All posts by Ann Chen
Article written by Melanie Smith, Senior Copywriter, Experian Clarity Services, Inc. It’s been almost a decade since the Great Recession in the United States ended, but consumers continue to feel its effects. During the recession, millions of Americans lost their jobs, retirement savings decreased, real estate reduced in value and credit scores plummeted. Consumers that found themselves impacted by the financial crisis often turned to alternative financial services (AFS). Since the end of the recession, customer loyalty and retention has been a focus for lenders, given that there are more options than ever before for AFS borrowers. To determine what this looks like in the current climate, we examined today’s non-prime consumers, what their traditional scores look like and if they are migrating to traditional lending. What are alternative financial services (AFS)? Alternative financial services (AFS) is a term often used to describe the array of financial services offered by providers that operate outside of traditional financial institutions. In contrast to traditional banks and credit unions, alternative service providers often make it easier for consumers to apply and qualify for lines of credit but may charge higher interest rates and fees. More than 50% of new online AFS borrowers were first seen in 2018 To determine customer loyalty and fluidity, we looked extensively at the borrowing behavior of AFS consumers in the online marketplace. We found half of all online borrowers were new to the space as of 2018, which could be happening for a few different reasons. Over the last five years, there has been a growing preference to the online space over storefront. For example, in our trends report from 2018, we found that 17% of new online customers migrated from the storefront single pay channel in 2017, with more than one-third of these borrowers from 2013 and 2014 moving to online overall. There was also an increase in AFS utilization by all generations in 2018. Additionally, customers who used AFS in previous years are now moving towards traditional credit sources. 2017 AFS borrowers are migrating to traditional credit As we examined the borrowing behavior of AFS consumers in relation to customer loyalty, we found less than half of consumers who used AFS in 2017 borrowed from an AFS lender again in 2018. Looking into this further, about 35% applied for a loan but did not move forward with securing the loan and nearly 24% had no AFS activity in 2018. We furthered our research to determine why these consumers dropped off. After analyzing the national credit database to see if any of these consumers were borrowing in the traditional credit space, we found that 34% of 2017 borrowers who had no AFS activity in 2018 used traditional credit services, meaning 7% of 2017 borrowers migrated to traditional lending in 2018. Traditional credit scores of non-prime borrowers are growing After discovering that 7% of 2017 online borrowers used traditional credit services in 2018 instead of AFS, we wanted to find out if there had also been an improvement in their credit scores. Historically, if someone is considered non-prime, they don’t have the same access to traditional credit services as their prime counterparts. A traditional credit score for non-prime consumers is less than 600. Using VantageScore 3.0, we examined the credit scores of consumers who used and did not use AFS in 2018. We found about 23% of consumers who switched to traditional lending had a near-prime credit score, while only 8% of those who continued in the AFS space were classified as near-prime. Close to 10% of consumers who switched to traditional lending in 2018 were classified in the prime category. Considering it takes much longer to improve a traditional credit rating, it’s likely that some of these borrowers may have been directly impacted by the recession and improved their scores enough to utilize traditional credit sources again. Key takeaways AFS remains a viable option for consumers who do not use traditional credit or have a credit score that doesn’t allow them to utilize traditional credit services. New AFS borrowers continue to appear even though some borrowers from previous years have improved their credit scores enough to migrate to traditional credit services. Customers who are considered non-prime still use AFS, as well as some near-prime and prime customers, which indicates customer loyalty and retention in this space. For more information about customer loyalty and other recently identified trends, download our recent reports. State of Alternative Data 2019 Lending Report
From the time we wake up to the minute our head hits the pillow, we make about 35,000 conscious and unconscious decisions a day. That’s a lot of processing in a 24-hour period. As part of that process, some decisions are intuitive: we’ve been in a situation before and know what to expect. Our minds make shortcuts to save time for the tasks that take a lot more brainpower. As for new decisions, it might take some time to adjust, weigh all the information and decide on a course of action. But after the new situation presents itself over and over again, it becomes easier and easier to process. Similarly, using traditional data is intuitive. Lenders have been using the same types of data in consumer credit worthiness decisions for decades. Throwing in a new data asset might take some getting used to. For those who are wondering whether to use alternative credit data, specifically alternative financial services (AFS) data, here are some facts to make that decision easier. In a recent webinar, Experian’s Vice President of Analytics, Michele Raneri, and Data Scientist, Clara Gharibian, shed some light on AFS data from the leading source in this data asset, Clarity Services. Here are some insights and takeaways from that event. What is Alternative Financial Services? A financial service provided outside of traditional banking institutions which include online and storefront, short-term unsecured, short-term installment, marketplace, car title and rent-to-own. As part of the digital age, many non-traditional loans are also moving online where consumers can access credit with a few clicks on a website or in an app. AFS data provides insight into each segment of thick to thin-file credit history of consumers. This data set, which holds information on more than 62 million consumers nationwide, is also meaningful and predictive, which is a direct answer to lenders who are looking for more information on the consumer. In fact, in a recent State of Alternative Credit Data whitepaper, Experian found that 60 percent of lenders report that they decline more than 5 percent of applications because they have insufficient information to make a loan decision. The implications of having more information on that 5 percent would make a measurable impact to the lender and consumer. AFS data is also meaningful and predictive. For example, inquiry data is useful in that it provides insight into the alternative financial services industry. There are also more stability indicators in this data such as number of employers, unique home phone, and zip codes. These interaction points indicate the stability or volatility of a consumer which may be helpful in decision making during the underwriting stage. AFS consumers tend to be younger and less likely to be married compared to the U.S. average and traditional credit data on File OneSM . These consumers also tend to have lower VantageScores, lower debt, higher bad rates and much lower spend. These statistics lend themselves to seeing the emerging consumer; millennials, immigrants with little to no credit history and also those who may have been subprime or near prime consumers who are demonstrating better credit management. There also may be older consumers who may have not engaged in traditional credit history in a while or those who have hit a major life circumstance who had nowhere else to turn. Still others who have turned to nontraditional lending may have preferred the experience of online lending and did not realize that many of these trades do not impact their traditional credit file. Regardless of their individual circumstances, consumers who leverage alternative financial services have historically had one thing in common: their performance in these products did nothing to further their access to traditional, and often lower cost, sources of credit. Through Experian’s acquisition and integration of Clarity Services, the nation’s largest alternative finance credit bureau, lenders can gain access to powerful and predictive supplemental credit data that better detect risk while benefiting consumers with a more complete credit history. Alternative finance data can be used across the lending cycle from prospecting to decisioning and account review to collections. Alternative data gives lenders an expanded view of consumer behavior which enables more complete and confident lending decisions. Find out more about Experian’s alternative credit data: www.experian.com/alternativedata.
What if you had an opportunity to boost your credit score with a snap of your fingers? With the announcement of Experian BoostTM, this will soon be the new reality. As part of an increasingly customizable and instant consumer reality in the marketplace, Experian is innovating in the space of credit to allow consumers to contribute information to their credit profiles via access to their online bank accounts. For decades, Experian has been a leader in educating consumers on credit: what goes into a credit score, how to raise it and how to maintain it. Now, as part of our mission to be the consumer’s bureau, Experian is ushering in a new age of consumer empowerment with Boost. Through an already established and full-fledged suite of consumer products, Experian Boost is the next generation offering a free online platform that places the control in the consumers’ hands to influence their credit scores. The platform will feature a sign-in verification, during which consumers grant read-only permission for Experian Boost to connect to their online bank accounts to identify utility and telecommunications payments. After they verify their data and confirm that they want the account information added to their credit file, consumers will receive an instant updated FICO® Score. The history behind credit information spans several centuries from a group of London tailors swapping information on customers to keeping credit files on index cards being read out to subscribers over the telephone. Even with the evolution of the credit industry being very much in the digital age today, Experian Boost is a significant step forward for a credit bureau. This new capability educates the consumer on what types of payment behavior impacts their credit score while also empowering them to add information to change it. This is a big win-win for consumers and lenders alike. As Experian is taking the next big step as a traditional credit bureau, adding these data sources is a new and innovative way to help consumers gain access to the quality credit they deserve as well as promoting fair and responsible lending to the industry. Early analysis of Experian’s Boost impact on the U.S. consumer credit scores showed promising results. Here’s a snapshot of some of those findings: These statistics provide an encouraging vision into the future for all consumers, especially for those who have a limited credit history. The benefit to lenders in adding these new data points will be a more complete view on the consumer to make more informed lending decisions. Only positive payment histories will be collected through the platform and consumers can elect to remove the new data at any time. Experian Boost will be available to all credit active adults in early 2019, but consumers can visit www.experian.com/boost now to register for early access. By signing up for a free Experian membership, consumers will receive a free credit report immediately, and will be one of the first to experience the new platform. Experian Boost will apply to most leading consumer credit scores used by lenders. To learn more about the platform visit www.experian.com/boost.
Every morning, I wake up and walk bleary eyed to the bathroom, pop in my contacts and start my usual routine. Did I always have contacts? No. But putting on my contacts and seeing clearly has become part of my routine. After getting used to contacts, wearing glasses pales in comparison. This is how I view alternative credit data in lending. Are you having qualms about using this new data set? I get it, it’s like sticking a contact into your eye for the first time: painful and frustrating because you’re not sure what to do. To relieve you of the guesswork, we’ve compiled the top four myths related to this new data set to provide an in-depth view as to why this data is an essential supplement to your traditional credit file. Myth 1: Alternative credit data is not relevant. As consumers are shifting to new ways of gaining credit, it’s important for the industry to keep up. These data types are being captured by specialty credit bureaus. Gone are the days when alternative financing only included the payday store on the street corner. Alternative financing now expands to loans such as online installment, rent-to-own, point-of-sale financing, and auto-title loans. Consumers automatically default to the financing source familiar to them – which doesn’t necessarily mean traditional financial institutions. For example, some consumers may not walk into a bank branch anymore to get a loan, instead they may search online for the best rates, find a completely digital experience and get approved without ever leaving their couches. Alternative credit data gives you a lens into this activity. Myth 2: Borrowers with little to no traditional credit history are high risk. A common misconception of a thin-file borrower is that they may be high risk. According to the CFPB, roughly 45 million Americans have little to no credit history and this group may contain minority consumers or those from low income neighborhoods. However, they also may contain recent immigrants or young consumers who haven’t had exposure to traditional credit products. According to recent findings, one in five U.S. consumers has an alternative financial services data hit– some of these are even in the exceptional or very good credit segments. Myth 3: Alternative credit data is inaccurate and has poor data quality. On the contrary, this data set is collected, aggregated and verified in the same way as traditional credit data. Some sources of data, such as rental payments, are monthly and create a consistent look at a consumer’s financial behaviors. Experian’s Clarity Services, the leading source of alternative finance data, reports their consumer information, which includes application information and bank account data, as 99.9% accurate. Myth 4: Using alternative credit data might be harmful to the consumer. This data enables a more complete view of a consumer’s credit behavior for lenders, and provides consumers the opportunity to establish and maintain a credit profile. As with all information, consumers will be assessed appropriately based on what the data shows about their credit worthiness. Alternative credit data provides a better risk lens to the lender and consumers may get more access and approval for products that they want and deserve. In fact, a recent Experian survey found 71% of lenders believe alternative credit data will help consumers who would have previously been declined. Like putting in a new pair of contact lenses the first time, it may be uncomfortable to figure out the best use for alternative credit data in your daily rhythm. But once it’s added, it’s undeniable the difference it makes in your day-to-day decisions and suddenly you wonder how you’ve survived without it so long. See your consumers clearly today with alternative credit data. Learn More About Alternative Credit Data
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