit data into the lending mainstream.

CreditVision Link: Predictive Risk Scoring Model

The new model that powers CreditVision Link is built on two sources of data: trended credit data and alternative credit data. According to creditcards.com’s Michelle Crouch, trended credit data is a detailed record of a consumer’s payment behavior over time. Trended data describes “exactly how you pay your bills: whether you’re a high-risk ‘revolver’ who carries a balance, or a low-risk ‘transactor’ who pays your credit cards in full every month.”

“The biggest change is that lenders now know exactly how you pay your bills: whether you’re a high-risk ‘revolver’ who carries a balance, or a low-risk ‘transactor’ who pays your credit cards in full every month.”

This behavior matters to lenders because it’s statistically significant: a 2013 TransUnion study found that so-called “revolvers” are three to 10 times more likely to default on their credit cards, auto loans, and home loans than “transactors”. The loss-given-default, or total cost of borrower defaults, is tough to pin down. But with a whopping $1 trillion in U.S. credit card debt waiting to be repaid, it’s easy to see that the stakes are high for lenders.

The Value of New Credit Risk Models for the Unbanked

Alternative credit data, the second piece of CreditVision Link, is an even more recent addition to lenders’ risk scoring arsenal. New credit risk models for the unbanked rely on data points that aren’t traditionally considered in credit scores, but that fill in important details about a borrower’s financial behavior. Examples of alternative credit data include:

• Utility bill payment history
• Mobile phone payment history
• Cable TV bills
• Rent payments 
• Bank account withdrawal and deposit patterns

To understand the value of these new credit risk models for the unbanked, consider a potential borrower with no traditional credit history. They’ve never opened a credit card or received a major loan. Now, suppose they apply for a credit card at your institution. In order to evaluate their risk of defaulting and offer them a loan, you attempt to check their credit score, and find… no record. By Consumer Financial Protection Bureau estimates, this “no-hit” situation applies to as many as 45 million Americans.

For lenders, this is a problem: many of those 45 million credit invisibles could be untapped responsible borrowers – profitable customers waiting to be served. But without data to illuminate the risks involved in lending to that untapped market, lenders don’t have a good enough reason to say “yes.” Alternative credit scoring models have unlocked access to an entirely untapped market. After all, pretty much everyone has some kind of financial record, and a consistent history of short-term payments is better than no history at all.

Together, these two data streams make up TransUnion’s CreditVision Link predictive risk scoring model. They form a relatively comprehensive picture of a potential borrower’s financial behavior. And they shine a light on the blind spots in traditional credit scoring. But one thing would make a composite risk scoring model like CreditVision Link even stronger: utility data. 

 

Utility Data: The Future of Risk Scoring

One the most predictive sources of alternative data has been waiting for its chance in the spotlight, and Urjanet’s here to put it center stage. We’re talking about – drumroll, please! – utility payment history.

Utility account payment history is already considered eligible for reporting to credit bureaus, under the Fair Credit Reporting Act (FCRA). Unfortunately, utilities don’t have much incentive to report this data to credit bureaus, so very few do. By considering an applicant’s history of utility payments, creditors get a look into the applicant’s history of financial decision-making and can use it to make transparent, informed credit decisions. A great utility payment history can justify extending a line of credit where a creditor otherwise might not have, while a poor utility payment history provides third party verified data to back up a denial.

Either way, lenders get a chance to open up the “no-hit” population with actionable financial data – and traditionally underserved but responsible applicants get access to credit they might otherwise never have had. With utility data powering new credit risk models for the unbanked, everybody wins.

To learn more about how new credit risk models for the unbanked are powering the future of consumer lending, check out our eBook, It’s Time to Rethink Credit Scoring. And if you’re ready to learn how Urjanet’s Utility Data Platform can help you lend with confidence, request a free demo today.

Related Resources:

• Webinar Replay: The Credit Score Present & Future
• Expert Q&A with eCredable: Changing the Credit Scoring Game with Alternative Data
• Protecting Consumer Choice in Alternative Credit Data Sharing

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